diff --git a/raw/aaer/2004/AAER-1938.txt b/raw/aaer/2004/AAER-1938.txt new file mode 100644 index 0000000000000000000000000000000000000000..daaf29b0d80e883dd82765f95ffe40261b5dc424 --- /dev/null +++ b/raw/aaer/2004/AAER-1938.txt @@ -0,0 +1,1389 @@ + + + + + + + + + + + + + + + + SEC.gov | Robert Quattrone, et al. + + + + + + + + !function(){var e=navigator.userAgent,a=document.documentElement,n=a.className;n=n.replace("no-js","js"),/iPad|iPhone|iPod/.test(e)&&!window.MSStream&&(n+=" ua-ios"),a.className=n}(); + {"path":{"baseUrl":"\/","pathPrefix":"","currentPath":"node\/493201","currentPathIsAdmin":false,"isFront":false,"currentLanguage":"en"},"pluralDelimiter":"\u0003","suppressDeprecationErrors":true,"gtag":{"tagId":"","consentMode":false,"otherIds":[],"events":[],"additionalConfigInfo":[]},"ajaxPageState":{"libraries":"eJxdT0GOwzAI_JBdn_oei2DkeINNZLC22devlaZS2wtiBhhmcKNUTPo97jxyaXEH3GJpiZrFhQW38A4cMqgeYQGlV19JFTKpQ-kUmvQKXP7I0cO4tC2kPnbg2wVdFslM0SCHPMs3vsEPPD7J6hgOGdPCKJyoRxxqUuePHjLLAuzVjimenRJGSLW08NoBK9LUn6SHlrytVOlcpJShB63QLSpBx_WkOzHNePol4fRQo_qMPvQ36ZXsAmd99lMNr2t_GUR9n60EyX9a_wePd5ns","theme":"uswds_sec","theme_token":null},"ajaxTrustedUrl":[],"gtm":{"tagId":null,"settings":{"data_layer":"dataLayer","include_classes":false,"allowlist_classes":"","blocklist_classes":"","include_environment":false,"environment_id":"","environment_token":""},"tagIds":["GTM-TD3BKV"]},"data":{"extlink":{"extTarget":false,"extTargetAppendNewWindowDisplay":true,"extTargetAppendNewWindowLabel":"(opens in a new window)","extTargetNoOverride":false,"extNofollow":false,"extTitleNoOverride":false,"extNoreferrer":false,"extFollowNoOverride":false,"extClass":"0","extLabel":"(link is external)","extImgClass":false,"extSubdomains":true,"extExclude":".*\\.gov|http:\/\/www.xbrl.org\/utr\/2013-05-17\/utr.xml|http:\/\/www.xbrl.org\/dtr\/type\/numeric-2009-12-16.xsd|http:\/\/www.xbrl.org\/dtr\/type\/nonNumeric-2009-12-16.xsd|https:\/\/secir.secure.force.com\/ombudsman\/OMMSForm","extInclude":"","extCssExclude":".data-exempt","extCssInclude":"","extCssExplicit":"","extAlert":true,"extAlertText":"You are now leaving the SEC Website. 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Individuals (SALI) + + + + + Enforcement Data Delivery Standards + + + + + Small Businesses + + + + + Appellate Briefs + + + + + Amicus / Friend of the Court Briefs + + + + + + + + + + + + + + + + + + + + + + + + + + Enforcement & Litigation + + + + + + + Litigation Releases + + + + + Administrative Proceedings + + + + + Administrative Law Judge Orders and Initial Decisions + + + + + Trading Suspensions + + + + + Distributions to Harmed Investors + + + + + Receiverships + + + + + Electronic Filings in Administrative Proceedings (eFAP) + + + + + Rules of Practice + + + + + Applications for Reentry + + + + + Reports of Investigations + + + + + Whistleblower Program + + + + + Public Alert: Unregistered Soliciting Entities (PAUSE) + + + + + SEC Action Lookup - Individuals (SALI) + + + + + Enforcement Data Delivery Standards + + + + + Small Businesses + + + + + Appellate Briefs + + + + + Amicus / Friend of the Court Briefs + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + Home + + + Enforcement and Litigation + + + Litigation Releases + + + Robert Quattrone, et al. + + + + + + + + + + + + Robert Quattrone, et al. + + + + + + + + + + + + + + + + + + + + + Defendants Include Former Suprema Executives and Several Suprema Customers and Vendors Who Participated in the Multi-Year Scheme + + On January 7, 2004, the Securities and Exchange Commission filed a civil complaint in the United States District Court for the District of New Jersey charging ten defendants with violating the antifraud and other provisions of the federal securities laws in connection with a multi-year financial fraud at Suprema Specialties, Inc. (Suprema), a now defunct manufacturer and distributor of cheese products based in Paterson, New Jersey. The defendants include Arthur Christensen, the former controller of Suprema; John Van Sickell, the former operations manager of Suprema's Paterson, New Jersey plant; five entities that purported to buy from or sell products to Suprema in the round-tripping scheme, Battaglia & Company, Inc. (Battaglia), California Milk Market (CMM), LNN Enterprises, Inc. (LNN), Packing Products, Inc. (Packing Products), and West Coast Commodities, Inc. (WCC); and three persons who owned or operated these entities, Lawrence Fransen, Robert Quattrone, and George Vieira. Vieira was also sued in connection with his conduct as the former chief operating officer of Suprema's Manteca, California plant. Without admitting or denying the SEC's charges, all of the defendants have consented to the entry of judgments providing for full injunctive and other relief (described below), while deferring for determination at a later date the amount of any disgorgement, prejudgment interest and civil penalties to be awarded. + + In its complaint, the SEC charged that, from at least 1998 through February 2002, when Suprema filed for bankruptcy, the defendants were engaged in a financial fraud that consisted of three components. First, Suprema and certain of its customers and vendors, including the five entities named as defendants, engaged in "round-tripping" transactions that generated approximately $700 million in fictitious sales revenue, or approximately 60% of Suprema's total reported revenue of approximately $1.13 billion over the relevant time period. Second, imitation cheese and non-cheese products were falsely re-labeled as premium cheeses to fraudulently inflate Suprema's reported inventory. Third, certain of Suprema's cheese products were adulterated with imitation cheese and non-cheese ingredients in order to reduce Suprema's costs illegally, contrary to statements in its filings with the SEC that Suprema sold "natural" or "all natural" cheeses that met applicable federal standards. According to the SEC's complaint, all three components of the fraudulent scheme resulted in material misstatements in Suprema's periodic reports filed with the SEC during its fiscal years 1998 through 2001 and the first quarter of 2002, as well as in the registration statements Suprema filed with the SEC for its secondary public offerings in 2000 and 2001. + + The complaint alleges that the round-tripping transactions were effectuated through "circles" of entities, each of which included Suprema, a third-party "customer," and a related "vendor." In most instances, the customer and vendor in each circle shared a common owner. False paperwork, including purchase orders, invoices, and bills of lading, was created purporting to represent sales of various cheese products from Suprema to the customer, then from the customer to the vendor, and finally from the vendor back to Suprema. On each leg of the circle - Suprema to the customer, customer to the vendor, and vendor back to Suprema - checks were circulated in purported payment for the transactions. Typically, the checks from Suprema to each vendor involved in the fraud were greater than the corresponding checks from the related customer back to Suprema. This difference in the checks represented a kick-back or "commission" paid to the common owners for their participation in the fraudulent scheme. Funds for the checks, including commissions, were drawn on Suprema's line of credit, which increased as Suprema's accounts receivable grew. With rare exception, no goods were actually sold, purchased, or exchanged in these transactions. + + Specifically, in its complaint the SEC alleged that the defendants participated in the fraudulent scheme as follows: + + From at least 1998 through the first quarter of 2002, Suprema engaged in bogus round-tripping transactions with Battaglia and Packing Products, both of which were owned or operated by Quattrone.   + + From at least 1998 through the first quarter of 2002, Suprema engaged in bogus round-tripping transactions with WCC and CMM, both of which were owned or operated by Vieira.   + + From at least 2000 through the first quarter of 2002, Suprema engaged in bogus round-tripping transactions with Wall Street Cheese, LLC (not named as a defendant) and LNN, both of which were owned or operated by Fransen.   + + During the respective time periods, Quattrone, Vieira, and Fransen each signed false audit confirms that were provided to Suprema's independent auditors, and each received commissions for their participation in the fraudulent scheme.   + + Collectively, the participation of Quattrone, Vieira, and Fransen resulted in overstatements in Suprema's reported revenue by approximately 5.75%, 7.41%, 14.25%, 19.51%, and 19.48% in fiscal years 1998, 1999, 2000, 2001, and the first quarter of 2002, respectively.   + + From at least 2000 through the first quarter of 2002, Van Sickell relabeled Suprema's inventory, delivered and retrieved checks in person, and created fraudulent paperwork all in furtherance of the round-tripping scheme. He relabeled imitation cheese products as higher-valued premium cheeses in order to inflate Suprema's inventory. He also adulterated the cheese using ingredients such as food starch and partially hydrogenated soybean oil, as well as other fillers, in accordance with ingredient formulas developed by Suprema in response to competitive pressures for lower-priced products.   + + From at least 1998 through 2001, Christensen was aware of improprieties in Suprema's cheese transactions. From August 2001 through his resignation in December 2001, Christensen assumed responsibility for coordinating the flow of false invoices and checks in the round-tripping scheme.   + + From December 2001 through February 2002, Vieira assumed responsibility for coordinating the flow of false invoices and checks in the round-tripping scheme. Based on these allegations, the SEC charged Christensen, Fransen, Quattrone, Van Sickell, Vieira, Battaglia, CMM, LNN, Packing Products, and WCC with: (i) securities fraud in violation of Section 10(b) of the Securities Exchange Act of 1934 (Exchange Act) and Exchange Act Rule 10b-5; (ii) aiding and abetting Suprema's violations of the periodic reporting, books and records, and internal accounting controls provisions of Exchange Act Sections 13(a) and 13(b)(2)(A) and (B) and Exchange Act Rules 12b-20, 13a-1, and 13a-13; and (iii) aiding and abetting misrepresentations by Suprema's officers and directors to the company's accountants in violation of Exchange Act Rule 13b2-2. Christensen and Van Sickell were also charged with violating the antifraud provisions of Section 17(a) of the Securities Act of 1933 and, along with Vieira, knowingly circumventing internal accounting controls and falsifying corporate books and records in violation of Exchange Act Section 13(b)(5) and Exchange Act Rule 13b2-1. + + Without admitting or denying the allegations of the SEC's complaint, all of the defendants have agreed to settle the SEC's charges. Subject to the Court's approval, these settlements would result in judgments ordering permanent injunctive relief against future violations of the federal securities laws, permanent officer and director bars against the individual defendants (with the exception of Christensen, who would be subject to a ten-year bar in recognition of his level of cooperation), and deferment of any disgorgement, interest, or civil penalties until decided by the court upon motion by the SEC at a later date. + + In a related proceeding, the United States Attorney for the District of New Jersey filed criminal charges against Fransen, Quattrone, Van Sickell, and Vieira. At a plea hearing in the U.S. District Court for the District of New Jersey held earlier today, Fransen, Quattrone, and Vieira each plead guilty to one count of securities fraud and one count of conspiracy to commit securities fraud, bank fraud, and mail fraud and to make false statements to auditors. In the same proceeding, Van Sickell plead guilty to one count of food adulteration and misbranding with intent to defraud and one count of conspiracy to commit securities fraud, bank fraud, and mail fraud, to make false statements to auditors, and to introduce adulterated and misbranded food into interstate commerce. ( U.S. v. Lawrence Fransen , CR04-10 (D.N.J.); U.S. v. George Vieira , CR04-11 (D.N.J.); U.S. v. John Van Sickell , CR04-12 (D.N.J.); and U.S. v. Robert Quattrone , CR04-13 (D.N.J.)). + + The SEC acknowledges the assistance of the United States Attorney's Office for the District of New Jersey, the Federal Bureau of Investigation, and the U.S. Food and Drug Administration in its investigation, which is continuing. + + SEC Complaint in this matter + + + + +  + + + + + + + + + + + + + + + + + + + + + + + + + Return to top + + + + + SEC homepage + + + + + + + + + + + + + + About the SEC + + + + + + Budget & Performance + + + Careers + + + Commission Votes + + + Contact + + + Contracts + + + + + + + + Transparency + + + + + + Accessibility & Disability + + + Super Intelligence + + + FOIA + + + Inspector General + + + No FEAR Act Data + + + Ombuds + + + SEC Excess Personal Property Guidance + + + + + + + + Websites + + + + + + Investor.gov + + + Related Sites + + + USA.gov + + + + + + + + Site Information + + + + + + Plain Writing + + + Privacy & Security + + + Site Map + + + + + + + + + + + + + + + + + + Stay connected. 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Mahler, John W. Bracewell, III, and Patricia L. Jones + + + + + + + + + + + + Dorothy L. Mahler, John W. Bracewell, III, and Patricia L. Jones + + + + + + + + + + + + + + + + + + + U.S. SECURITIES AND EXCHANGE COMMISSION + Litigation Release No. 18536 / January 9, 2004 + Accounting and Auditing Enforcement +Release No. 1939 / January 9, 2004 + + Securities and Exchange Commission v. Dorothy L. Mahler, John W. Bracewell, III, and Patricia L. Jones Civil Action No. 3:03-CV-1202 (MDTN) + + On December 23, 2003, the Honorable John T. Nixon, U. S. District Judge for the Middle District of Tennessee, entered Final Judgments as to defendants Dorothy L. Mahler (Mahler) and Patricia L. Jones (Jones), restraining and enjoining them from further violations of Sections 10(b) and 13(b)(5) of the Securities Exchange Act of 1934 (Exchange Act), and from aiding and abetting violations of Sections 13(a) and 13(b)(2)(A) of the Exchange Act and Rules 10b-5, 12b-20, 13a-1 and 13b2-1 thereunder. Mahler and Jones consented to the entries of the judgments without admitting or denying any of the allegations of the Commission's complaint. Further, the court ordered disgorgement and prejudgment interest against Mahler in the respective amounts of $17,675 and $2,300, ordered Mahler to pay a civil penalty of $25,000, and barred Mahler from serving as an officer or director of a public company for ten years. + The complaint alleges that the defendants perpetrated a financial reporting fraud involving the financial statements of Genesco, Inc. ("Genesco"), a footwear and accessories company headquartered in Nashville, Tennessee. Mahler, President of Genesco's Johnston & Murphy division, Bracewell, a division vice president, and Jones, the division's Director of Customer Care, caused Genesco to improperly recognize $2.8 million of sales revenue prior to the end of a quarter and in advance of a customer's requested shipping date. The defendants improperly recorded revenue in the quarter to meet sales targets for the quarter. This overstatement of sales and earnings was reflected on Genesco's financial statements included in its Form 10-K for fiscal year 2001. + See also: L.R. 18508 (December 17, 2003) + + + SEC Complaint in this matter --> + + + + + + + + + + + + + + + + + + + + + + + + + + Return to top + + + + + SEC homepage + + + + + + + + + + + + + + About the SEC + + + + + + Budget & Performance + + + Careers + + + Commission Votes + + + Contact + + + Contracts + + + + + + + + Transparency + + + + + + Accessibility & Disability + + + Super Intelligence + + + FOIA + + + Inspector General + + + No FEAR Act Data + + + Ombuds + + + SEC Excess Personal Property Guidance + + + + + + + + Websites + + + + + + Investor.gov + + + Related Sites + + + USA.gov + + + + + + + + Site Information + + + + + + Plain Writing + + + Privacy & Security + + + Site Map + + + + + + + + + + + + + + + + + + Stay connected. 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Fastow + + + + + + + + !function(){var e=navigator.userAgent,a=document.documentElement,n=a.className;n=n.replace("no-js","js"),/iPad|iPhone|iPod/.test(e)&&!window.MSStream&&(n+=" ua-ios"),a.className=n}(); + {"path":{"baseUrl":"\/","pathPrefix":"","currentPath":"node\/493246","currentPathIsAdmin":false,"isFront":false,"currentLanguage":"en"},"pluralDelimiter":"\u0003","suppressDeprecationErrors":true,"gtag":{"tagId":"","consentMode":false,"otherIds":[],"events":[],"additionalConfigInfo":[]},"ajaxPageState":{"libraries":"eJxdT0GOwzAI_JBdn_oei2DkeINNZLC22devlaZS2wtiBhhmcKNUTPo97jxyaXEH3GJpiZrFhQW38A4cMqgeYQGlV19JFTKpQ-kUmvQKXP7I0cO4tC2kPnbg2wVdFslM0SCHPMs3vsEPPD7J6hgOGdPCKJyoRxxqUuePHjLLAuzVjimenRJGSLW08NoBK9LUn6SHlrytVOlcpJShB63QLSpBx_WkOzHNePol4fRQo_qMPvQ36ZXsAmd99lMNr2t_GUR9n60EyX9a_wePd5ns","theme":"uswds_sec","theme_token":null},"ajaxTrustedUrl":[],"gtm":{"tagId":null,"settings":{"data_layer":"dataLayer","include_classes":false,"allowlist_classes":"","blocklist_classes":"","include_environment":false,"environment_id":"","environment_token":""},"tagIds":["GTM-TD3BKV"]},"data":{"extlink":{"extTarget":false,"extTargetAppendNewWindowDisplay":true,"extTargetAppendNewWindowLabel":"(opens in a new window)","extTargetNoOverride":false,"extNofollow":false,"extTitleNoOverride":false,"extNoreferrer":false,"extFollowNoOverride":false,"extClass":"0","extLabel":"(link is external)","extImgClass":false,"extSubdomains":true,"extExclude":".*\\.gov|http:\/\/www.xbrl.org\/utr\/2013-05-17\/utr.xml|http:\/\/www.xbrl.org\/dtr\/type\/numeric-2009-12-16.xsd|http:\/\/www.xbrl.org\/dtr\/type\/nonNumeric-2009-12-16.xsd|https:\/\/secir.secure.force.com\/ombudsman\/OMMSForm","extInclude":"","extCssExclude":".data-exempt","extCssInclude":"","extCssExplicit":"","extAlert":true,"extAlertText":"You are now leaving the SEC Website. The link you have selected is located on another server. Please click on the OK button below to proceed to the selected site. The SEC does not endorse this web site, its sponsor, or any of the policies, activities, products, or services offered on the site or by any advertiser on the site.","extHideIcons":false,"mailtoClass":"0","telClass":"","mailtoLabel":"(link sends email)","telLabel":"(link is a phone number)","extUseFontAwesome":false,"extIconPlacement":"append","extPreventOrphan":false,"extFaLinkClasses":"fa fa-external-link","extFaMailtoClasses":"fa fa-envelope-o","extAdditionalLinkClasses":"","extAdditionalMailtoClasses":"","extAdditionalTelClasses":"","extFaTelClasses":"fa fa-phone","allowedDomains":null,"extExcludeNoreferrer":""}},"user":{"uid":0,"permissionsHash":"e506dfd1572f94bd1f339f1a7483bfbded31d4a9d2bdfdca3fdbc235153380ee"}} + + + + + + + + + + + + + + Skip to search field + + + + Skip to main content + + + + + + + + + + + + + + + + + + An official website of the United States government + Here’s how you know + + + Here’s how you know + + + + + + + + + + + Official websites use .gov + + + A .gov website belongs to an official government organization in the United States. + + + + + + + + + Secure .gov websites use HTTPS + + + A lock + ( Lock A locked padlock ) + or https:// means you’ve safely connected to the .gov website. Share sensitive information only on official, secure websites. + + + + + + + + + + + + + + + + + SEC homepage + + + + + + + Menu + + + + + + + + + + + + + + Close + + + + + + + + + + + + + Search SEC.gov & EDGAR + + + + + + Search + + + + + + + + + + + + + + + + + Search Filings + + + + + + + + + Search Filings + + + + + + + + + Full Text Search + + + + + + Latest Filings + + + + + + Mutual Fund Search + + + + + + Variable Insurance Products Search + + + + + + SIC Codes + + + + + + CIK Lookup + + + + + + Public Dissemination Service (PDS) + + + + + + Search Assistance + + + + + + + + + + + + + Submit Filings + + + + + + + + + Submit Filings + + + + + + + + + EDGAR Filer Management Portal + + + + + + EDGAR Filing Portal + + + + + + Online Forms Management Portal + + + + + + EDGAR Next + + + + + + Forms Index + + + + + + Filer Support & Resources + + + + + + + + + + + + + Data & Research + + + + + + + + + Data & Research + + + + + + + + + Data Library + + + + + + Statistics & Data Visualizations + + + + + + Structured Data + + + + + + Investment Management Data + + + + + + Open Data at the SEC + + + + + + + + + + + + + Rules, Enforcement, & Compliance + + + + + + + + + + + + + + + + + + + + Rules & Regulations + + + + + + + + + Rulemaking Activity + + + + + + Submit Public Comments + + + + + + Staff Guidance + + + + + + No-Action, Interpretive, and Exemptive Letters + + + + + + Self-Regulatory Organization Rulemaking + + + + + + Public Petitions for Rulemaking + + + + + + + + + + + + + + + + + Enforcement & Litigation + + + + + + + + + Litigation Releases + + + + + + Administrative Proceedings + + + + + + Administrative Law Judge Orders and Initial Decisions + + + + + + Trading Suspensions + + + + + + Distributions to Harmed Investors + + + + + + Receiverships + + + + + + + + + + + + + + + + + Compliance + + + + + + + + + Examination Priorities + + + + + + Risk Alerts + + + + + + Compliance Outreach Program + + + + + + + + + + + + + + + + + + + + + + + Proposed Rules + + + + + + What's New + + + + + + Whistleblower Program + + + + + + + + + + + + + + + + + + + Featured Topics + + + + + + + + + Featured Topics + + + + + + + + + Crypto Task Force + + + + + + Cybersecurity + + + + + + Market Structure Analytics + + + + + + Saving and Investing for Military Personnel + + + + + + Saving and Investing for Teachers + + + + + + SEC-CFTC Harmonization Initiative + + + + + + Treasury Clearing Implementation + + + + + + + + + + + + + About + + + + + + + + + About + + + + + + + + + Mission + + + + + + Commissioners + + + + + + Divisions & Offices + + + + + + Division & Office Directors + + + + + + Advisory Committees + + + + + + Budget & Performance + + + + + + Reports & Publications + + + + + + Commission Votes + + + + + + Contact the SEC + + + + + + Careers + + + + + + + + + + + + + Submit a Tip or Complaint + + + + + + + + + + + + + + + + + Newsroom + + + | + + + Investors + + + Small Businesses + + + Whistleblowers + + + + + + + + + + + + + + + Newsroom + + + | + + + Investors + + + Small Businesses + + + Whistleblowers + + + + + + + + + + + + + + + + + Search SEC.gov & EDGAR + + + + + + Search + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + More in this Section + + + + + + + + + + + + + Enforcement & Litigation + + + + + + + Litigation Releases + + + + + Administrative Proceedings + + + + + Administrative Law Judge Orders and Initial Decisions + + + + + Trading Suspensions + + + + + Distributions to Harmed Investors + + + + + Receiverships + + + + + Electronic Filings in Administrative Proceedings (eFAP) + + + + + Rules of Practice + + + + + Applications for Reentry + + + + + Reports of Investigations + + + + + Whistleblower Program + + + + + Public Alert: Unregistered Soliciting Entities (PAUSE) + + + + + SEC Action Lookup - Individuals (SALI) + + + + + Enforcement Data Delivery Standards + + + + + Small Businesses + + + + + Appellate Briefs + + + + + Amicus / Friend of the Court Briefs + + + + + + + + + + + + + + + + + + + + + + + + + + Enforcement & Litigation + + + + + + + Litigation Releases + + + + + Administrative Proceedings + + + + + Administrative Law Judge Orders and Initial Decisions + + + + + Trading Suspensions + + + + + Distributions to Harmed Investors + + + + + Receiverships + + + + + Electronic Filings in Administrative Proceedings (eFAP) + + + + + Rules of Practice + + + + + Applications for Reentry + + + + + Reports of Investigations + + + + + Whistleblower Program + + + + + Public Alert: Unregistered Soliciting Entities (PAUSE) + + + + + SEC Action Lookup - Individuals (SALI) + + + + + Enforcement Data Delivery Standards + + + + + Small Businesses + + + + + Appellate Briefs + + + + + Amicus / Friend of the Court Briefs + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + Home + + + Enforcement and Litigation + + + Litigation Releases + + + Andrew S. Fastow + + + + + + + + + + + + Andrew S. Fastow + + + + + + + + + + + + + + + + + + + + Fastow To Disgorge More Than $23 Million; Agrees To Cooperate In Ongoing Investigation + + The Securities and Exchange Commission ("Commission") today settled civil fraud charges filed against Andrew S. Fastow, Enron's former Chief Financial Officer. The complaint, filed on October 2, 2002 in U.S. District Court in Houston, alleged that Fastow defrauded Enron's shareholders and enriched himself and others by, among other things, entering into undisclosed side deals, manufacturing earnings for Enron through sham transactions, and inflating the value of Enron's investments. Without admitting or denying the allegations in the Commission's complaint, Fastow has agreed to be enjoined permanently from violating the antifraud, periodic reporting, books and records, and internal control provisions of the federal securities laws, and to be barred permanently from acting as an officer or director of a public company. The Commission settled its action in coordination with the Justice Department's Enron Task Force, which entered into a guilty plea with Fastow on related criminal charges. In resolving the parallel civil and criminal proceedings, Fastow has agreed to serve a ten-year sentence, disgorge more than $23 million and to cooperate with the government's continuing investigation. + As alleged in the Commission's complaint, Fastow participated in a series of fraudulent transactions. Three of the transactions - RADR, Chewco, and Southampton - were part of an alleged scheme to hide Fastow's interest in and control of certain entities in order to avoid consolidating those entities in Enron's financial statements. This was done, according to the complaint, for self-enrichment and to mislead analysts, rating agencies, and others about Enron's true financial condition. + Two of the transactions - the Nigerian barges and Cuiaba - are alleged to have been sham sales best described as secret asset-parking arrangements. The Nigerian barges involve Enron's purported sale of an interest in certain Nigerian barges to Merrill Lynch & Co., Inc. ("Merrill"). Fastow is alleged to have personally promised that Merrill would be taken out of its so-called investment and later arranged for an entity he controlled, LJM2 Co-Investment, L.P. ("LJM2"), to buy the financial institution's interest at a pre-arranged rate of return on a pre-arranged time table. In Cuiaba, Enron entered into a transaction with another off-balance-sheet entity controlled by Fastow, LJM Cayman, L.P. ("LJM1"), to sell an interest in a severely troubled power plant in Cuiaba, Brazil, in order to avoid consolidation of project debt and recognize earnings. In connection with this transaction, Fastow allegedly entered into an unwritten side agreement with Enron requiring Enron to buy back the interest it just sold to Fastow at a guaranteed profit. + In the last transaction, Enron and LJM2 created a complex financial structure - Raptor I - that allowed Enron to hedge against potential declines in certain of its mark-to-market investments. LJM2's $30 million investment - representing the purported 3% outside equity required to be at risk in order for Enron to avoid consolidating the Raptor vehicle in its financial statements - however was not at risk. Fastow allegedly entered into an undisclosed side deal in which Enron agreed that, prior to conducting any hedging activity with Raptor I, Enron would return LJM2's investment ($30 million) plus a guaranteed return ($11 million). As a result, Raptor I should have been consolidated on Enron's financial statements. To conceal the side deal, Fastow and others allegedly devised a scheme to manufacture the $41 million payment to LJM2. Enron and the Raptor vehicle entered into a "put," a transaction in which Enron essentially bet that its own stock price would decline. Enron purchased that "put" option from the Raptor vehicle for $41 million. The $41 million was then transferred from Raptor I to LJM2. The complaint alleged that there was no true business purpose for the "put" other than to generate funds to pay LJM2 under the undisclosed side deal. The complaint also alleged that in September 2000, Fastow and others used Raptor I to effectuate a fraudulent hedging transaction and thus avoid a decrease in the value of Enron's investment in the stock of a public company called Avici Systems Inc. Specifically, Fastow and others back-dated documents to make it appear that Enron locked in the value of its investment in Avici in early August 2000, when Avici's stock was trading at its all time high price. + The Commission's investigation relating to Enron is continuing. + + SEC Complaint in this matter --> + + + + + + + + + + + + + + + + + + + + + + + + + + Return to top + + + + + SEC homepage + + + + + + + + + + + + + + About the SEC + + + + + + Budget & Performance + + + Careers + + + Commission Votes + + + Contact + + + Contracts + + + + + + + + Transparency + + + + + + Accessibility & Disability + + + Super Intelligence + + + FOIA + + + Inspector General + + + No FEAR Act Data + + + Ombuds + + + SEC Excess Personal Property Guidance + + + + + + + + Websites + + + + + + Investor.gov + + + Related Sites + + + USA.gov + + + + + + + + Site Information + + + + + + Plain Writing + + + Privacy & Security + + + Site Map + + + + + + + + + + + + + + + + + + Stay connected. 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Nussbaum, CPA + + + + + + + + !function(){var e=navigator.userAgent,a=document.documentElement,n=a.className;n=n.replace("no-js","js"),/iPad|iPhone|iPod/.test(e)&&!window.MSStream&&(n+=" ua-ios"),a.className=n}(); + {"path":{"baseUrl":"\/","pathPrefix":"","currentPath":"node\/368651","currentPathIsAdmin":false,"isFront":false,"currentLanguage":"en"},"pluralDelimiter":"\u0003","suppressDeprecationErrors":true,"gtag":{"tagId":"","consentMode":false,"otherIds":[],"events":[],"additionalConfigInfo":[]},"ajaxPageState":{"libraries":"eJxdT0GOwzAI_JBdn_oei2DkeINNZLC22devlaZS2wtiBhhmcKNUTPo97jxyaXEH3GJpiZrFhQW38A4cMqgeYQGlV19JFTKpQ-kUmvQKXP7I0cO4tC2kPnbg2wVdFslM0SCHPMs3vsEPPD7J6hgOGdPCKJyoRxxqUuePHjLLAuzVjimenRJGSLW08NoBK9LUn6SHlrytVOlcpJShB63QLSpBx_WkOzHNePol4fRQo_qMPvQ36ZXsAmd99lMNr2t_GUR9n60EyX9a_wePd5ns","theme":"uswds_sec","theme_token":null},"ajaxTrustedUrl":[],"gtm":{"tagId":null,"settings":{"data_layer":"dataLayer","include_classes":false,"allowlist_classes":"","blocklist_classes":"","include_environment":false,"environment_id":"","environment_token":""},"tagIds":["GTM-TD3BKV"]},"data":{"extlink":{"extTarget":false,"extTargetAppendNewWindowDisplay":true,"extTargetAppendNewWindowLabel":"(opens in a new window)","extTargetNoOverride":false,"extNofollow":false,"extTitleNoOverride":false,"extNoreferrer":false,"extFollowNoOverride":false,"extClass":"0","extLabel":"(link is external)","extImgClass":false,"extSubdomains":true,"extExclude":".*\\.gov|http:\/\/www.xbrl.org\/utr\/2013-05-17\/utr.xml|http:\/\/www.xbrl.org\/dtr\/type\/numeric-2009-12-16.xsd|http:\/\/www.xbrl.org\/dtr\/type\/nonNumeric-2009-12-16.xsd|https:\/\/secir.secure.force.com\/ombudsman\/OMMSForm","extInclude":"","extCssExclude":".data-exempt","extCssInclude":"","extCssExplicit":"","extAlert":true,"extAlertText":"You are now leaving the SEC Website. 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Wahba, CP and Stuart A. Nussbaum, CPA + + + + + + + + + + + + Weiser LLP, Victor R. Wahba, CP and Stuart A. Nussbaum, CPA + + + + + + + + + + + + + + + + + + + + + SECURITIES EXCHANGE ACT OF 1934 +Release No. 49082 / January 15, 2004 + + INVESTMENT ADVISERS ACT OF 1940 +Release No. 2208 / January 15, 2004 + + ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 1943 / January 15, 2004 + + Admin. Proc. File No. 3-11374 + + + + In the Matter of + WEISER LLP, VICTOR R. WAHBA, CPA and STUART A. NUSSBAUM, CPA + Respondents. + + : : : : : : : : : : + ORDER INSTITUTING PUBLICADMINISTRATIVE AND CEASE-AND-DESIST PROCEEDINGS PURSUANT TO SECTION 203(k) OF THE INVESTMENT ADVISERS ACT OF 1940 AND RULE 102(e) OF THE COMMISSION'S RULES OF PRACTICE, MAKING FINDINGS, AND IMPOSING REMEDIAL SANCTIONS AND A CEASE-AND-DESIST ORDER + I. + The Securities and Exchange Commission ("Commission") deems it appropriate that public administrative and cease-and-desist proceedings be, and hereby are, instituted against Weiser LLP ("Weiser"), Victor R. Wahba, CPA ("Wahba"), and Stuart A. Nussbaum, CPA ("Nussbaum") (collectively, the "Respondents") pursuant to Section 203(k) of the Investment Advisers Act of 1940 ("Advisers Act") and Rules 102(e)(1)(ii) and (iii) of the Commission's Rules of Practice. 1 + II. + In anticipation of the institution of these proceedings, the Respondents have each submitted an Offer of Settlement (collectively, the "Offers"), which the Commission has determined to accept. Solely for the purpose of these proceedings and any other proceedings brought by or on behalf of the Commission, or to which the Commission is a party, and without admitting or denying the findings herein, except as to the Commission's jurisdiction over the Respondents and the subject matter of these proceedings, Respondents consent to the entry of this Order Instituting Public Administrative and Cease-and-Desist Proceedings Pursuant to Section 203(k) of the Investment Advisers Act of 1940 and Rule 102(e) of the Commission's Rules of Practice, Making Findings, and Imposing Remedial Sanctions and a Cease-and-Desist Order ("Order"), as set forth below. + III. + On the basis of this Order and the Respondents' Offers, the Commission finds 2 that: + A. RESPONDENTS + 1. Weiser (formerly known as M.R. Weiser & Co. LLP) is a New York limited liability partnership that maintains its principal place of business in New York, New York. In 1993, Sagam Capital Management Corp. (formerly known as Sagam Management Corp.) ("Sagam Corp.") engaged Weber Lipshie & Co. ("Weber Lipshie") to assist Sagam Corp. and its president, Yehuda Shiv ("Shiv"), in implementing certain undertakings required by a Commission cease-and-desist order. In the Matter of Sagam Management Corp. and Yehuda Shiv, Advisers Act Release No. 1368, Admin. Proc. File No. 3-8023 (April 21, 1993) ("Sagam Corp. Order"). In addition to implementing these undertakings, Sagam Corp. engaged Weber Lipshie to conduct annual surprise examinations for Sagam Corp. As of October 31, 1994, Weber Lipshie ceased doing business and certain of the former partners and employees, including Wahba, joined Weiser. Sagam Corp. engaged Weiser to perform the services that Weber Lipshie previously performed. + 2. Wahba, age 39, is a Weiser partner and a certified public accountant who has been licensed to practice by the State of New York since 1992. Wahba, while at Weber Lipshie, worked on the implementation of the undertakings required by the Sagam Corp. Order. Wahba was the Weiser partner in charge of the 1997 and 1998 surprise examinations of Sagam Corp. + 3. Nussbaum, age 34, is a senior manager at Weiser and a certified public accountant who has been licensed to practice by the State of New York since 1993. Nussbaum was the manager on Weiser's 1997 and 1998 surprise examinations of Sagam Corp. + B. RELEVANT ENTITY AND INDIVIDUAL + 1. Sagam Corp. has been registered with the Commission as an investment adviser since August 10, 1989. It is a Delaware corporation that maintains its principal place of business in New York, New York. On April 21, 1993, the Commission entered the Sagam Corp. Order requiring Sagam Corp. to cease and desist from violating Sections 204 and 206(4) of the Advisers Act and Rules 204-2, 204-3 and 206(4)-2 thereunder. On December 10, 2001, the Commission instituted a civil injunctive action in federal district court in the Southern District of New York against Sagam Corp. alleging that Sagam Corp. violated Section 17(a) of the Securities Act of 1933 ("Securities Act"), Section 10(b) of the Securities Exchange Act of 1934 ("Exchange Act") and Rule 10b-5 thereunder, and Sections 206(1) and 206(2) of the Advisers Act by creating and sending false account statements to its clients and by misappropriating client assets. SEC v. Yehuda Shiv, Sagam Capital Management Corp., and Sagam Capital LLC, ("SEC v. Shiv") 01CV11282 (S.D.N.Y.) (AKH). Thereafter, Sagam Corp. consented to a partial judgment enjoining it from future violations of these sections, which the Court entered on July 31, 2002. + 2. Shiv, age 72, is an Israeli citizen and is currently incarcerated in a federal correctional institution in Fort Dix, New Jersey. Prior to December 10, 2001, Shiv was the President of Sagam Corp. and made investment decisions for all Sagam Corp. client accounts. In the Sagam Corp. Order, the Commission found that Shiv caused Sagam Corp.'s violations of Sections 204 and 206(4) of the Advisers Act and Rules 204-2, 204-3 and 206(4)-2 thereunder. In SEC v. Shiv, the Commission alleged that Shiv violated Section 17(a) of the Securities Act, Section 10(b) of the Exchange Act and Rule 10b-5 thereunder, and Sections 206(1) and 206(2) of the Advisers Act by creating and sending false account statements to the clients of Sagam Corp. and Sagam Capital LLC ("Sagam LLC"), another investment adviser registered with the Commission. On January 24, 2003, the Court in SEC v. Shiv entered, by consent, a final judgment against Shiv which: (1) permanently enjoined him from future violations of the antifraud provisions of the federal securities laws; and (2) ordered disgorgement of $32,215,429, plus prejudgment interest thereon, but waiving payment of all disgorgement, except for the surrender of certain assets valued at approximately $2.8 million, based on Shiv's sworn representations in his Statement of Financial Condition. On July 24, 2002, Shiv pled guilty to one count of securities fraud for violating Section 10(b) of the Exchange Act and Rule 10b-5 and one count of securities fraud for violating Section 206 of the Advisers Act before the United States District Court for the Southern District of New York. On February 26, 2003, Shiv was sentenced to 15 months in a federal correctional facility. United States v. Yehuda Shiv, 02CR135 (S.D.N.Y.) (SWK). On May 29, 2003, the Commission, by consent, issued an order barring Shiv from associating with any investment adviser. In the Matter of Yehuda Shiv, Advisers Act Release No. 2133A, Admin. Proc. No. 3-11138 (May 29, 2003). + C. FACTS + 1. The Sagam Corp. Order + a. On April 21, 1993, the Commission simultaneously instituted and settled, by consent, an administrative proceeding against Sagam Corp. and Shiv finding that Sagam Corp. violated Section 206(4) of the Advisers Act and Rule 206(4)-2 thereunder by failing to: (1) maintain separate records for each client account in which funds were deposited; (2) notify its clients in writing after accepting funds and securities; and (3) verify client funds and securities during a surprise examination by an independent accountant. In the Sagam Corp. Order, the Commission also found that Sagam Corp. violated Section 204 of the Advisers Act and Rule 204-2 thereunder by failing to keep accurate books and records. Further, the Commission found that Shiv caused all of Sagam Corp.'s violations. + b. The Sagam Corp. Order required Shiv and Sagam Corp. to: (1) implement and maintain procedures to ensure compliance with the books and records provisions of the Advisers Act; (2) retain an accountant to review Sagam Corp.'s existing compliance procedures with the books and records requirements of the Advisers Act and to recommend procedures designed to ensure continued compliance with these provisions; and (3) retain an accountant, within one year after the Sagam Corp. Order, to review such procedures and then submit a report detailing the results of the accountant's review. + c. Shiv, on behalf of Sagam Corp., hired Weber Lipshie as the independent accountant required by the Sagam Corp. Order to assist Sagam Corp. and Shiv in creating the necessary books and records and to ensure that Sagam Corp. and Shiv continued to adhere to the books and records requirements of the Advisers Act. Wahba was the senior staff accountant on this engagement. On April 8, 1994, Weber Lipshie submitted a report to the Commission stating that Sagam Corp. had been in compliance with the books and records requirements of the Advisers Act from January 1, 1993, through April 8, 1994. After Weber Lipshie ceased doing business in 1994, Weiser employed Wahba and Weiser was engaged to perform these services for Sagam Corp. + d. Sagam Corp. also engaged Weber Lipshie to perform annual surprise examinations required by Section 206(4) of the Advisers Act and Rule 206(4)-2(a)(5) thereunder. Weber Lipshie performed the 1993 surprise examination of Sagam Corp. Wahba was the senior staff accountant on this examination. Because he worked on the undertakings required by the Sagam Corp. Order, Wahba, and through him Weiser, knew that the Commission had ordered Sagam Corp. to cease and desist from violating Section 206(4) of the Advisers Act and Rule 206(4)-2(a)(5) for failing to have an independent accountant conduct a surprise examination of clients' funds and securities over which Sagam Corp. maintained custody. + e. After Weber Lipshie ceased doing business and Wahba became employed by Weiser, Weiser conducted surprise examinations of Sagam Corp. from 1994 through 1998 for which Sagam Corp. paid Weiser $26,152. In 1993, while at Weber Lipshie, Wahba participated in developing the procedures that Weber Lipshie and, later, Weiser used in connection with its surprise examinations of Sagam Corp. + 2. The Respondents' 1997 and 1998 Surprise Examinations of Sagam Corp. + a. In November 1997 and November 1998, the Respondents conducted surprise examinations of Sagam Corp.'s clients' funds and securities pursuant to Advisers Act Rule 206(4)-2(a)(5). 3 Wahba was the partner in charge of the 1997 and 1998 surprise examinations, and as such, Wahba approved the procedures that Weiser used in performing these surprise examinations. Further, Wahba reviewed and approved the work that Nussbaum performed, and Wahba signed the examination certificates in connection with these surprise examinations. Nussbaum, as the manager on these examinations, was responsible for performing the verification procedures outlined by Wahba. Weiser's technical review department approved the use of the examination procedures and approved the surprise examination certificates prior to filing. + b. The Respondents, following the procedures that Wahba helped to establish in 1993, performed virtually identical procedures for both the 1997 and 1998 surprise examinations. As part of these surprise examinations, the Respondents sent letters to the bank that maintained actual custody of Sagam Corp.'s clients' funds and securities, directing the bank to send to Weiser portfolio valuations for securities held under the custody of Sagam Corp. In connection with the 1997 examination, the bank sent to Weiser portfolio valuations for 25 Sagam Corp. clients' accounts. In connection with the 1998 examination, the bank produced portfolio valuations for 53 clients' accounts. In both examinations, the Respondents also requested that Shiv provide Weiser with client position reports from Sagam Corp. showing all open and closed positions for each client over which Sagam Corp. maintained custody of funds or securities. In response, Sagam Corp.'s client position reports contained open and closed positions for 36 Sagam Corp. clients in 1997, and 42 clients in 1998. Thus, the Respondents should have been aware that for the 1997 and 1998 surprise examinations, the bank and Shiv provided the Respondents with client position reports for a different number of clients. The Respondents took no action to resolve the discrepancies regarding the number of clients provided by Shiv and the bank and determine the correct number of clients' accounts for which Sagam Corp. maintained custody of funds and securities. + c. In the examinations, the Respondents randomly selected certain Sagam Corp. client accounts on which they conducted verification procedures. The Respondents did not conduct verification procedures for every one of Sagam Corp. clients' accounts, as required by Advisers Act Rule 206(4)-2(a)(5). After selecting a sample of client accounts on which to perform the verification procedures, the Respondents identified, on a test basis, certain open securities positions within the Sagam Corp. position report. The Respondents then reconciled the open positions they selected from Sagam Corp.'s client position report with the portfolio valuation that BJB had sent to Weiser. Therefore, for the accounts that the Respondents reviewed, they failed to verify all the funds and securities for these accounts, as required by Advisers Act Rule 206(4)-2(a)(5). Specifically, the Respondents did not identify every client's open securities and funds positions within the Sagam Corp. client position reports and verify these positions with the BJB portfolio valuations for that client. + d. The Respondents did not attempt to contact Sagam Corp.'s clients during the 1997 and 1998 surprise examinations to obtain written confirmation from the clients of the value of the funds and securities in each client's account, as required by Advisers Act Rule 206(4)-2(a)(5) and Investment Advisers Act Release No. 201. See Investment Advisers Act Release No. 201 (May 26, 1966) (generally provides guidance to accountants who conduct surprise examinations of advisers that are subject to the custody rule). Although Shiv knew the contact information for all Sagam Corp.'s clients, including clients that were foreign corporations, the Respondents never asked Shiv the identity of the beneficial owners of the corporate clients. + e. Nussbaum drafted, and Wahba reviewed and signed, an examination certificate for the 1997 surprise examination, dated February 12, 1998 (the "1997 Examination Certificate"). In the 1997 Examination Certificate, Weiser represented that "Securities owned as of the close of business on November 14, 1997, shown by the books and records examined by us, were located at Bank Julius Baer and Co. Ltd. … for which [Weiser] obtained confirmation." Prior to its filing with the Commission, Weiser's technical review department reviewed the 1997 Examination Certificate to ensure that it complied with applicable professional standards, and Weiser's technical review department concurred with its filing. On March 24, 1998, along with a Form ADV-E, Weiser filed the 1997 Examination Certificate, which failed to comply with the requirements of Rule 206(4)-2(a)(5) and applicable professional standards. The 1997 Examination Certificate did not state whether Weiser had verified any client funds over which Sagam Corp. was the custodian. The 1997 Examination Certificate also failed to state whether Sagam Corp. had been complying with Advisers Act Rule 204-2(b) for the period since the last surprise examination. + f. For the 1998 surprise examination of Sagam Corp., Nussbaum drafted, and Wahba reviewed and signed, an examination certificate dated January 19, 1999 and Form ADV-E (the "1998 Examination Certificate"). In January 1999, Wahba sent the 1998 Examination Certificate to Weiser's technical review department to ensure that it complied with all applicable professional standards. Weiser's technical review department retained the 1998 Examination Certificate until November 1999 while it was reviewing the language of the certificate. Prior to November 1999, the Respondents did not file any statement with the Commission indicating a delay concerning the filing of the 1998 Examination Certificate. Weiser's report control sheet for the 1998 surprise examination shows that the technical review department concurred with the filing of the 1998 Examination Certificate on November 30, 1999. However, the 1998 Examination Certificate was never filed with the Commission. + 3. SEC v. Shiv + a. On December 10, 2001, the Commission filed a civil injunctive action against Shiv, Sagam Corp., and Sagam LLC alleging violations of the antifraud provisions of the Securities Act, Exchange Act and Advisers Act. The Commission alleged that, from 1995 through 2001, Shiv, Sagam Corp., and Sagam LLC created and sent account statements to their investment advisory clients that materially overstated the value of assets in the clients' accounts. Shiv sent Sagam Corp.'s ten biggest clients statements falsely overstating the net asset value of the clients' accounts by a total of approximately $182 million. To cover the existence of his fraud, from 1996 to December 2001, Shiv made approximately 26 unauthorized transfers between client accounts. No evidence indicates that the Respondents knew of this fraudulent conduct prior to the Commission's civil action. + 4. Legal Requirements + a. Section 206(4) of the Advisers Act provides that it is unlawful for any investment adviser, by use of the mails or any means or instrumentalities of interstate commerce, directly or indirectly to engage in any act, practice or course of business which is fraudulent, deceptive, or manipulative pursuant to Commission rules defining prohibited acts, practices, or courses of business. + b. During the relevant period, Advisers Act Rule 206(4)-2(a)(5) stated that it constituted a fraudulent, deceptive, or manipulative act, practice or course of business within the meaning of Section 206(4) of the Advisers Act for any registered investment adviser who had custody or possession of any client's funds or securities to do any act, or take any action with respect to such funds or securities, unless all such client funds and securities were verified by actual examination at least once during each calendar year by an independent public accountant on a date chosen by the accountant without prior notice to the investment adviser. Advisers Act Rule 206(4)-2(a)(5) did not permit the independent accountant to use sampling, testing, or any other technique which would result in less than all of the funds and securities of the adviser's clients over which the adviser had custody or possession being verified during the calendar year. See Investment Advisers Act Release No. 201 (stating that an independent public accountant must reconcile the physical count and confirmation of current clients' funds and securities to the books and records of the investment adviser, but allowing the use of sampling for closed accounts only). See also PricewaterhouseCoopers Investment Advisers, LLC, SEC No-Action Letter, 1999 SEC No-Act. LEXIS 679 (August 10, 1999). Also, in order for the investment adviser to satisfy the conditions of Rule 206(4)-2(a)(5), the independent public accountant must have transmitted to the Commission, promptly after each examination, a certificate, attached to a Form ADV-E, stating that an examination of such funds and securities has been made, and describing the nature and extent of the examination. + c. On May 26, 1966, the Commission issued Investment Advisers Act Release No. 201, which described the nature of the examination and certificate required by Advisers Act Rule 206(4)-2(a)(5). According to Investment Advisers Act Release No. 201, to make an appropriate examination under Rule 206(4)-2(a)(5), an independent public accountant should have, among other things: (1) obtained confirmation of funds on deposit in banks; (2) reconciled the physical count and confirmations to the investment adviser's books and records; (3) verified the investment adviser's books and records by adequate examination of the security records and transactions since the last examination; and (4) obtained from clients written confirmation of the funds and securities in the clients' accounts as of the date of the physical examination. + d. Investment Advisers Act Release No. 201 also outlined the information that should be contained in the independent public accountant's examination certificate, including, among other things: (1) an appropriate description, in general terms, of the scope of the examination of the books and records; (2) whether the examination was made without prior notice to the adviser; and (3) the results of the examination including an expression as to whether, with respect to the rules under the Advisers Act, the investment adviser was in compliance with Rule 206(4)-2(a)(1) and (2) as of the examination date and had been complying with Rule 204-2(b) during the period since the prior examination date. + e. On May 1, 1998, the AICPA first provided guidance concerning the examination requirements of Advisers Act Rule 206(4)-2(a)(5) in its Audit and Accounting Guide - Audits of Investment Companies ("AICPA Guide"). According to the AICPA Guide, the attestation report must have included specific references to the following procedures that must have been performed by the independent accountant in connection with the surprise examination, including, among other things: (1) confirmation of all cash and securities held by a third party, such as a custodian bank or broker, in the name of the investment adviser as agent or trustee for clients; (2) reconciliation of all such cash and securities to books and records of client accounts maintained by the investment adviser; and (3) confirmation with all clients of the detail of cash and securities held by the investment adviser on behalf of such clients. In performing the examination, the independent public accountant must not have simply relied on a certified asset list furnished by the bank that held the clients' securities in safekeeping for the investment adviser. Instead, the accountant must have reconciled all such cash and securities to the books and records of client accounts maintained by the investment adviser. See Arthur Young & Co., SEC No-Action Letter, 1983 SEC No-Act. LEXIS 3197 (November 17, 1983). The AICPA Guide provided a sample attestation report for Advisers Act Rule 206(4)-2(a)(5) engagements. + 5. Violations + a. Sagam Corp. violated Section 206(4) of the Advisers Act because the Respondents failed to conduct the 1997 and 1998 surprise examinations of Sagam Corp. in accordance with the requirements of Rule 206(4)-2(a)(5) and applicable professional standards. Specifically, in both the 1997 and 1998 surprise examinations, the Respondents failed to determine for which accounts Sagam Corp. maintained custody of clients' funds and securities. The Respondents also failed to examine all clients' funds and securities for which Sagam Corp. maintained custody. The Respondents examined only a sampling of Sagam Corp.'s clients' accounts. Additionally, for the clients' accounts that the Respondents did select to examine, they failed to verify by actual examination all the funds and securities for these clients. Instead, the Respondents selected only a sampling of such funds and securities from Sagam Corp.'s books and records and reconciled this sampling to the certified asset list provided by the bank. Further, the Respondents did not attempt to obtain any written confirmation from Sagam Corp.'s clients of the amount of funds and securities held by Sagam Corp. on behalf of Sagam Corp.'s clients. Finally, the Respondents failed to include all the necessary representations in its 1997 Examination Certificate that was filed with the Commission. Specifically, the Respondents failed to state whether Sagam Corp. had been complying with Investment Advisers Act Rule 204-2(b) for the period since the last surprise examination. The Respondents also failed to ensure that the necessary Form ADV-E and examination certificate for Weiser's 1998 surprise examination was filed. + b. Because Weiser was hired to perform certain undertakings required by the Sagam Corp. Order, Weiser and Wahba knew about the Sagam Corp. Order and that Sagam Corp. had previously violated Section 206(4) of the Advisers Act for failing to have adequate surprise examinations performed by an independent public accountant pursuant to Rule 206(4)-2(a)(5). Nussbaum became aware of the Sagam Corp. Order in connection with the 1997 year-end audit of Sagam Corp., prior to his drafting the 1997 Examination Certificate. The Respondents therefore knew that if they failed to conduct the 1997 and 1998 surprise examinations pursuant to Rule 206(4)-2(a)(5) and applicable professional standards that Sagam Corp. would violate Section 206(4) of the Advisers Act and the Sagam Corp. Order. The Respondents designed and performed the surprise examination procedures, and these procedures were inadequate. Thus, the Respondents failed to conduct the 1997 and 1998 surprise examinations of Sagam Corp. in accordance with Rule 206(4)-2(a)(5) and applicable professional standards, causing Sagam Corp.'s violations of Section 206(4) of the Advisers Act. Therefore, the Respondents willfully aided and abetted and caused Sagam Corp.'s violations of Section 206(4) of the Advisers Act. + c. During both the 1997 and 1998 surprise examinations of Sagam Corp., the Respondents engaged in improper professional conduct. Rule 102(e)(1)(iv) defines improper professional conduct for accountants under Rule 102(e)(1)(ii). In particular, the Respondents engaged in improper professional conduct as defined by Rules 102(e)(1)(iv)(B)(1) and (2). + d. An accountant who acts negligently and engages in a single instance of highly unreasonable conduct that results in a violation of applicable professional standards in circumstances in which such an accountant knows, or should know, that heightened scrutiny is warranted has engaged in improper professional conduct. Rule 102(e)(1)(iv)(B)(1) of the Commission's Rules of Practice. The Respondents engaged in improper professional conduct as defined by this Rule by engaging in instances of highly unreasonable conduct in connection with their work on the 1997 and 1998 surprise examinations of Sagam Corp. + e. The Respondents engaged in instances of highly unreasonable conduct in connection with the 1997 and 1998 surprise examinations by failing to conduct these surprise examinations in accordance with Advisers Act Rule 206(4)-2(a)(5) by: (1) failing to ascertain for which accounts Sagam Corp. maintained custody of clients' funds and securities; (2) failing to examine each Sagam Corp. client account to verify whether all funds and securities were maintained in such account; (3) failing to verify all the funds and securities in each Sagam Corp. client account as of the date of the surprise examination; (4) failing to attempt to contact Sagam Corp.'s clients to obtain written confirmation of the balance of funds and securities in the clients' accounts; and (5) failing to file adequate surprise examination certificates. + f. The Respondents knew that heightened scrutiny was warranted in connection with their 1997 and 1998 surprise examinations of Sagam Corp. because: (1) the Respondents knew that the Sagam Corp. Order required that Sagam Corp. cease and desist from violating Section 206(4) of the Advisers Act and Rule 206(4)-2(a)(5) because of its failure to have an independent public accountant conduct a surprise examination of all Sagam Corp.'s clients' funds and securities; (2) the Respondents knew that the Sagam Corp. Order required Sagam Corp. and Shiv to cease and desist from violating the books and records requirements of the Advisers Act; and (3) the Respondents should have recognized that the bank and Sagam Corp. provided them portfolio valuations for a different number of clients. Therefore, the Respondents engaged in improper professional conduct, as defined by Rule 102(e)(1)(iv)(B)(1) of the Commission's Rules of Practice. + g. The Respondents engaged in improper professional conduct by repeated instances of unreasonable conduct resulting in violations of applicable professional standards that indicate a lack of competence to practice before the Commission in connection with the 1997 and 1998 surprise examinations of Sagam Corp. The Respondents engaged in repeated instances of unreasonable conduct by failing to conduct the 1997 and 1998 surprise examinations in accordance with Advisers Act Rule 206(4)-2(a)(5) and applicable professional standards, including Investment Advisers Act Release No. 201. Additionally, the Respondents failed to follow the guidance in the AICPA Guide for purposes of the 1998 surprise examination. Therefore, the Respondents engaged in improper professional conduct as defined by Rule 102(e)(1)(iv)(B)(2) of the Commission's Rules of Practice. + 6. Findings and Undertakings + a. Based on the foregoing, the Commission finds that the Respondents, in connection with the 1997 and 1998 surprise examinations of Sagam Corp., caused Sagam Corp.'s violations of Section 206(4) of the Advisers Act. + b. Based on the foregoing, the Commission finds that the Respondents, in connection with the 1997 and 1998 surprise examinations of Sagam Corp., willfully aided and abetted Sagam Corp.'s violations of Section 206(4) of the Advisers Act. + c. Based on the foregoing, the Commission finds that the Respondents, in connection with the 1997 and 1998 surprise examinations of Sagam Corp., engaged in improper professional conduct pursuant to Rules 102(e)(1)(ii) and (iv)(B)(1) and (2) of the Commission's Rules of Practice. + d. Weiser undertakes to: + 1. retain an independent consultant ("Consultant"), not unacceptable to the staff of the Commission, at Weiser's expense, to: (a) review, within 60 days of the entry of this Order, Weiser's policies and procedures, including, without limitation, the policies and procedures used by Weiser's technical review or quality control department, relating to work performed under the Advisers Act and the Investment Company Act of 1940 ("Investment Company Act") and all Rules promulgated thereunder; (b) recommend such additional policies and procedures which are reasonably designed to ensure that Weiser complies with applicable professional standards when performing work under the Advisers Act and the Investment Company Act and to submit to the Commission's staff, within 30 days of the review, a report outlining the results of the Consultant's review, and what recommendations, if any, were made; and (c) at least nine months after, but prior to one year from, the date of this Order, review Weiser's compliance with these policies and procedures, and to submit a report to the Commission's staff, within 30 days of the review, detailing the results of this review. + 2. require the Consultant to enter into an agreement that provides that for the period of the engagement and for a period of two years from completion of the engagement, the Consultant shall not enter into any employment, consultant, attorney-client, auditing or other professional relationship with Respondent, or any of its present or former affiliates, directors, officers, employees, or agents acting in their capacity. The agreement will also provide that the Consultant will require that any firm with which he/she is affiliated or of which he/she is a member, and any person engaged to assist the Consultant in performance of his/her duties under the Order shall not, without prior written consent of the staff of the Division of Enforcement, Northeast Regional Office, enter into any employment, consultant, attorney-client, auditing or other professional relationship with the Respondent, or any of its present or former affiliates, directors, officers, employees or agents acting in their capacity as such for the period of the engagement and for a period of two years after the engagement. + 3. to maintain membership in the SEC Practice Section of the American Institute of Certified Public Accountants Division for CPA Firms ("SEC Practice Section") or an organization providing equivalent oversight and quality control functions ("equivalent organization") as long as Weiser appears or practices before the Commission, and comply with all applicable SEC Practice Section or equivalent organization requirements, including all requirements for periodic peer reviews, concurring partner reviews, and continuing professional education. + IV. + In view of the foregoing, the Commission deems it appropriate to impose the sanctions agreed to in the Respondents' Offers. + Accordingly, it is hereby ORDERED, effective immediately, that: + A. Pursuant to Section 203(k) of the Advisers Act, Weiser, Wahba, and Nussbaum shall cease and desist from committing or causing any violations and any future violations of Section 206(4) of the Advisers Act. + B. Pursuant to Rules 102(e)(1)(ii) and (iii) of the Commission's Rules of Practice, Weiser is censured. + C. Pursuant to Rules 102(e)(1)(ii) and (iii) of the Commission's Rules of Practice, Wahba is denied the privilege of appearing or practicing before the Commission as an accountant. + D. After four years from the date of this order, Wahba may request that the Commission consider his reinstatement by submitting an application (attention: Office of the Chief Accountant) to resume appearing or practicing before the Commission as: + 1. a preparer or reviewer, or a person responsible for the preparation or review, of any public company's financial statements that are filed with the Commission. Such an application must satisfy the Commission that Wahba's work in his practice before the Commission will be reviewed either by the independent audit committee of the public company for which he works or in some other acceptable manner, as long as he practices before the Commission in this capacity; and/or + 2. an independent accountant. Such an application must satisfy the Commission that: + (a) Wahba, or the firm with which he is associated, is a member of the SEC Practice Section or equivalent organization; + (b) Wahba, or the firm, has received an unqualified report relating to his, or the firm's, most recent peer review conducted in accordance with the guidelines adopted by the SEC Practice Section or equivalent organization; and + (c) As long as Wahba appears or practices before the Commission as an independent accountant he will remain either a member of, or associated with a member firm of, the SEC Practice Section or equivalent organization, and will comply with all applicable SEC Practice Section or equivalent organization requirements, including all requirements for periodic peer reviews, concurring partner reviews, and continuing professional education. + E. The Commission will consider an application by Wahba to resume appearing or practicing before the Commission provided that his state CPA license is current and he has resolved all other disciplinary issues with the applicable state boards of accountancy. However, if the state licensure is dependant on reinstatement by the Commission, the Commission will consider an application on its other merits. The Commission's review may include consideration of, in addition to the matters referenced above, any other matters relating to Wahba's character, integrity, professional conduct, or qualifications to appear or practice before the Commission. + F. Pursuant to Rules 102(e)(1)(ii) and (iii) of the Commission's Rules of Practice, Nussbaum is denied the privilege of appearing or practicing before the Commission as an accountant. + G. After one year from the date of this order, Nussbaum may request that the Commission consider his reinstatement by submitting an application (attention: Office of the Chief Accountant) to resume appearing or practicing before the Commission as: + 1. a preparer or reviewer, or a person responsible for the preparation or review, of any public company's financial statements that are filed with the Commission. Such an application must satisfy the Commission that Nussbaum's work in his practice before the Commission will be reviewed either by the independent audit committee of the public company for which he works or in some other acceptable manner, as long as he practices before the Commission in this capacity; and/or + 2. an independent accountant. Such an application must satisfy the Commission that: + (a) Nussbaum, or the firm with which he is associated, is a member of the SEC Practice Section or an equivalent organization; + (b) Nussbaum, or the firm, has received an unqualified report relating to his, or the firm's, most recent peer review conducted in accordance with the guidelines adopted by the SEC Practice Section or equivalent organization; and + (c) As long as Nussbaum appears or practices before the Commission as an independent accountant he will remain either a member of, or associated with a member firm of, the SEC Practice Section or equivalent organization, and will comply with all applicable SEC Practice Section or equivalent organization requirements, including all requirements for periodic peer reviews, concurring partner reviews, and continuing professional education. + H. The Commission will consider an application by Nussbaum to resume appearing or practicing before the Commission provided that his state CPA license is current and he has resolved all other disciplinary issues with the applicable state boards of accountancy. However, if the state licensure is dependant on reinstatement by the Commission, the Commission will consider an application on its other merits. The Commission's review may include consideration of, in addition to the matters referenced above, any other matters relating to Nussbaum's character, integrity, professional conduct, or qualifications to appear or practice before the Commission. + I. Weiser shall, within 7 days of the entry of this Order, pay $26,152 in disgorgement plus $13,527 in prejudgment interest thereon for a total of $39,679 to Arthur Steinberg, Esq., the Court-appointed Receiver in SEC V. Shiv. Such payment shall be: (A) made by United States postal money order, certified check, bank cashier's check or bank money order; (B) made payable to Arthur Steinberg, Esq., as Receiver for Sagam Capital Management Corp.; (C) hand-delivered or mailed to Arthur Steinberg, Esq., Kaye Scholer LLP, 425 Park Avenue, New York, NY 10022; and (D) submitted under cover letter that identifies Weiser as a Respondent in these proceedings, the file number of these proceedings, a copy of which cover letter and money order or check shall be sent to Gerald A. Gross, Deputy Assistant Regional Director, Securities and Exchange Commission, Division of Enforcement, Northeast Regional Office, 233 Broadway, New York, NY, 10279. + J. Weiser shall comply with its undertakings enumerated in Section III.B.6 above. + + + By the Commission. + + + Jonathan G. Katz + Secretary + + + + Endnotes + 1 Rule 102(e)(1)(ii) provides, in relevant part, that: + The Commission may censure or deny, temporarily or permanently, the privilege of appearing or practicing before it … to any person … who is found … to have engaged in improper professional conduct. + Rule 102(e)(1)(iii) provides, in relevant part, that: + The Commission may censure or deny, temporarily or permanently, the privilege of appearing or practicing before it … to any person who is found … to have willfully violated, or willfully aided and abetted the violation … of the Federal securities laws or the rules or regulations thereunder. + 2 The findings herein are made pursuant to the Respondents' Offers of Settlement and are not binding on any other person or entity in this or any other proceeding. + 3 The Commission recently amended Rule 206(4)-2 to reflect modern custodial practices and clarify circumstances under which an adviser has custody of client assets. See Advisers Act Release No. 2176 (Sept. 29, 2003; Effective Date Nov. 5, 2003; Compliance Date April 5, 2004) http://www.sec.gov/rules/final/ia-2176.htm. In this amendment, the Commission eliminated the surprise examination requirement that existed under old Rule 206(4)-2(a)(5) when a qualified custodian sends quarterly account statements directly to the adviser's clients. If the qualified custodian does not send quarterly account statements, however, the adviser must comply with the surprise examination requirement. The scope of the independent public accountant's surprise examination did not change under the new rule. Rule 206(4)-2(a)(3)(ii)(B). This order refers to Rule 206(4)-2(a)(5), the custody rule in effect during the relevant period. + + + + + + + + + + + + + + + + + + + + + + + + + Return to top + + + + + SEC homepage + + + + + + + + + + + + + + About the SEC + + + + + + Budget & Performance + + + Careers + + + Commission Votes + + + Contact + + + Contracts + + + + + + + + Transparency + + + + + + Accessibility & Disability + + + Super Intelligence + + + FOIA + + + Inspector General + + + No FEAR Act Data + + + Ombuds + + + SEC Excess Personal Property Guidance + + + + + + + + Websites + + + + + + Investor.gov + + + Related Sites + + + USA.gov + + + + + + + + Site Information + + + + + + Plain Writing + + + Privacy & Security + + + Site Map + + + + + + + + + + + + + + + + + + Stay connected. 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Corrpro Companies, Inc., 1:04CV0085 (N.D. Ohio) + + The Commission announced today that it has filed an injunctive action against Corrpro Companies, Inc. (Corrpro), a U.S. public corporation based in Medina Ohio, alleging that Corrpro had inadequate internal controls during its fiscal years 2001 and the first three quarters of 2002. The complaint alleges that Corrpro engaged in reporting, record keeping and internal control violations. The Commission further announced that, simultaneously with the filing of the Complaint, Corrpro consented to the entry of an injunction from future violations of these provisions. Corrpro's offer of settlement will be submitted to the Court for its approval. + + According to the complaint, Corrpro misstated its financial statements during 2001 and the first three quarters of 2002, due to fraud in Corrpro's Australian subsidiary, which took place during approximately October 2000 through February 2002. The complaint alleges that the Australian subsidiary's chief executive officer and chief financial officer were falsifying certain of the subsidiary's financial records, and submitting the falsified information to Corrpro for inclusion in Corrpro's financial statements. The complaint alleges that Corrpro discovered the fraud through its own investigation in February 2002. The complaint further alleges, however, that Corrpro failed to discover the falsification of Corrpro Australia's statements until February 2002 due to its inadequate internal controls. Finally, the complaint alleges that following its discovery of the fraud in its Australian subsidiary, Corrpro undertook remedial measures to strengthen its financial reporting policies and internal control structure. + + The complaint alleges that, as a result of the foregoing, Corrpro violated Section 13(a) of the Securities Exchange Act of 1934 (Exchange Act) and Rules 12b-20, 13a-1 and 13a-13 thereunder, by filing financial statements that contained false financial data. The complaint also alleges that Corrpro violated Section 13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act, by failing to devise and maintain an adequate system of internal accounting controls. + + Corrpro has consented to the entry of a final judgment that permanently enjoins it from further violations of the provisions of the federal securities laws described above, and that requires it to comply with certain undertakings, without admitting or denying the allegations in the complaint. The undertakings require Corrpro to (i) continue to maintain the remedial measures it has adopted since Spring 2002 (after discovering the Australian fraud) in order to comply with the provisions of the federal securities laws alleged in the complaint; (ii) for at least its fiscal years ending March 2004, 2005 and 2006, continue to engage an outside firm with appropriate qualifications and expertise to perform the internal audit function, or should Corrpro decide to staff the internal audit function with its own employees, assist a designated employee director of internal audit in performing certain internal audit procedures, and to require the internal audit function to report directly to the Audit Committee; (iii) to require internal audit to prepare a confidential business report at the close of each of the above fiscal years, to the Audit Committee, and copied to the staff of the Commission and to Corrpro's independent auditors, which shall include (a) a description of the scope of the Audit Plan during the preceding year, (b) confirmation that the Audit Plan was carried out, (c) an overview of the significant control weaknesses identified which require improvement, and (d) a review of the steps taken to improve the system of internal controls; and (iv) for at least the fiscal years mentioned above, to maintain a hotline managed by an outside vendor pursuant to which employees, customers and vendors may report to the Audit Committee anonymously, without fear of retaliation, any suspicions of fraudulent or criminal activity, apparent weakness in control systems, misstatements or exaggerations of financial results, incorrect application of accounting policies, and any other activity that could lead to inaccuracies or distortions of Corrpro's financial results. + + In determining to accept Corrpro's settlement offer, the Commission considered that Corrpro undertook remedial actions and substantial cooperation with Commission staff. + + In 1998, Corrpro was previously sanctioned by the Commission for unrelated reporting and internal control violations. + + The Commission has also brought separate charges against the two officers of Corrpro's Australian subsidiary in connection with this matter (Securities and Exchange Commission v. Waring and Treloar, Case No. 1:03-cv-2030, N. D. Ohio), which are still pending. See Litigation Release Number 18382, and Accounting and Auditing Enforcement Release Number 1883, both dated October 1, 2003. The Commission's complaint in that action seeks injunctive relief against Waring and Treloar as well as the imposition of an officer and director bar. + + The Australian Commonwealth Director of Public Prosecution in Melbourne in the State of Victoria, Australia, has issued summons to Waring and Treloar for criminal violations of various sections of the Australian Corporations Act, and of the Crimes Act of the State of Victoria, in connection with the same conduct described in the Commission's complaint. + + CONTACT: Cynthia Storer Baran +(312) 886-1456 + + + +  + + + + + + + + + + + + + + + + + + + + + + + + + Return to top + + + + + SEC homepage + + + + + + + + + + + + + + About the SEC + + + + + + Budget & Performance + + + Careers + + + Commission Votes + + + Contact + + + Contracts + + + + + + + + Transparency + + + + + + Accessibility & Disability + + + Super Intelligence + + + FOIA + + + Inspector General + + + No FEAR Act Data + + + Ombuds + + + SEC Excess Personal Property Guidance + + + + + + + + Websites + + + + + + Investor.gov + + + Related Sites + + + USA.gov + + + + + + + + Site Information + + + + + + Plain Writing + + + Privacy & Security + + + Site Map + + + + + + + + + + + + + + + + + + Stay connected. 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P.C., Peter M. Behrens, CPA, Marvin J. Morris, CPA, and Benedict P. Rybicki, CPA + + + + + + + + + + + + Grant Thornton LLP, Doeren Mayhew & Co. P.C., Peter M. Behrens, CPA, Marvin J. Morris, CPA, and Benedict P. Rybicki, CPA + + + + + + + + + + + + + + + + + + + + + IN THE MATTER OF GRANT THORNTON LLP, DOEREN MAYHEW & CO. P.C., PETER M. BEHRENS, CPA, MARVIN J. MORRIS, CPA, AND BENEDICT P. RYBICKI, CPA + +The Securities and Exchange Commission announced today that it has instituted public administrative proceedings pursuant to Commission Rule 102(e) and cease-and-desist proceedings against Grant Thornton LLP, Doeren Mayhew & Co. P.C., Peter M. Behrens, Marvin J. Morris and Benedict P. Rybicki for misconduct in connection with their audit of MCA Financial Corporation's financial statements for the fiscal year ended January 31, 1998. + +At the time, MCA was a mortgage banking company based in Southfield, Michigan. Grant Thornton is a national accounting firm headquartered in Chicago, Illinois. Doeren Mayhew is an accounting firm based in Troy, Michigan. Grant Thornton and Doeren Mayhew jointly audited MCA's 1998 annual financial statements. Behrens, a 46-year-old resident of Troy, Michigan, is a partner in the Detroit office of Grant Thornton. Morris, a 60-year-old resident of Grosse Pointe Park, Michigan, and Rybicki, a 40-year-old resident of Grosse Pointe Park, Michigan, are directors of Doeren Mayhew. + +In the Order Instituting Proceedings the Commission's Division of Enforcement alleges that in connection with the 1998 MCA audit, the respondents caused and aided and abetted MCA's violations of the antifraud and reporting provisions of the federal securities laws, violated or caused and aided and abetted violations of Section 10A of the Exchange Act and engaged in improper professional conduct. + + +Specifically, the Division alleges: + MCA violated the antifraud and reporting provisions of the federal securities laws by filing materially false and misleading 1998 annual financial statements with the Commission and using those financial statements in connection with a public offering of debentures.   + MCA's 1998 annual financial statements were materially false and misleading because MCA utilized related party transactions to inflate and mischaracterize its income, assets and equity.   + Behrens and Morris were the engagement partners for the 1998 MCA audit. Rybicki was the engagement manager for that audit.   + during the audit, the respondents knew that MCA failed to disclose several million dollars of material, related party transactions in its 1998 annual financial statements.   + despite this knowledge, Grant Thornton and Doeren Mayhew jointly issued a report containing an unqualified opinion on MCA's 1998 annual financial statements and consented to the inclusion of their report in MCA's debenture offering materials.   + the respondents failed to inform MCA's Board of Directors that MCA's 1998 annual financial statements did not disclose millions of dollars of material, related party transactions.   + the respondents did not adequately plan the 1998 MCA audit, did not act with sufficient skepticism in conducting the audit, and did not obtain enough evidence to support their conclusions and, thus, engaged in improper professional conduct. + +A hearing will be scheduled before an administrative law judge to determine whether the Division's allegations are true, to provide the respondents an opportunity to dispute the allegations, and to determine what remedial sanctions are appropriate under the circumstances of this case. The Commission directed that an administrative law judge shall issue an initial decision in this matter within 300 days from the date and service of the Order. + +  + + See also the Order in this matter + + + +  + + + + + + + + + + + Resources + + + + + the Order in this matter + + + + + + + + + + + + + + + + + + + + + + + + Return to top + + + + + SEC homepage + + + + + + + + + + + + + + About the SEC + + + + + + Budget & Performance + + + Careers + + + Commission Votes + + + Contact + + + Contracts + + + + + + + + Transparency + + + + + + Accessibility & Disability + + + Super Intelligence + + + FOIA + + + Inspector General + + + No FEAR Act Data + + + Ombuds + + + SEC Excess Personal Property Guidance + + + + + + + + Websites + + + + + + Investor.gov + + + Related Sites + + + USA.gov + + + + + + + + Site Information + + + + + + Plain Writing + + + Privacy & Security + + + Site Map + + + + + + + + + + + + + + + + + + Stay connected. 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Hollinger International, Inc. , U.S. District Court for the Northern District of Illinois, Case No. 04C0336 (N.D. Ill. 2004) + +On January 16, 2004, the Securities and Exchange Commission obtained a federal court order against Hollinger International, Inc. to ensure that the work of the Special Committee of Hollinger International's board of directors - including its efforts to recover and preserve corporate assets - continues under the jurisdiction and oversight of the court, and without regard to whether there is a change in control at the company. Hollinger International consented to the entry of the order, which also permanently enjoins the company from violating the reporting and internal control provisions of the federal securities laws. The Commission filed a civil injunctive complaint against the Chicago-based Hollinger International in the United States District Court for the Northern District of Illinois alleging that, from at least 1999 through 2001, the company's Commission filings contained misstatements and omitted to state material facts regarding transfers of corporate assets to certain of Hollinger International's insiders and related entities. + +Under the order, Hollinger International is required to maintain its Special Committee to, among other things, continue its investigation of alleged misconduct and its efforts to recover and maintain corporate assets. In the event the Special Committee's authority were in any way impaired, including through a change in control of the company, Richard C. Breeden (the current Counsel to the Special Committee) would serve as a court-ordered Special Monitor to protect the interests of Hollinger International shareholders. A hearing will be set at a later date to determine whether it is appropriate to require Hollinger International to pay disgorgement, prejudgment interest and civil penalties. In addition, Hollinger International has expressly agreed that the Commission may file additional charges against it at a later time, including for the same conduct alleged in the complaint. + +Specifically, the Commission alleged that Hollinger International violated Sections 13(a), 13(b)(2)(A) and 13(b)(2)(B) of the Securities Exchange Act of 1934 [15 U.S.C. §§ 78m(a), 78m(b)(2)(A) and 78m(b)(2)(B)] and Rules 12b-20, 13a-1, 13a-13, 13b2-1 and 13b2-2 thereunder [17 C.F.R. §§ 240.12b-20, 240.13a-1, 240.13a-13, 240.13b2-1 and 240.13b2-2]. + + + SEC Complaint in this matter + + +  + + + + + + + + + + + + + + + + + + + + + + + + + Return to top + + + + + SEC homepage + + + + + + + + + + + + + + About the SEC + + + + + + Budget & Performance + + + Careers + + + Commission Votes + + + Contact + + + Contracts + + + + + + + + Transparency + + + + + + Accessibility & Disability + + + Super Intelligence + + + FOIA + + + Inspector General + + + No FEAR Act Data + + + Ombuds + + + SEC Excess Personal Property Guidance + + + + + + + + Websites + + + + + + Investor.gov + + + Related Sites + + + USA.gov + + + + + + + + Site Information + + + + + + Plain Writing + + + Privacy & Security + + + Site Map + + + + + + + + + + + + + + + + + + Stay connected. 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Causey + + + + + + + + + + + + Richard A. Causey + + + + + + + + + + + + + + + + + + + + Securities and Exchange Commission v. Richard A. Causey , , Civil Action No. H-04-0284 (Harmon) (S.D. Tx.) + +The Securities and Exchange Commission ("Commission") today charged Richard A. Causey, the former Chief Accounting Officer of Enron Corp., with violating, and aiding and abetting the violation of, the antifraud, periodic reporting, books and records, and internal controls provisions of the federal securities laws. [Sections 10(b), 13(a), 13(b)(2) and 13(b)(5) of the Securities Exchange Act of 1934 and Exchange Act Rules 10b-5, 12b-20, 13a1, 13a-13, 13b2-1 and 13b2-2] The Commission is seeking disgorgement of all ill-gotten gains, civil money penalties, a permanent bar from acting as a director or officer of a publicly held company, and an injunction against future violations of the federal securities laws. The Commission brought this action in coordination with the Justice Department's Enron Task Force, which filed related criminal charges against Causey. + +As alleged in the Complaint, Causey, along with others at Enron, engaged in a wide-ranging scheme to manipulate Enron's publicly reported earnings through a variety of devices designed to produce materially false and misleading financial results. As alleged, Causey and others fraudulently manipulated Enron's merchant asset portfolio; improperly used "off-balance-sheet" special purpose entities ("SPEs"); manipulated Enron's "business segment reporting" to conceal losses at Enron's retail energy business, Enron Energy Services ("EES"); manipulated expenses to conceal losses at Enron's broadband unit, Enron Broadband Services ("EBS"); and manipulated reserves in Enron's wholesale energy trading business to conceal earnings volatility and losses. The Complaint also alleges that Causey, and others, made false and misleading statements concerning Enron's financial results and the performance of its businesses, and that these misrepresentations also were reflected in Enron's public filings with the Commission. + +Specifically, the Commission's Complaint alleges as follows: + Manufacturing Earnings by Fraudulently Manipulating Asset Values. Causey and other senior Enron managers artificially increased the book value of certain assets in Enron's "merchant asset portfolio" to manufacture earnings needed to meet Enron internal budget targets. Because the portfolio included many energy-related businesses that were not publicly traded, Enron valued the businesses according to its own internal accounting "models." Enron then manipulated these models in order to produce results necessary to meet internal budget targets. For example, under the direction of Causey and others, Enron personnel fraudulently increased the value of one of the largest of Enron's merchant assets, Mariner Energy, Inc., by $100 million in the fourth quarter of 2000.   + Use of SPEs to Manipulate Reported Financial Results. Causey and others entered into fraudulent transactions with LJM Cayman, L.P and LJM2 Co-Investment, L.P. (collectively "LJM"), two "off-balance sheet" SPEs created and managed by Andrew Fastow, Enron's then-Chief Financial Officer, to manipulate Enron's reported financial results. These transactions primarily took the form of purported "asset sales," which were used to manufacture earnings for Enron and conceal debt. The transactions were not arm's-length and could not have been accomplished using legitimate independent counterparties. In many instances, the transactions were conducted pursuant to an undisclosed side agreement between Causey and Fastow that LJM would be guaranteed against loss in certain of its transactions with Enron, and that other losses to LJM would be made up through other transactions with Enron. +In addition, the Commission's Complaint describes Causey's role in the infamous "Raptor" transactions. Beginning in the spring of 2000, Enron and LJM engaged in a series of financial transactions with four SPEs called Raptor I, Raptor II, Raptor III and Raptor IV (collectively referred to as the "Raptors"). Raptor I was designed to protect Enron from having to report publicly decreases in value in large portions of its energy "merchant asset portfolio" and technology investments by allowing Enron to "hedge" the value of those investments with an allegedly independent third party, known as Talon. The Raptor I structure, however, was invalid under applicable accounting rules because, among other things, (i) Talon was not independent from Enron and LJM's investment in Talon was not at risk, and (ii) Causey and Fastow had entered into an oral side agreement that LJM would receive its initial investment in Talon ($30 million) plus a large profit ($11 million) from Enron, all prior to Talon engaging in any of the hedging transactions. To satisfy the side deal, Causey, Fastow, and others manufactured a transaction between Enron and Talon that generated a $41 million payment to LJM. Causey and others caused Enron to purchase a "put" on its own stock that had no business purpose, but instead was designed to ensure that LJM was returned its initial investment plus its promised profit. After satisfying the side deal, Enron used Raptor I to hedge the value of Enron's already-inflated assets. Causey and Fastow also used Raptor I to fraudulently misrepresent Enron's financial position by back-dating a hedge so that Enron could capture the all-time high stock value of one of the Enron assets at a time when they knew that the value had already declined.   + Concealing EES Failures. Causey and others concealed massive losses at EES by fraudulently manipulating Enron's "business segment reporting." At the close of the first quarter of 2001, Enron, with Causey's approval, "reorganized" its business segments and moved a large portion of EES's business into Enron North America ("ENA"), part of Enron's wholesale energy business segment. The "reorganization" was fraudulently designed to conceal hundreds of millions of dollars of losses at EES, Enron's heavily touted retail energy trading business, which it would otherwise have had to disclose. Enron moved the losing portion of EES's business into ENA because, as Causey and others knew, ENA had ample earnings, including large reserves accounts as described below, and could cover the EES losses while continuing to meet Enron's internal budget targets.   + Concealing EBS Failures. In the first quarter of 2001, Causey and others concealed losses at EBS by fraudulently manipulating EBS's expenses. Causey manipulated EBS's expenses to ensure that EBS did not record first-quarter losses that exceeded the annual losses that Enron had budgeted for EBS and to achieve Causey's dictated first quarter 2001 financial result.   + Manipulating Reserves to Conceal Earnings Volatility and Losses. During 2000 and 2001, Enron's wholesale energy trading business, primarily its ENA business, began generating extraordinary trading profits as a result of rapidly rising energy prices in the western United States, especially in California. In order to mask these earnings and preserve them for later use, Causey and others fraudulently created and used reserve accounts within ENA both to conceal the extent of ENA's trading profits and to avoid reporting large losses in other areas of its business. + +The Commission brought this action in coordination with the U.S. Department of Justice Enron Task Force. The Commission's investigation is continuing. + + SEC Complaint in this matter + + +  + + + + + + + + + + + + + + + + + + + + + + + + + + Return to top + + + + + SEC homepage + + + + + + + + + + + + + + About the SEC + + + + + + Budget & Performance + + + Careers + + + Commission Votes + + + Contact + + + Contracts + + + + + + + + Transparency + + + + + + Accessibility & Disability + + + Super Intelligence + + + FOIA + + + Inspector General + + + No FEAR Act Data + + + Ombuds + + + SEC Excess Personal Property Guidance + + + + + + + + Websites + + + + + + Investor.gov + + + Related Sites + + + USA.gov + + + + + + + + Site Information + + + + + + Plain Writing + + + Privacy & Security + + + Site Map + + + + + + + + + + + + + + + + + + Stay connected. 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Lloyd Silverstein + + Civil Action No. 04 Civ. 255 (E.D.N.Y.)(Glasser, I.L.) + + On January 22, 2004, the Securities and Exchange Commission filed charges against Lloyd Silverstein, a former senior vice president of finance at Computer Associates International, Inc., ("CA"), for committing accounting fraud while at CA. The Commission's complaint, filed in the United States District Court for the Eastern District of New York, alleges that Silverstein participated in a widespread practice that resulted in the improper recognition of revenue by CA, one of the world's largest software companies. During at least CA's fiscal year 2000, which ran from April 1, 1999 through March 31, 2000 ("FY2000"), CA prematurely recognized revenue from software contracts that had not yet been consummated, in violation of Generally Accepted Accounting Principles ("GAAP"). The Commission's complaint alleges that, based on this conduct, Silverstein violated Sections 10(b) and 13(b)(5) of the Securities Exchange Act of 1934 ("Exchange Act"), and Rules 10b-5 and 13b2-1 thereunder. The Complaint further alleges that Silverstein is also liable for aiding and abetting CA's violations of Sections 10(b), 13(a) and 13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act, and Rules 10b-5, 12b-20, 13a-1 and 13a-13 thereunder. Without admitting or denying the allegations of the Complaint, Silverstein consented to a permanent injunction and officer and director bar, as described more fully below. + + Specifically, the Commission's complaint alleges as follows: + + Through the conduct of certain members of CA management, including Silverstein, CA engaged in a practice in which CA held its books open after the end of each quarter and improperly recorded, in that elapsed quarter, revenue from contracts that had not been finalized and executed before the expiration of the quarter. CA personnel sometimes concealed this practice by using licensing contracts that falsely bore preprinted signature dates for the last day of the quarter that had just expired, rather than the subsequent dates on which the contracts actually were executed.   + + As a result of this improper practice, CA made material misrepresentations and omissions about its revenue and earnings in Commission filings and other public statements for at least FY2000. For the Second, Third and Fourth Quarters of FY2000, respectively, at least 33%, 26% and 5.5% of CA's reported quarterly revenues pertained to contracts not executed by CA or the company's clients by the quarter's end. For all quarters of FY2000 combined, CA prematurely recognized over $1 billion in revenue from at least 95 contracts that the client or CA signed after the quarter close.   + + CA's FY2000 reported revenues and earnings per share appeared to meet or exceed the consensus estimates of Wall Street analysts, but CA failed to disclose that those reported results improperly included prematurely recognized revenue and did not comply with GAAP. When CA refrained from recognizing revenue prematurely during the Second Quarter of FY2001, the company missed its earnings estimate and CA's stock price dropped over 43% in a single day. The Commission further alleges that Silverstein facilitated CA's accounting fraud by, among other things: + + (1) advising CA's sales force of the number of days CA's management and Finance Department had decided to "extend" a particular fiscal quarter; + + (2) knowing or recklessly disregarding the fact that CA personnel were backdating contracts to conceal their true execution dates; + + (3) participating in the process of negotiating contracts after quarter's end while knowing or recklessly disregarding the fact that CA would record revenue from those contracts in the quarter that had just elapsed; + + (4) knowing or recklessly disregarding the fact that the purpose of extending fiscal quarters and backdating contracts was improperly to report in prior fiscal quarters revenue from contracts that were not executed and finalized until after those fiscal quarters elapsed, and knowing or recklessly disregarding the fact that such practices were improper under GAAP; + + (5) allowing personnel to forward false and misleading contracts and paperwork to CA's Finance Department for accounting purposes; and + + (6) advising CA's sales force about revenue recognition rules while he knew or should have known that GAAP required that both CA and the customer execute a software contract before CA could recognize revenue from that contract + + In its lawsuit, the Commission seeks a judgment: (a) permanently enjoining Silverstein from violating, and aiding and abetting violations of, the securities laws; (b) requiring Silverstein to disgorge his ill-gotten gains together with prejudgment interest; (c) imposing civil money penalties; and (d) barring Silverstein from acting as an officer or director of a publicly held company. + + Concurrently with the filing of the Commission's complaint, Silverstein, without admitting or denying the allegations of the Complaint, consented to entry of a permanent injunction prohibiting him from violating Sections 10(b) and 13(b)(5) of the Exchange Act and Rules 10b-5 and 13b2-1 thereunder, and from aiding and abetting any violations of Sections 10(b), 13(a), 13(b)(2) of the Securities Exchange Act of 1934 and Rules 10b-5, 12b-20, 13a-1 and 13a-13. Silverstein also consented to a permanent bar from serving as an officer or director of a publicly held company. Litigation against Silverstein with respect to the Commission's claims of disgorgement and penalties is continuing. + + The Commission acknowledges the assistance of the United States Attorney's Office for the Eastern District of New York and the Federal Bureau of Investigation in this matter. The Commission's investigation is continuing. + + SEC Complaint in this matter + + + +  + + + + + + + + + + + + + + + + + + + + + + + + + Return to top + + + + + SEC homepage + + + + + + + + + + + + + + About the SEC + + + + + + Budget & Performance + + + Careers + + + Commission Votes + + + Contact + + + Contracts + + + + + + + + Transparency + + + + + + Accessibility & Disability + + + Super Intelligence + + + FOIA + + + Inspector General + + + No FEAR Act Data + + + Ombuds + + + SEC Excess Personal Property Guidance + + + + + + + + Websites + + + + + + Investor.gov + + + Related Sites + + + USA.gov + + + + + + + + Site Information + + + + + + Plain Writing + + + Privacy & Security + + + Site Map + + + + + + + + + + + + + + + + + + Stay connected. 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Ross, CPA + + + + + + + + !function(){var e=navigator.userAgent,a=document.documentElement,n=a.className;n=n.replace("no-js","js"),/iPad|iPhone|iPod/.test(e)&&!window.MSStream&&(n+=" ua-ios"),a.className=n}(); + {"path":{"baseUrl":"\/","pathPrefix":"","currentPath":"node\/368561","currentPathIsAdmin":false,"isFront":false,"currentLanguage":"en"},"pluralDelimiter":"\u0003","suppressDeprecationErrors":true,"gtag":{"tagId":"","consentMode":false,"otherIds":[],"events":[],"additionalConfigInfo":[]},"ajaxPageState":{"libraries":"eJxdT0GOwzAI_JBdn_oei2DkeINNZLC22devlaZS2wtiBhhmcKNUTPo97jxyaXEH3GJpiZrFhQW38A4cMqgeYQGlV19JFTKpQ-kUmvQKXP7I0cO4tC2kPnbg2wVdFslM0SCHPMs3vsEPPD7J6hgOGdPCKJyoRxxqUuePHjLLAuzVjimenRJGSLW08NoBK9LUn6SHlrytVOlcpJShB63QLSpBx_WkOzHNePol4fRQo_qMPvQ36ZXsAmd99lMNr2t_GUR9n60EyX9a_wePd5ns","theme":"uswds_sec","theme_token":null},"ajaxTrustedUrl":[],"gtm":{"tagId":null,"settings":{"data_layer":"dataLayer","include_classes":false,"allowlist_classes":"","blocklist_classes":"","include_environment":false,"environment_id":"","environment_token":""},"tagIds":["GTM-TD3BKV"]},"data":{"extlink":{"extTarget":false,"extTargetAppendNewWindowDisplay":true,"extTargetAppendNewWindowLabel":"(opens in a new window)","extTargetNoOverride":false,"extNofollow":false,"extTitleNoOverride":false,"extNoreferrer":false,"extFollowNoOverride":false,"extClass":"0","extLabel":"(link is external)","extImgClass":false,"extSubdomains":true,"extExclude":".*\\.gov|http:\/\/www.xbrl.org\/utr\/2013-05-17\/utr.xml|http:\/\/www.xbrl.org\/dtr\/type\/numeric-2009-12-16.xsd|http:\/\/www.xbrl.org\/dtr\/type\/nonNumeric-2009-12-16.xsd|https:\/\/secir.secure.force.com\/ombudsman\/OMMSForm","extInclude":"","extCssExclude":".data-exempt","extCssInclude":"","extCssExplicit":"","extAlert":true,"extAlertText":"You are now leaving the SEC Website. 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Ross, CPA + + + + + + + + + + + + Richard R. Ross, CPA + + + + + + + + + + + + + + + + + + + + + SECURITIES ACT OF 1933 +Release No. 8361 / February 4, 2004 + + SECURITIES EXCHANGE ACT OF 1934 +Release No. 49186 / February 4, 2004 + + ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 1950 / February 4, 2004 + + Admin. Proc. File No. 3-11392 + + + + In the Matter of + RICHARD R. ROSS, CPA + Respondent. + + : : : : : : : : : : + ORDER INSTITUTING PUBLIC ADMINISTRATIVE PROCEEDINGS PURSUANT TO RULE 102(e)(3) OF THE COMMISSION'S RULES OF PRACTICE, MAKING FINDINGS, AND IMPOSING REMEDIAL SANCTIONS + I. + The Securities and Exchange Commission ("Commission") deems it appropriate and in the public interest that public administrative proceedings be, and hereby are, instituted against Richard R. Ross ("Ross" or "Respondent"), CPA pursuant to Rule 102(e)(3) of the Commission's Rules of Practice. 1 > + II. + In anticipation of the institution of these proceedings, Respondent has submitted an Offer of Settlement ("Offer"), which the Commission has determined to accept. Solely for the purpose of these proceedings and any other proceedings brought by or on behalf of the Commission, or to which the Commission is a party, and without admitting or denying the findings contained herein, except as to the Commission's jurisdiction over him and the subject matter of these proceedings and the findings contained in Section III.3 below, which are admitted, Respondent consents to the entry of this Order Instituting Administrative Proceedings Pursuant to Rule 102(e)(3) of the Commission's Rules of Practice, Making Findings, and Imposing Remedial Sanctions ("Order"), as set forth below. + III. + On the basis of this Order and Respondent's Offer, the Commission finds that: + 1. Richard R. Ross, CPA, age 36, was the chief financial officer of Styling Technology Corporation ("Styling") from April 1997 to April 2000. Prior to joining Styling, Ross worked in Arthur Andersen LLP's office in Phoenix, Arizona, and was the manager on two Styling audits. Ross is a certified public accountant licensed in California. + 2. Styling Technology Corporation is a Delaware corporation headquartered in Scottsdale, Arizona that at all relevant times was engaged in the development, production and marketing of beauty salon products. Styling's common stock is registered with the Commission under Section 12(g) of the Securities Exchange Act of 1934 ("Exchange Act") and until November 1999 was listed for trading on the Nasdaq National Market System. In August 2000, Styling entered a proceeding under Chapter 11 of the U.S. Bankruptcy Code and shortly thereafter restated its financial statements for 1997, 1998 and the first two quarters of 1999. Pursuant to a plan of reorganization filed in the bankruptcy court, Styling sold off all of its business assets. + 3. On December 4, 2003, the U.S. District Court for the District of Columbia entered a final judgment by consent against Ross, permanently enjoining him from violating Section 17(a) of the Securities Act of 1933 and Sections 10(b) and 13(b)(5) of the Exchange Act and Rules 10b-5, 13b2-1 and 13b2-2 thereunder and from aiding and abetting violations of Sections 13(a), 13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act and Rules 12b-20, 13a-1 and 13a-13 thereunder in a civil action entitled Securities and Exchange Commission v. Sam Leopold et al., Civil Action Number 1:03-cv-02491-RMU. The Court also ordered Ross to disgorge $100,000, based on the payment of two bonuses to him and his exercise of Styling options during 1998, and ordered that he be permanently barred from acting as an officer or director of a public company. + 4. The Commission's complaint alleged, among other things, that Ross and others engaged in a fraudulent scheme which resulted in Styling filing materially false and misleading financial statements in its annual reports on Form 10-K for the fiscal years ended December 31, 1997 and December 31, 1998 and in its quarterly reports on Form 10-Q for the first two quarters of fiscal year 1999. The complaint alleged that Ross engaged in a number of accounting practices that did not conform with generally accepted accounting principles ("GAAP") and that materially inflated Styling's reported earnings. The complaint specifically alleged that, during 1997 and 1998, Ross, among other things, directed or approved the recording of revenue from transactions in which Styling did not ship any product or in which the company merely shipped product between warehouses it controlled. The complaint further alleged that during 1999 Ross continued to direct or approve the recognition of revenue from sales that did not meet GAAP criteria, and that Ross and others falsely attributed the write-off of $5.1 million of uncollectible accounts receivable to a strategic business realignment. + IV. + In view of the foregoing, the Commission deems it appropriate and in the public interest to impose the sanction agreed to in Respondent Ross' Offer. + Accordingly, IT IS HEREBY ORDERED, effective immediately, that Ross is suspended from appearing or practicing before the Commission as an accountant. + + + By the Commission. + + + Jonathan G. Katz + Secretary + + + + Endnotes + 1 Rule 102(e)(3)(i) of the Commission's Rules of Practice provides, in relevant part, that: + The Commission, with due regard to the public interest and without preliminary hearing, may, by order, . . . suspend from appearing or practicing before it any . . . accountant . . . who has been by name . . . permanently enjoined by any court of competent jurisdiction, by reason of his or her misconduct in an action brought by the Commission, from violating or aiding and abetting the violation of any provision of the Federal securities laws or of the rules and regulations thereunder. + + + + + + + + + + + + + + + + + + + + + + + + + Return to top + + + + + SEC homepage + + + + + + + + + + + + + + About the SEC + + + + + + Budget & Performance + + + Careers + + + Commission Votes + + + Contact + + + Contracts + + + + + + + + Transparency + + + + + + Accessibility & Disability + + + Super Intelligence + + + FOIA + + + Inspector General + + + No FEAR Act Data + + + Ombuds + + + SEC Excess Personal Property Guidance + + + + + + + + Websites + + + + + + Investor.gov + + + Related Sites + + + USA.gov + + + + + + + + Site Information + + + + + + Plain Writing + + + Privacy & Security + + + Site Map + + + + + + + + + + + + + + + + + + Stay connected. 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Individuals (SALI) + + + + + Enforcement Data Delivery Standards + + + + + Small Businesses + + + + + Appellate Briefs + + + + + Amicus / Friend of the Court Briefs + + + + + + + + + + + + + + + + + + + + + + + + + + Enforcement & Litigation + + + + + + + Litigation Releases + + + + + Administrative Proceedings + + + + + Administrative Law Judge Orders and Initial Decisions + + + + + Trading Suspensions + + + + + Distributions to Harmed Investors + + + + + Receiverships + + + + + Electronic Filings in Administrative Proceedings (eFAP) + + + + + Rules of Practice + + + + + Applications for Reentry + + + + + Reports of Investigations + + + + + Whistleblower Program + + + + + Public Alert: Unregistered Soliciting Entities (PAUSE) + + + + + SEC Action Lookup - Individuals (SALI) + + + + + Enforcement Data Delivery Standards + + + + + Small Businesses + + + + + Appellate Briefs + + + + + Amicus / Friend of the Court Briefs + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + Home + + + Enforcement and Litigation + + + Litigation Releases + + + Cumulus Media Inc. et al. + + + + + + + + + + + + Cumulus Media Inc. et al. + + + + + + + + + + + + + + + + + + + U.S. SECURITIES AND EXCHANGE COMMISSION + Litigation Release No. 18566 February 5, 2004 + + Accounting and Auditing Enforcement +Release No. 1951 / February 5, 2004 + + Securities and Exchange Commission v. Cumulus Media Inc. et al., (U.S.D.C. N.D. Ill., Case Number 03-C-8908, filed December 10, 2003) + + The Securities and Exchange Commission announced that on January 22, 2004, Judge Ronald Guzman of the United States District Court for the Northern District of Illinois, entered Final Judgments and Orders of Permanent Injunction against Cumulus Media Inc., its former Chief Financial Officer, Richard J. Bonick, Jr., its former Vice President of Finance, Daniel O'Donnell, and its former Executive Chairman, Richard W. Weening, based on their involvement in two separate schemes to artificially inflate Cumulus' financial position. The Commission's Complaint, filed on December 10, 2003, alleged that throughout 1999, Cumulus and Bonick prematurely recorded revenue from advertising contract packages into Cumulus' books, records and accounts causing Cumulus to overstate its net revenues and broadcast cash flows and understate its net losses for the first and third quarters of 1999. The Commission's Complaint further alleged that in a second scheme, Cumulus, Weening and O'Donnell engaged in an attempt to manage Cumulus' earnings and broadcast cash flow for the fourth quarter of 1999 in order to bring those figures in line with Wall Street analyst's expectations for that quarter. + The Final Judgments, entered pursuant to Cumulus, Bonick, O'Donnell and Weening's consents and without admitting or denying the allegations of the Commission's Complaint, permanently enjoined them from violating or aiding and abetting violations of the federal securities laws and ordered Bonick, O'Donnell and Weening to pay civil penalties. Specifically, the Court permanently enjoined Bonick from violating or aiding and abetting violations of Sections 17(a)(2) and 17(a)(3) of the Securities Act of 1933, Sections 13(a), 13(b)(2)(A), 13(b)(2)(B) and 13(b)(5) of the Securities Exchange Act of 1934 and Rules 12b-20, 13a-13 and 13b2-1 and imposed a civil penalty of $50,000 against him. The Court permanently enjoined Weening and O'Donnell from violating or aiding and abetting violations of Sections 13(b)(2)(A) and 13(b)(5) of the Exchange Act and Rules 13b2-1 and 13b2-2 thereunder and imposed civil penalties of $75,000 and $40,000 respectively against them. The Court permanently enjoined Cumulus from violating Sections 17(a)(2) and 17(a)(3) of the Securities Act, Sections 13(a), 13(b)(2)(A), 13(b)(2)(B) and 13(b)(5) of the Exchange Act and Rules 12b-20, 13a-13 and 13b2-1 thereunder. + For further information, see LR-18504 (December 12, 2003). + + + SEC Complaint in this matter --> + + + + + + + + + + + + + + + + + + + + + + + + + + Return to top + + + + + SEC homepage + + + + + + + + + + + + + + About the SEC + + + + + + Budget & Performance + + + Careers + + + Commission Votes + + + Contact + + + Contracts + + + + + + + + Transparency + + + + + + Accessibility & Disability + + + Super Intelligence + + + FOIA + + + Inspector General + + + No FEAR Act Data + + + Ombuds + + + SEC Excess Personal Property Guidance + + + + + + + + Websites + + + + + + Investor.gov + + + Related Sites + + + USA.gov + + + + + + + + Site Information + + + + + + Plain Writing + + + Privacy & Security + + + Site Map + + + + + + + + + + + + + + + + + + Stay connected. 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No. 49182 / February 4, 2004 + + ACCOUNTING AND AUDITING ENFORCEMENT +Rel. No. 1952 / February 4, 2004 + +Admin. Proc. File No. 3-10509 + + In the Matter of +JAMES THOMAS MCCURDY, CPA + OPINION OF THE COMMISSION + RULE 102(e) PROCEEDING + Grounds for Remedial Action + Improper Professional Conduct + +Accountant engaged in improper professional conduct when he failed (1) to obtain sufficient competent evidence regarding the probable collectibility of a receivable; (2) to maintain an attitude of professional skepticism; (3) to render an accurate audit report, in that he certified financial statements as being prepared in accordance with generally accepted accounting principles when they were not; and (4) to exercise due professional care. Held , it is in the public interest for the respondent to be denied the privilege of appearing or practicing before the Commission as an accountant for one year. + + APPEARANCES: + + Charles M. Carberry , of Jones, Day, Reavis & Pogue, for James Thomas McCurdy. + + Karen Matteson , for the Division of Enforcement and Office of the Chief Accountant. + +Appeal filed: August 30, 2002 +Last brief received: December 11, 2002 +Oral argument: October 29, 2003 + + I. + +The Division of Enforcement and the Office of the Chief Accountant (together the "Division") appeal from the decision of an administrative law judge. The law judge found that James Thomas McCurdy did not engage in improper professional conduct within the meaning of Rule 102(e)(1)(ii) of the Commission's Rules of Practice 1 in connection with his audit of the financial statements of JWB Aggressive Growth Fund (the "Fund"), a registered investment company, 2 for the year ending December 31, 1998 ("FY 1998"). The law judge found that the Division did not establish that the financial statements were not in accordance with generally accepted accounting principles ("GAAP"). The law judge found that nonetheless McCurdy did violate generally accepted auditing standards ("GAAS") in that he should have obtained more evidence from additional sources in assessing the probable collectibility of a receivable that comprised 25% of the Fund's assets. The law judge concluded, however, that McCurdy's failure to do so was neither reckless nor highly unreasonable, and she dismissed the charges against him. We base our findings on an independent review of the record, except with respect to those findings not challenged on appeal. 3 + + II. + +McCurdy has been a certified public accountant ("CPA") since 1980. He is licensed to practice in Ohio. His firm, McCurdy & Associates CPAs, Inc., specializes in auditing mutual funds and broker-dealers doing business on a fully disclosed basis. Before founding McCurdy & Associates in 1980, McCurdy served as the CFO for a savings and loan for approximately seven years. McCurdy has never been subject to professional discipline. + +The Fund became registered with the Commission as an investment company in November 1995 and commenced operations in March 1996. At its height, it had approximately sixty investors and total net assets of $456,0000. John W. Bagwell, doing business as JWB Investment Advisory & Research ("Bagwell" or the "Adviser"), was the investment adviser of the Fund, which was his only advisory client. Bagwell was also the president and a trustee of the Fund. + +By voluntary agreement, the Adviser undertook to reimburse the Fund's expenses to the extent they exceeded a certain percentage of the Fund's assets. The Fund's expenses consistently exceeded the cap. The Fund paid the expenses as they were incurred, keeping track of the payments in a "Due From Adviser" account. + +As of December 31, 1997, the "Due From Adviser" account had a balance of $3,783. By early December 1998, the balance was nearly $80,000. + +At a December 3, 1998 Fund board meeting, Bagwell informed the Fund's trustees that the Adviser was immediately terminating the voluntary agreement to absorb Fund expenses that exceeded the cap. Bagwell also told the trustees that it would be "extremely difficult" for him to pay off the balance in the "Due From Adviser" account by December 31. Bagwell asked the board to allow him to pay off the amount due over time. He stated that, since the voluntary agreement was no longer in effect, the balance in the account would not continue to increase. Attached to the minutes of the board meeting was a letter from Bagwell dated November 20, 1998, in which Bagwell made a "voluntary commitment" to paying off the outstanding receivable -- at that time, $79,465.23 -- "in a timely manner," according to a schedule that called for Bagwell to pay $5,000 in November; $5,000 in December, "or bring the receivable below the guideline where the receivable is not a material fact"; and "$5,000 to $20,000 a month" from January 1999 until the receivable was paid off in full. + +The minutes of the December 3 trustees' meeting ("December 3 Minutes") provide the following account of the board's discussion of Bagwell's proposal: + +In answer to questioning from the Board, [counsel for the board] explained to the Board that, under normal circumstances, it was illegal for a mutual fund to lend money to an adviser. By allowing the Adviser to pay off this balance over time, the SEC, pursuant to an audit, could claim that such an action constituted an illegal lending of Fund assets. However, the Board also should look at the totality of the circumstances. If the Board refused to allow the Adviser time to pay off the balance, such an action could have serious adverse effects on the Adviser, to the long-term detriment of the Fund. Further, but for the voluntary actions of the Adviser, the Fund would have absorbed all those expenses, to the substantial detriment of the shareholders. Another element to consider was the [Board's] duty to assure itself that the Adviser was a viable entity on a continuing basis. If the Board found otherwise, it would have an obligation to take steps to rectify that situation. [The fact that] the Adviser . . . could not immediately satisfy its obligation raised [a question as to the Adviser's viability. Counsel] advised the Board to assure itself, before making any decision, that the Adviser was a viable entity and that extending time to the Adviser to pay off the receivable account would be, in their reasonable business judgement, of long-term benefit to the shareholders of the Fund, and that such benefit outweighed the risks to the Fund. + +The Board then questioned Mr. Bagwell at length concerning the financial condition of the Adviser, the Adviser's ability to pay off the account in a reasonable time period, and the sources of income available to the Adviser to pay off such sums. The Adviser presented a balance sheet and income statement to the Board and demonstrated, to the satisfaction of the Board, that the Adviser would be able to pay off the account not later than June of 1999. + +Mr. Bagwell again referred to the proposed payment schedule . . . and assured the Board that he would be able to comply with its requirements. + +After its discussion, the board unanimously approved the proposed payment schedule, as did the independent trustees by separate vote. Despite Bagwell's assurances, however, he had not made the payment due in November, nor did he make the payment due in December. The record does not indicate whether the Board noted or discussed the missed November payment, or the payment due in December. + +In December, 1998, the Fund's board of trustees retained McCurdy's firm to audit the Fund's 1998 financial statements. McCurdy began work on the audit in January 1999 and completed the field work for the audit on January 25, 1999. The financial statements showed that the Fund had assets of $340,484. Among the assets listed was a receivable due from the Adviser in the amount of $83,399 (the "Receivable"). Because the Receivable was included as an asset, it was included when the net asset value of the Fund was calculated. + +McCurdy recognized, while conducting the audit, that the Receivable was "very material" to the Fund because it constituted nearly 25% of the Fund's total assets. 4 McCurdy also recognized that the Receivable arose from a related party transaction. Because the Receivable was based on a material related party transaction, McCurdy determined that additional audit procedures would be necessary. 5 + +McCurdy testified that, in evaluating the probable collectibility of the Receivable, he considered, among other things, the evaluation of the Fund's independent trustees and its board, as reflected in the December 3 Minutes. 6 McCurdy both reviewed the Minutes and spoke to Fund counsel, who participated in the meeting and advised the board in its deliberations as to whether it should extend the time for the Adviser to repay the Receivable. 7 McCurdy did not contact the trustees to discuss the matter, nor did he discuss it with the Adviser. Although the minutes indicate that the board "questioned [the Adviser] at length" concerning his financial condition, his ability to pay off the account in a reasonable time period, and the sources of income available to him to repay such sums, McCurdy did not inquire into what those questions were, or what answers the board received. Additionally, although the minutes state that the Adviser presented "a balance sheet and income statement" to the board, these materials were not included as attachments to the minutes, and McCurdy made no effort to obtain copies of them. McCurdy admitted at the hearing that he did not know whether the financial statements were audited or unaudited, and acknowledged that it was "very possible" that "they could simply have been something that [the Adviser] created himself and gave to the board." + +McCurdy testified that he also considered the renewal of the Fund's bond by an insurance company in February 1999 in evaluating the probable collectibility of the Receivable. The two-year premium for the policy was $2,400, and the limit of liability for uncollectible items was $25,000. + +The record does not indicate the basis for the insurance company's renewal. McCurdy did not contact the insurance company to find out the basis for its decision to renew the bond, nor to ask whether the company was aware of the size of the Receivable. The Fund's audited financial statements for fiscal year 1998 were not yet publicly available at the time the insurance company renewed the bond. The most recent financial statements available to the insurance company were those from 1997, when receivables from the Adviser were only $3,783. + +McCurdy further testified that he had considered the measures taken to ensure that the Receivable would not continue to grow in evaluating the probable collectibility of the Receivable. Minutes of the meetings of the Fund's trustees showed that steps had been taken to halt the growth of the Receivable: the trustees had approved less expensive service providers, and the Adviser had terminated the agreement to pay expenses above a cap. Finally, McCurdy testified that he had considered, in evaluating the collectibility of the Receivable, the Adviser's history of repayment of receivables owed to the Fund, the size of the Receivable, and the percentage of the Receivable that had been incurred during the twelve months preceding the audit. + +The independent auditor's report, dated January 25, 1999, which was filed with the Commission on March 8, 1999 together with the Fund's financial statements, stated that McCurdy's firm had audited the financial statements in accordance with GAAS, and gave an unqualified opinion that the financial statements were presented in accordance with GAAP. As noted above, those financial statements included the Receivable as an asset. As of the report date, the Adviser had not made any of the payments due under the schedule approved by the trustees. + III. + +The Order Instituting Proceedings ("OIP") charged that McCurdy engaged in improper professional conduct within the meaning of Rule 102(e) in conducting the audit of the Fund. Specifically, it charged that McCurdy falsely represented that the Fund's December 31, 1998 audited financial statements were presented in accordance with GAAP. Under GAAP, a receivable may not be recorded as an asset unless collectibility is probable. 8 The OIP further charged that McCurdy failed to comply with GAAS during the audit because he failed to (1) obtain sufficient competent evidence, 9 (2) maintain an attitude of professional skepticism, 10 (3) render an accurate audit report, 11 and (4) exercise due professional care. 12 In a case such as this, these standards overlap somewhat. For example, a failure to maintain professional skepticism about information obtained from management can result in a failure independently to verify that information and gather sufficient competent evidential matter. Similarly, if an auditor fails to exercise due professional care, he may not obtain sufficient competent evidential matter to support an audit conclusion that the financial statements were prepared in compliance with GAAP. + + Evaluation of the Decision by the Fund's Trustees + +McCurdy contends that the decision of the Fund's independent trustees to extend the time for the Adviser to repay the Receivable, as reflected in the December 3 Minutes, was "a substantial piece of evidence as to collectibility. It was not reliance on representation of management. Rather, it was . . . the carefully considered conclusion of independent individuals charged with fiduciary duties to the Fund's directors." + +We do not believe that the trustees' decision to extend the payment schedule is sufficient competent evidence to establish that the Receivable was probably collectible. The trustees' vote does not, on its face, represent their conclusion that the Receivable was probably collectible. The issue was not put to the trustees in those terms. Bagwell made clear to the board that financial difficulties made it unlikely that he could pay off his debt before the Fund's books closed at fiscal year-end. The Fund's attorney counseled that a refusal to allow the Adviser time to pay off the balance "could have serious adverse effects on the Adviser, to the long-term detriment of the Fund." The trustees then found, based on their reasonable business judgment, that it was in the best interests of the Fund to extend the time for payment, and that "the benefits to the Fund and its shareholders outweigh[ed] the potential risks to the Fund . . .". The board also directed the Adviser to inform the board immediately if it was unable to comply with the payment schedule "in order for the board to take appropriate action." + +Rather than a conclusion that the Receivable was probably collectible, the trustees' decision appears to represent a business judgment that, in light of all the circumstances, it was in the Fund's best interests to extend the payment due date. The trustees' decision was made on the basis of unidentified information provided to the board in the context of a related-party transaction. + +Even if the trustees' vote embodied their belief that the Receivable was probably collectible, that vote alone would not have constituted sufficient competent evidence of probable collectibility. The record does not show that the trustees had anything more than representations of management, i.e. , Bagwell, on which to base their decision. 13 While the independent trustees' vote represents non-management views, those views add little when they are based on only information offered by management. Moreover, McCurdy never knew what that information was, since he neither spoke with the trustees nor obtained copies of the materials they were given. Without knowing what information the trustees had available to them, how well equipped they were to evaluate that information, and how diligently they reviewed the matter, McCurdy could not assume that the trustees' decision was sound or relevant to the issue of colectibility. GAAS required McCurdy to go "beyond inquiry of management"; he did not even go as far as making inquiry of the trustees, whose decision was itself based on representations of management. McCurdy's reliance on the trustees' vote to accept Bagwell's repayment terms constituted a failure to see the obvious limitations of the wording of the December 3 Minutes or to evaluate the soundness of the trustees' decision. + +Moreover, the repayment agreement was a related party transaction concerning a material uncollected balance. GAAS set forth a list of procedures that "should be considered" in such circumstances. These include obtaining information about the related party's financial capability "from audited financial statement, unaudited financial statements, income tax returns, and reports issued by regulatory agencies, taxing authorities, financial publications, or credit agencies." 14 McCurdy did not perform any of these procedures. + +McCurdy's contention that the trustees' vote was a substantial piece of evidence supporting the probable collectibility of the Receivable is further belied by other information in the same Minutes that report the vote. The Adviser's stated inability to pay the Receivable by year end should have heightened concerns as to the collectibility of the Receivable. Whether a receivable is due to be paid off by year end or afterwards does not in itself affect its probable collectibility. But an extension of the payment date as a result of inability to pay inevitably raises concerns as to collectibility. Additionally, the absence of any reference in the minutes to the status of the November payment due under the proposed payment schedule should have raised questions as to the thoroughness of the trustees' inquiry, and created doubts as to the Adviser's ability or willingness to comply with even the extended payment schedule. McCurdy's failure to engage in additional inquiry, either by contacting Bagwell or otherwise, compounds his error in using the trustees' vote as "a substantial piece of evidence as to collectibility." 15 + + Renewal of Insurance + +McCurdy argues that the insurance company's renewal of the bond, with coverage for receivables that exceeded the policy premium, was competent evidence that the Receivable was probably collectible. He characterizes that renewal as representing a professional judgment by an entity in the business of risk assessment that the insurance company probably would not have to pay out more money to cover unpaid receivables than it would receive in premiums. As noted above, there is no indication in the record that the insurance company had available to it any financial information about the Fund other than the Fund's 1997 financial statements, in which the balance in the "Due from Adviser" account was only $3,783. The record does not establish that the renewal of the bond was competent evidence of the probable collectibility of the 1998 Receivable of $83,399. + +McCurdy contends that, in relying on the renewal of the bond, he had no reason to believe the insurance company did not perform the due diligence necessary to protect its investment. This argument evidences a fundamental misapprehension of McCurdy's role as an auditor. It was McCurdy's responsibility, as the Fund's auditor, to assess the accuracy and reliability of the financial information disclosed to members of the public by the Fund. He could not rely on an assumption that others made such an assessment with a suitable level of knowledge and care. To the contrary, the insurance company was entitled to rely on the accuracy of the Fund's financial statements, as audited by McCurdy, in making its decision to renew the bond. 16 + + History of Payment + +McCurdy argues that the Adviser's timely payment of receivables in prior years, as confirmed by the Fund's former auditors, indicated that the Adviser did not have a pattern of defaulting on obligations to the Fund that would have raised questions as to his repayment of the Receivable. While a history of default would have been a source of concern, the lack of such a history does not establish probable collectibility on these facts. The amount of the Receivable at the end of 1998 was more than 22 times the amount of the outstanding due from the Adviser's account at the end of 1997. Bagwell admitted at the December 3 board meeting that paying the Receivable by the end of 1998 would have been "extremely difficult" and had missed all scheduled payments as of the time McCurdy signed the unqualified audit opinion. + +McCurdy argues that the Adviser's lack of immediate liquidity did not establish an inability to repay the Receivable within the time allotted under the payment schedule. This is not the correct standard. McCurdy needed evidence that the Receivable was probably collectible in order to include it as an asset. Bagwell's statement to the trustees at the December 3 board meeting should have prompted McCurdy, in the exercise of due professional care, to make at least some inquiry of Bagwell concerning his future ability to pay and take some additional step to verify Bagwell's response. + + Miscellaneous Issues + +McCurdy argues that the Receivable, while material to the Fund, was not for an "inherently large" sum of money. The significance of this argument is unclear. The important thing is that the amount was material to the Fund. In fact, the amount was more than 12 1/2 times the audit materiality gauge of $6,605. Moreover, Bagwell's admission that it would be extremely difficult to pay the Receivable by year-end, plus the missed payments, suggest that, at least at that time, the amount was large to him. Under these circumstances, the amount of the Receivable is not competent evidence of probable collectibility. + +McCurdy states that the fact that the vast majority of the Receivable was incurred during the twelve months immediately preceding the audit also played a role in his evaluation. 17 In light of Bagwell's expressed difficulties in paying by year end and his missed payments, we see no connection between the time when the Receivable was incurred and its probable collectibility. + +McCurdy argues that the fact that the Receivable would not continue to grow "substantially increased the probability that the [Adviser] would have the capability of repaying the existing balance since no new obligations would occur." We find this argument unpersuasive. It does not follow that eliminating additional liability makes the payment of existing indebtedness probable. 18 + +Based on this evidence, we find that the Fund's financial statements for the year ended December 31, 1998, incorrectly included the Receivable as an asset because there was insufficient evidence that the Receivable was probably collectible as required by FASB 6. 19 Accordingly, we find that the 1998 financial statements were not, as McCurdy certified, presented in accordance with GAAP. We further find that the audit was not performed in accordance with GAAS because McCurdy did not obtain sufficient competent evidential matter to afford a reasonable basis for his unqualified opinion regarding the financial statements, did not maintain professional skepticism in evaluating the evidence he obtained, did not exercise professional due care, and did not render an accurate audit report. + + IV. + +The OIP charged that McCurdy's conduct was reckless or, in the alternative, highly unreasonable. Recklessness, for purposes of assessing accountant conduct under Rule 102(e), is defined as "not merely a heightened form of ordinary negligence; it is an 'extreme departure from the standards of ordinary care, . . . which presents a danger of misleading buyers or sellers that is either known to the [actor] or is so obvious that the actor must have been aware of it.'" 20 Recklessness can be established by a showing of an extreme departure from the standard of ordinary care for auditors. 21 + +McCurdy knew that the Receivable was "very material" to the Fund; he also recognized that it represented a related party transaction. Having determined that additional procedures were required to verify that the Receivable was probably collectible, he performed virtually none. He identified as evidence supporting the probable collectibility of the Receivable the December 3 Minutes and the insurance documents, which provided only indirect and unsubstantiated information about that collectibility. McCurdy's reliance on these materials was not justified. + +McCurdy did not contact Bagwell directly to obtain materials McCurdy could use in making his own assessment of collectibility. Nor did he contact the Fund's trustees to find out what they had relied on in approving the extended payment plan. He did not discover, or was indifferent to, the fact that, as of the date he signed the financial statements in March, the scheduled payment period was half over and Bagwell had not made any payments. Inquiring about Bagwell's compliance with the agreed upon payment schedule would have been an obvious, and uncomplicated, step to take. + +In view of the significance of the matters at issue, McCurdy's failure to obtain more information was an extreme departure from the standard of ordinary care for auditors. By thus acting recklessly, McCurdy engaged in improper professional conduct within the meaning of Rule 102(e). 22 + + V. + +Improper professional conduct within the meaning of Rule 102(e) may also be established by a "single instance of highly unreasonable conduct that results in a violation of applicable professional standards in circumstances in which an accountant knows, or should know, that heightened scrutiny is warranted." 23 In adopting the "highly unreasonable" standard, we explained that it is "an intermediate standard, higher than ordinary negligence but lower than the traditional definition of recklessness used in cases brought under Section 10(b) and Rule 10b-5 of the Exchange Act." 24 We further explained that the "heightened scrutiny" referred to would be warranted, among other things, "when matters are important or material, or when warning signals or other factors should alert an accountant" to a heightened risk. 25 + +Heightened scrutiny was warranted here for several reasons. The Receivable was clearly material; it represented nearly 25% of the Fund's assets. Moreover, it arose from a related party transaction. In addition, Bagwell's acknowledged difficulty in paying off the Receivable by year end was a warning signal that collectibility of the Receivable might be uncertain. + +Despite these indications that heightened scrutiny was warranted, McCurdy failed to undertake such simple, obvious steps as contacting Bagwell or the Trustees for more information, or reviewing copies of Bagwell's tax returns or credit reports. Under these circumstances, McCurdy's failure to obtain additional competent evidence regarding the collectibility of the Receivable was highly unreasonable. + + VI. + +Under all of the circumstances, we believe that the appropriate sanction for McCurdy's improper professional conduct is to deny him the privilege of appearing or practicing before the Commission for one year. By failing to obtain sufficient competent evidential matter to provide the basis for the expression of an audit opinion regarding the treatment of the Receivable as an asset, and by opining that the financial statements were in accordance with GAAP despite the booking of the Receivable as an asset, McCurdy violated fundamental principles of auditing. + +McCurdy has significant experience in audit work; at the time of the audit he had been a CPA for nearly 20 years. This lengthy experience makes his failure to conduct the audit in accordance with applicable professional standards particularly troublesome. McCurdy is an actively licensed CPA, and we anticipate that he will continue to conduct audits of public companies. Whether McCurdy acted recklessly or highly unreasonably, his departure from his professional duties warrants denying him the privilege of appearing or practicing before the Commission for one year. + +An appropriate order will issue. 26 + +By the Commission (Commissioners GLASSMAN, GOLDSCHMID, and CAMPOS); Chairman DONALDSON and Commissioner ATKINS concurring in: + the finding that McCurdy engaged in improper professional conduct within the meaning of Rule 102(e)(l)(iv)(B)( 1 ), and   + all of the remainder of the opinion with the exception of the finding in Part IV of the opinion that McCurdy's conduct was reckless. + +  + +Jonathan G. Katz +    Secretary + SECURITIES AND EXCHANGE COMMISSION +Washington, D.C. + + SECURITIES EXCHANGE ACT OF 1934 +Rel. No. 49182 / February 4, 2004 + +Admin. Proc. File No. 3-10509 + + In the Matter of +JAMES THOMAS MCCURDY, CPA + ORDER IMPOSING REMEDIAL SANCTIONS + +On the basis of the Commission's opinion issued this day it is + +ORDERED that James Thomas McCurdy be temporarily denied the privilege of appearing or practicing before the Commission as an accountant for one year, effective at the opening of business on February 17, 2004. + +By the Commission. + +  + +Jonathan G. Katz +   Secretary + + 1 17 C.F.R. § 201.102(e)(1)(ii). Rule 102(e)(1)(ii) permits the Commission to censure or deny, permanently or temporarily, the privilege of appearing or practicing before it to persons found to have engaged in improper professional conduct. As applied to accountants, "improper professional conduct" includes, in relevant part, + +"(A) [i]ntentional or knowing conduct, including reckless conduct, that results in a violation of applicable professional standards; or + +(B) . . . negligent conduct [consisting of]: + +(1) a single instance of highly unreasonable conduct that results in a violation of applicable professional standards in circumstances in which an accountant knows, or should know, that heightened scrutiny is warranted." + + 17 C.F.R. § 201.102(e)(1)(iv). + + + 2 The Fund is now defunct. See JWB Aggressive Growth Fund , 74 SEC Docket 2246 (Apr. 25, 2001) (finding that the Fund had ceased to be an investment company and ordering that its registration cease to be in effect). + + + 3 Rule of Practice 451(d), 17 C.F.R. § 201.451(d), permits a member of the Commission who was not present at oral argument to participate in the decision of a proceeding if that member has reviewed the oral argument transcript prior to such participation. Commissioners Glassman and Campos have conducted the required review. + + + 4 Using guidelines that he identified as accepted by the American Institute of Certified Public Accountants ("AICPA"), McCurdy calculated that, for purposes of his audit of the Fund, amounts larger than $6,605 would be regarded as material. AICPA, AU § 150.04 notes, "The concept of materiality is inherent in the work of the independent auditor. There should be stronger grounds to sustain the independent auditor's opinion with respect to those items which are relatively more important . . . ." + + + 5 See generally AICPA, AU § 334.10 (setting forth procedures that should be considered in evaluating related party transactions, though those procedures "might not otherwise be deemed necessary to comply with [GAAS]." McCurdy did not specify, either in his audit papers or his testimony, what procedures he performed that were "additional" to ones he might have performed regarding a smaller receivable from a non-related party. + + + 6 McCurdy's testimony as to what he considered was in many instances supported by highlighting on his audit work papers. + + + 7 The record does not show that the attorney imparted to McCurdy any information about the December 3 meeting that went beyond that contained in the minutes. + + + 8 See Financial Accounting Standards Board Statement of Financial Accounting Concepts No. 6, Elements of Financial Statements, ¶ 25 ("Assets are probable future economic benefits, obtained or controlled by a particular entity as a result of past transactions or events."). The law judge found no GAAP violation under a standard that would have required the Division to prove lack of probable collectibility. That is not the correct standard. The Receivable could not be recorded as an asset unless it was probably collectible. If McCurdy did not have sufficient competent evidence that the Receivable was probably collectible, he should not have signed a report stating that the financial statements were in accordance with GAAP. + + + 9 AICPA, Codification of Statements on Auditing Standards, AU (hereinafter "AICPA, AU") § 326.01 requires that "[sufficient] competent evidential matter . . . be obtained through inspection, observation, inquiries, and confirmations to afford a reasonable basis for an opinion regarding the financial statements." + + + 10 See AICPA, AU § 230.07 ("Due professional care requires the auditor to exercise professional skepticism .") (emphasis in original). + + + 11 AICPA, AU § 508.07 permits an auditor to express an unqualified opinion that financial statements are presented in accordance with GAAP only when the auditor's opinion is formed on the basis of an audit performed in accordance with GAAS. + + + 12 AICPA, AU § 230.01 states that "[d]ue professional care is to be exercised in the performance of the audit and the preparation of the report." + + + 13 GAAS require that the procedures used in obtaining and evaluating evidential matter regarding related party transactions "should extend beyond inquiry of management." AICPA, AU § 334.09. + + + 14 AICPA, AU § 334.10e. + + + 15 The record is unclear as to whether McCurdy knew, when he signed the audit report, that Bagwell had failed to make the November and December payments called for in the extended payment schedule, or whether McCurdy had inquired about those payments. The question whether Bagwell was complying with the revised payment schedule was relevant to the collectibility of the Receivable. + + + 16 We are not suggesting that there was any inaccuracy in the 1997 financial statements. + + + 17 McCurdy argues that, under applicable accounting guidance, because the Receivable was under one year old at the time of the audit, it was presumptively current. The authorities upon which he relies do not support this argument. Neither Accounting Research Bulletin 43, Chapter 3A, paragraph 6, which discusses under what circumstances assets should not be classified as current, nor Statement of Financial Accounting Standards 6, which discusses classification of short-term obligations expected to be refinanced, mentions the period during which a receivable was incurred as a relevant factor. + + + 18 McCurdy states that he had contemporaneous discussions with Commission staff examiners, who were conducting an examination of the Fund at the time McCurdy was conducting his audit, about receivables, and that the examiners "never raised an issue of collectibility." McCurdy's assertion does not provide sufficient context to permit any inference to be drawn from the examiners' purported silence as to collectibility. + + + 19 We disagree with the law judge's findings of fact as set forth in her analysis of the GAAP violation charged. The law judge stated that "[the] only record evidence concerning the probability of collectibility is that Bagwell agreed to pay, was $10,000 in arrears at the end of January, and paid $12,000 in early 1999" (emphasis in original). This summary ignores Bagwell's statement that it would be extremely difficult for him to pay the Receivable by December 31. Additionally, it treats payments made in "early 1999" as relevant, even though the record does not show that Bagwell had made any payments by the audit report date, or even by the date the financial statements were filed. Based on our review of the record, and our evaluation of the evidence as set forth above, we conclude that the GAAP violation at issue was established. + + + 20 Amendment to Rule 102(e) of the Commission's Rules of Practice, Exchange Act Rel. No. 40567 (Oct. 18, 1998), 68SEC Docket 707, 710 ("Amendment to Rule 102(e)") (citations omitted); see also, e.g. , Michael J. Marrie, CPA , Exchange Act Rel. No. 48246 (July 29, 2003), 80 SEC Docket 2694, 2704 n.11, appeal pending , No. 03-1265 (D.C. Cir.). + + + 21 Carroll A. Wallace, CPA , Exchange Act Rel. No. 48372 (Aug. 20, 2003), 80 SEC Docket 3370, appeal pending , No. 03-1350 (D.C. Cir.); Michael J. Marrie, CPA , 80 SEC Docket at 2705. + + + 22 McCurdy argues that he acted in good faith in conducting his audit of the Fund and that, for that reason, he cannot be found to have acted recklessly under Rule 102(e). We find, however, that McCurdy's attitude was essentially one of indifference as to whether the Receivable was collectible or not, and that this indifference is inconsistent with a finding that he acted in good faith. + + + 23 Rule 102(e)(l)(iv)(B)( 1 ). + + + 24 Amendment to Rule 102(e), 68 SEC Docket at 710 (citation omitted). + + + 25 Id. , 68 SEC Docket at 711 (citation omitted). + + + 26 We have considered all of the parties' contentions. 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Kutsenda, CPA + + + + + + + + + + + + Robert G. Kutsenda, CPA + + + + + + + + + + + + + + + + + + + + + SECURITIES EXCHANGE ACT OF 1934 +Release No. 49206 / February 6, 2004 + + ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 1954 / February 6, 2004 + + Admin. Proc. File No. 3-10517 + + + + In the Matter of + Robert G. Kutsenda, CPA + + : : : : : : : : + ORDER GRANTING APPLICATION FOR REINSTATEMENT TO APPEAR AND PRACTICE BEFORE THE COMMISSION AS AN ACCOUNTANT RESPONSIBLE FOR THE PREPARATION OR REVIEW OF FINANCIAL STATEMENTS REQUIRED TO BE FILED WITH THE COMMISSION + On June 19, 2001, Robert G. Kutsenda, CPA, ("Kutsenda") was denied the privilege of appearing or practicing as an accountant before the Commission as a result of settled public administrative proceedings instituted by the Commission against Kutsenda pursuant to Rule 102(e) of the Commission's Rules of Practice. 1 This order is issued in response to Kutsenda's application for reinstatement to practice before the Commission as an accountant. + The Rule 102(e) proceeding against Kutsenda arose from his determination, in the context of a consultation on a particular accounting matter, that Andersen could issue an unqualified audit report on the 1995 financial statements of Waste Management, Inc. ("Waste Management" or the "Company"). The Andersen engagement team consulted with Kutsenda in his capacity as Practice Director. Kutsenda's conduct resulted in a violation of applicable professional standards because he did not require Andersen to withhold or qualify its audit report on the Company's 1995 financial statements in light of Waste Management's "netting" - i.e. offsetting - of misstatements against an unrelated one-time gain in violation of generally accepted accounting principles ("GAAP"). The undisclosed netting or offsetting distorted the Company's financial picture and caused the Company's 1995 income statement to be materially misstated. Kutsenda's conduct was highly unreasonable because he knew, or should have known, that the Company's netting violated GAAP, that prior-period misstatements of which he was aware would not be disclosed to investors, that the impact of the netting on the Company's 1995 financial statements was material and that an unqualified audit report was not warranted. As a result, Kutsenda was found by the Commission to have engaged in improper professional conduct and was denied the privilege of appearing or practicing before the Commission as an accountant, with a right to request that the Commission consider his reinstatement after one year from the date of the order. + In his application for reinstatement, Kutsenda states that he is retired and does not intend to practice again before the Commission. Kutsenda has represented to the staff that if he subsequently resumes practice as an accountant responsible for the preparation or review of financial statements of a public company to be filed with the Commission, he undertakes to have his work reviewed by the independent audit committee of the company for which he would conduct such work, or in some other manner acceptable to the Commission, while practicing before the Commission in that capacity. Kutsenda is not, at this time, seeking to practice before the Commission as an independent accountant and has represented to the Commission staff that, if he should wish to resume practicing before the Commission as an independent accountant, he will submit a separate application to the Commission. Therefore, Kutsenda's suspension from practice before the Commission as an independent accountant continues in effect until the Commission determines that a sufficient showing has been made in this regard in accordance with the terms of the original suspension order. + Rule 102(e)(5) of the Commission's Rules of Practice governs applications for reinstatement, and provides that the Commission may reinstate the privilege to appear and practice before the Commission "for good cause shown." This "good cause" determination is necessarily highly fact specific. + On the basis of information supplied, representations made, and undertakings agreed to by Kutsenda, it appears that Kutsenda has complied with the terms of the June 19, 2001 order denying him the privilege of appearing or practicing as an accountant before the Commission, that no information has come to the attention of the Commission relating to his character, integrity, professional conduct or qualifications to practice before the Commission that would be a basis for adverse action against Kutsenda pursuant to Rule 102(e) of the Commission's Rules of Practice, and that Kutsenda, by undertaking to have his work reviewed by the independent audit committee of the company for which he then works, or in some other manner acceptable to the Commission, in his practice before the Commission as a preparer or reviewer of financial statements required to be filed with the Commission, has shown good cause for reinstatement. + Therefore, it is accordingly, + ORDERED pursuant to Rule 102(e)(5)(i) of the Commission's Rules of Practice that Robert G. Kutsenda, CPA, is hereby reinstated to appear and practice before the Commission as an accountant responsible for the preparation or review of financial statements required to be filed with the Commission. + + By the Commission. + + + Jonathan G. Katz + Secretary + + + + Endnotes + 1 See Accounting and Auditing Enforcement Release No. 1409, dated June 19, 2001. Kutsenda was permitted, pursuant to the order, to apply for reinstatement after one year upon making certain showings. + Rule 102(e)(5)(i) provides: + "An application for reinstatement of a person permanently suspended or disqualified under paragraph (e)(1) or (e)(3) of this section may be made at any time, and the applicant may, in the Commission's discretion, be afforded a hearing; however, the suspension or disqualification shall continue unless and until the applicant has been reinstated by the Commission for good cause." 17 C.F.R. § 201.102(e)(5)(i). + + + + + + + + + + + + + + + + + + + + + + + + + Return to top + + + + + SEC homepage + + + + + + + + + + + + + + About the SEC + + + + + + Budget & Performance + + + Careers + + + Commission Votes + + + Contact + + + Contracts + + + + + + + + Transparency + + + + + + Accessibility & Disability + + + Super Intelligence + + + FOIA + + + Inspector General + + + No FEAR Act Data + + + Ombuds + + + SEC Excess Personal Property Guidance + + + + + + + + Websites + + + + + + Investor.gov + + + Related Sites + + + USA.gov + + + + + + + + Site Information + + + + + + Plain Writing + + + Privacy & Security + + + Site Map + + + + + + + + + + + + + + + + + + Stay connected. 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Epstein + + + + + + + + + + + + Jonathan G. Epstein + + + + + + + + + + + + + + + + + + + U.S. SECURITIES AND EXCHANGE COMMISSION + Litigation Release No. 18571 / February 6, 2004 + + Accounting and Auditing Enforcement +Release No. 1955 / February 6, 2004 + + Securities and Exchange Commission v. Jonathan G. Epstein, Civil Action No. 2:04-CV-0218 (NDAL February 4, 2004) + + The Securities and Exchange Commission filed a Complaint on February 4, 2004, in the United States District Court for the Northern District of Alabama against Jonathan G. Epstein (Epstein), former President and Chief Executive Officer of Fila U.S.A. (Fila), an outside vendor of Just for Feet, Inc. (JFFI) in Birmingham, Alabama. + The Complaint alleges that Epstein assisted in perpetrating a financial reporting fraud involving the financial statements of JFFI, a former national retailer of athletic and outdoor footwear. Epstein signed an audit confirmation letter stating falsely that Fila owed JFFI $1.38 million in advertising "co-op receivables" which JFFI had improperly recorded. This overstatement of income was reflected on JFFI's financial statements included in its Form 10-K filed for fiscal year 1998, Forms 10-Q filed for the first and second quarters of fiscal year 1999, and in its registration statements on Forms S-8 and S-4 filed in May and June of 1999, respectively. + The Complaint seeks a permanent injunction enjoining Epstein from further violations or aiding and abetting violations of Section 17(a) of the Securities Act of 1933, Sections 10(b) and 13(a) of the Securities Exchange Act of 1934 and Rules 10b-5, 12b-20, 13a-1 and 13a-13 thereunder. The Complaint further seeks the imposition of civil monetary penalties against Epstein. + + + SEC Complaint in this matter + + + + + + + + + + + + + + + + + + + + + + + + + + Return to top + + + + + SEC homepage + + + + + + + + + + + + + + About the SEC + + + + + + Budget & Performance + + + Careers + + + Commission Votes + + + Contact + + + Contracts + + + + + + + + Transparency + + + + + + Accessibility & Disability + + + Super Intelligence + + + FOIA + + + Inspector General + + + No FEAR Act Data + + + Ombuds + + + SEC Excess Personal Property Guidance + + + + + + + + Websites + + + + + + Investor.gov + + + Related Sites + + + USA.gov + + + + + + + + Site Information + + + + + + Plain Writing + + + Privacy & Security + + + Site Map + + + + + + + + + + + + + + + + + + Stay connected. 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Boyd, and Christopher Curbello + + + + + + + + !function(){var e=navigator.userAgent,a=document.documentElement,n=a.className;n=n.replace("no-js","js"),/iPad|iPhone|iPod/.test(e)&&!window.MSStream&&(n+=" ua-ios"),a.className=n}(); + {"path":{"baseUrl":"\/","pathPrefix":"","currentPath":"node\/493391","currentPathIsAdmin":false,"isFront":false,"currentLanguage":"en"},"pluralDelimiter":"\u0003","suppressDeprecationErrors":true,"gtag":{"tagId":"","consentMode":false,"otherIds":[],"events":[],"additionalConfigInfo":[]},"ajaxPageState":{"libraries":"eJxdT0GOwzAI_JBdn_oei2DkeINNZLC22devlaZS2wtiBhhmcKNUTPo97jxyaXEH3GJpiZrFhQW38A4cMqgeYQGlV19JFTKpQ-kUmvQKXP7I0cO4tC2kPnbg2wVdFslM0SCHPMs3vsEPPD7J6hgOGdPCKJyoRxxqUuePHjLLAuzVjimenRJGSLW08NoBK9LUn6SHlrytVOlcpJShB63QLSpBx_WkOzHNePol4fRQo_qMPvQ36ZXsAmd99lMNr2t_GUR9n60EyX9a_wePd5ns","theme":"uswds_sec","theme_token":null},"ajaxTrustedUrl":[],"gtm":{"tagId":null,"settings":{"data_layer":"dataLayer","include_classes":false,"allowlist_classes":"","blocklist_classes":"","include_environment":false,"environment_id":"","environment_token":""},"tagIds":["GTM-TD3BKV"]},"data":{"extlink":{"extTarget":false,"extTargetAppendNewWindowDisplay":true,"extTargetAppendNewWindowLabel":"(opens in a new window)","extTargetNoOverride":false,"extNofollow":false,"extTitleNoOverride":false,"extNoreferrer":false,"extFollowNoOverride":false,"extClass":"0","extLabel":"(link is external)","extImgClass":false,"extSubdomains":true,"extExclude":".*\\.gov|http:\/\/www.xbrl.org\/utr\/2013-05-17\/utr.xml|http:\/\/www.xbrl.org\/dtr\/type\/numeric-2009-12-16.xsd|http:\/\/www.xbrl.org\/dtr\/type\/nonNumeric-2009-12-16.xsd|https:\/\/secir.secure.force.com\/ombudsman\/OMMSForm","extInclude":"","extCssExclude":".data-exempt","extCssInclude":"","extCssExplicit":"","extAlert":true,"extAlertText":"You are now leaving the SEC Website. 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Boyd, and Christopher Curbello + + + + + + + + + + + + John R. Boyd, and Christopher Curbello + + + + + + + + + + + + + + + + + + + + + The Securities and Exchange Commission (Commission) announced today that John R. Boyd and Christopher Curbello, former Golden Bear Golf, Inc., executives who headed Paragon Construction International, Inc., Golden Bear Golf's defunct golf course construction subsidiary, have settled the enforcement action the Commission filed against them in August 2002 which alleged that Boyd and Curbello directed a scheme that had the effect of artificially inflating Golden Bear's results by overstating Paragon's revenues and concealing losses. Boyd is the former president of Paragon and Curbello was Paragon's vice president for operations. Boyd and Curbello consented to the settlements without admitting or denying the Commission's allegations. The settlements permanently enjoin Boyd and Curbello from violating Section 10(b) of the Securities Exchange Act of 1934 (the "Exchange Act") [15 U.S.C. § 78j(b)] and Rule 10b-5 promulgated thereunder [17 C.F.R. § 240.10b-5], Section 13(b)(5) [15 U.S.C. § 78m(b)(5)] of the Exchange Act and Sections 13(a), 13(b)(2)(A) and 13(b)(2)(B) [15 U.S.C. §§ 78m(a), 78m(b)(2)(A) and 78m(b)(2)(B) of the Exchange Act. + In addition to agreeing to settlements with the Commission, Boyd and Curbello also have pled guilty to federal criminal charges arising out of their scheme. Curbello entered a guilty plea to conspiracy to commit securities fraud charges in October 2003 and Boyd entered a guilty plea to the same charges in November 2003. As a result of those guilty pleas, Curbello currently is serving a three and a half year prison sentence and Boyd is serving a five-year prison sentence. + In connection with pleading guilty to federal criminal charges, Boyd and Curbello admitted that they conspired to artificially inflate and accelerate Paragon's revenue and gross margin recognition by misrepresenting the true status of its construction contracts, causing Golden Bear to file false and misleading financial statements for its 1997 fiscal year and for the first quarter of 1998. Under the scheme, Paragon overstated contract profitability or ignored expected losses by (i) understating estimated construction costs, (ii) accelerating revenue and income recognition by overstating progress on construction projects, (iii) overstating estimated construction revenues and (iv) recording revenue and gross margin in connection with non-existent project agreements. The loss amount to shareholders was determined to be in excess of $49 million. + The Commission acknowledges the efforts of the United States Attorney for the Southern District of Florida and the Federal Bureau of Investigation. + See also Litigation Release No. 17648 (August 1, 2002) and Litigation Release No. 18042 (March 19, 2003). + For further information contact: Thomas C. Newkirk at (202) 942-4550 or James T. Coffman at (202) 942-4574. + + + SEC Complaint in this matter --> + + + + + + + + + + + + + + + + + + + + + + + + + + Return to top + + + + + SEC homepage + + + + + + + + + + + + + + About the SEC + + + + + + Budget & Performance + + + Careers + + + Commission Votes + + + Contact + + + Contracts + + + + + + + + Transparency + + + + + + Accessibility & Disability + + + Super Intelligence + + + FOIA + + + Inspector General + + + No FEAR Act Data + + + Ombuds + + + SEC Excess Personal Property Guidance + + + + + + + + Websites + + + + + + Investor.gov + + + Related Sites + + + USA.gov + + + + + + + + Site Information + + + + + + Plain Writing + + + Privacy & Security + + + Site Map + + + + + + + + + + + + + + + + + + Stay connected. 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Proc. File No. 3-11396 + + + + In the Matter of + PERFORMANCE FOOD GROUP COMPANY + + : : : : : : : : + ORDER INSTITUTING CEASE-AND-DESIST PROCEEDINGS, MAKING FINDINGS, AND IMPOSING A CEASE-AND-DESIST ORDER PURSUANT TO SECTION 21C OF THE SECURITIES EXCHANGE ACT OF 1934 + I. + The Securities and Exchange Commission ("Commission") deems it appropriate that cease-and-desist proceedings be, and hereby are, instituted pursuant to Section 21C of the Securities Exchange Act of 1934 ("Exchange Act") against Performance Food Group Company ("PFG"). + II. + In anticipation of the institution of these proceedings, PFG has submitted an Offer of Settlement (the "Offer"), which the Commission has determined to accept. Solely for the purpose of these proceedings and any other proceedings brought by or on behalf of the Commission, or to which the Commission is a party, and without admitting or denying the findings herein, except as to the Commission's jurisdiction over it and the subject matter of these proceedings, which are admitted, PFG consents to the entry of this Order Instituting Cease-and-Desist Proceedings, Making Findings, and Imposing a Cease-and-Desist Order Pursuant to Section 21C of the Securities Exchange Act of 1934 ("Order"), as set forth below. + III. + On the basis of this Order and PFG's Offer, the Commission finds 1 that: + Respondent + 1. Performance Food Group Company, a Tennessee corporation based in Richmond, Virginia, processes and sells food and food-related products to restaurants, hotels, schools and other businesses and institutions. In 2001, the company had net sales of $3.2 billion. PFG's common stock is registered with the Commission pursuant to Sections 12(b) and 12(g) of the Exchange Act, and is traded on the NASDAQ using the symbol "PFGC." Its fiscal year coincides with the calendar year. + Improper Accounting for Revenue + 2. As part of its obligations as a public reporting company, PFG files annual reports on Form 10-K and quarterly reports on Form 10-Q. + 3. On March 11, 2002, after the market closed, PFG announced that it had identified certain accounting errors contained in the financial statements prepared by AFI Foodservice Distributor, Inc. ("AFI"), a PFG subsidiary. PFG reported that the improper accounting caused PFG to overstate its own net income by an estimated total of $4 million to $5 million during 2000 and 2001. + 4. PFG later learned its internal records overstated the company's net income by a total of $3.9 million during fiscal years 2000 and 2001. As a result of these errors, PFG filed materially inaccurate financial information in its Forms 10-Q for the second and third quarters of 2000 and the first and third quarters of 2001. + 5. PFG's inaccurate filings resulted from the reckless conduct of a former AFI executive vice-president and one-time controller ("vice-president"), who was responsible for AFI's accounting functions and financial statements. + 6. The vice-president, a licensed CPA, was aware during 2000 and 2001 that, at the end of each month, certain AFI accounts were increasingly out-of-balance, which was a clear red flag of an accounting problem warranting investigation. Yet, he did not take any action to determine the source of the problems. Likewise, he did not contact his superiors or PFG's accounting/finance department to notify them of the problems or to discuss potential solutions. + 7. Instead, each month for almost two years, rather than performing the manual reconciliations and calculations necessary to resolve the imbalances, the vice-president simply made a series of arbitrary and increasingly large adjusting entries into the system to produce balanced figures. There was no reasonable accounting principle or practice to justify these entries, which were as large as $3.6 million. + 8. The vice-president failed to determine the effect that these arbitrary entries had on AFI's internal accounting records, which he knew PFG used in preparing its Commission filings. Further, he did not notify his superiors or the accounting/finance personnel at PFG about the adjusting entries he made to compensate for the imbalances. In fact, his adjusting journal entries had the effect of concealing the problems from other PFG personnel. + 9. As a result of these arbitrary entries, AFI's and PFG's accounting records reflected inaccurate totals for its sales, inventory, accounts payable and costs of goods sold. Further, the cumulative effect of these errors inflated AFI's net income, which, in turn, resulted in PFG's materially inaccurate Commission filings, as noted above. + 10. PFG's financial record-keeping and reporting errors were the product of the combination of PFG's structure of autonomous operating companies, its rapid growth through acquisitions, and the resulting delays in implementing an updated, uniform accounting system. The company lacked adequate internal controls and review procedures for its accounting functions. + 11. After identifying the problems, the company investigated the matter and restated its results for all of 2000 and corrected its quarterly results for 2001 in its Form 10-K for the fiscal year ended December 31, 2001. PFG also re-issued its Forms 10-Q for 2001. In addition, the company terminated the employment of the vice-president; implemented an updated, uniform accounting system, and improved its internal controls by imposing more rigorous procedures and hiring additional internal auditors. + Violations + 12. Section 13(a) of the Exchange Act requires reporting companies to file periodic and other reports with the Commission containing such information as the Commission's rules prescribe. Rule 13a-13, promulgated pursuant to Section 13(a), requires issuers to file quarterly reports with the Commission on Form 10-Q. Rule 12b-20, promulgated pursuant to Section 12 of the Exchange Act, requires "such further material information, if any, as may be necessary to make the required statements, in light of the circumstances under which they are made not misleading." A violation of these provisions is established if annual or quarterly reports are shown to contain materially inaccurate information regarding such items as the issuer's income. + 13. Section 13(b)(2)(A) of the Exchange Act requires reporting companies to make and keep books, records, and accounts, which, in reasonable detail, accurately and fairly reflect their transactions and dispositions of assets. + 14. Section 13(b)(2)(B) of the Exchange Act requires reporting companies to devise and maintain a system of internal accounting controls sufficient to provide reasonable assurances that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles. + 15. As a result of the conduct described above, PFG violated Sections 13(a), 13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act and Rules 12b-20 and 13a-13 thereunder. + PFG's Remedial Efforts + 16. In determining to accept the Offer, the Commission considered remedial acts promptly undertaken by PFG and cooperation afforded the Commission staff. + IV. + In view of the foregoing, the Commission deems it appropriate to impose the sanctions specified in PFG's Offer. + ACCORDINGLY, IT IS HEREBY ORDERED THAT PFG cease and desist from committing or causing any violations and any future violations of Sections 13(a), 13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act and Rules 12b-20 and 13a-13 thereunder. + + + + By the Commission. + + + Jonathan G. Katz + Secretary + + + + Endnotes + 1 The findings herein are made pursuant to PFG's Offer of Settlement and are not binding on any other person or entity in this or any other proceeding. + + + + + + + + + + + + + + + + + + + + + + + + + Return to top + + + + + SEC homepage + + + + + + + + + + + + + + About the SEC + + + + + + Budget & Performance + + + Careers + + + Commission Votes + + + Contact + + + Contracts + + + + + + + + Transparency + + + + + + Accessibility & Disability + + + Super Intelligence + + + FOIA + + + Inspector General + + + No FEAR Act Data + + + Ombuds + + + SEC Excess Personal Property Guidance + + + + + + + + Websites + + + + + + Investor.gov + + + Related Sites + + + USA.gov + + + + + + + + Site Information + + + + + + Plain Writing + + + Privacy & Security + + + Site Map + + + + + + + + + + + + + + + + + + Stay connected. 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Nichols + + + + + + + + + + + + Dean A. Nichols + + + + + + + + + + + + + + + + + + + U.S. SECURITIES AND EXCHANGE COMMISSION + Litigation Release No. 18578 / February 17, 2004 + + SECURITIES AND EXCHANGE COMMISSION V. DEAN A NICHOLS, Civil Action No. (D.N.J) + + The Securities and Exchange Commission (Commission) announced today that on February 17, 2004 it filed a complaint in federal district court in Newark, New Jersey against Dean A. Nichols (Nichols), a certified public accountant and a senior manager at a subsidiary of Performance Food Group Company (PFG), a large public company. The complaint alleges that, during 2000 and 2001, Nichols engaged in a fraudulent course of conduct in which he made numerous improper accounting journal entries on the books of AFI Foodservice Distributor, Inc. (AFI), a subsidiary of PFG. Nichols' conduct caused PFG to overstate its income by a total of $3.8 million in the company's Forms 10-Q filed with the Commission for the second and third quarters of 2000, and for the first and third quarters of 2001. + Nichols, an executive vice-president and one time controller of AFI, was responsible for AFI's accounting functions and financial statements. During 2000 and 2001, he repeatedly failed to reconcile imbalances in various AFI accounts, and made improper accounting adjustments in an effort to make the accounts appear to balance. Because AFI's accounts were consolidated with PFG's, Nichols' actions caused PFG materially to overstate its reported net earnings. Nichols never notified PFG's management or accounting personnel of the account imbalances or of his improper accounting adjustments. + On March 11, 2002, PFG announced that it had identified accounting errors in the financial statements of a subsidiary. The company later filed a Form 10-K for 2001 in which it reported its corrected net income for all of 2000 and 2001. + The complaint against Nichols seeks an injunction, disgorgement plus prejudgment interest, and a civil penalty based on his violation of, and/or aiding and abetting violations of, the antifraud, reporting, and books and records provisions of the federal securities laws (Sections 10(b), 13(a), 13(b)(2)(A) and 13(b)(5) of the Securities Exchange Act of 1934 and Rules 10b-5, 12b-20, 13a-13 and 13b2-1, thereunder). + + SEC Complaint in this matter + + + + + + + + + + + + + + + + + + + + + + + + + + Return to top + + + + + SEC homepage + + + + + + + + + + + + + + About the SEC + + + + + + Budget & Performance + + + Careers + + + Commission Votes + + + Contact + + + Contracts + + + + + + + + Transparency + + + + + + Accessibility & Disability + + + Super Intelligence + + + FOIA + + + Inspector General + + + No FEAR Act Data + + + Ombuds + + + SEC Excess Personal Property Guidance + + + + + + + + Websites + + + + + + Investor.gov + + + Related Sites + + + USA.gov + + + + + + + + Site Information + + + + + + Plain Writing + + + Privacy & Security + + + Site Map + + + + + + + + + + + + + + + + + + Stay connected. 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Causey and Jeffrey K. Skilling + + + + + + + + + + + + Richard A. Causey and Jeffrey K. Skilling + + + + + + + + + + + + + + + + + + + + + The Securities and Exchange Commission ("Commission") today charged Jeffrey K. Skilling, Enron Corp.'s former President, Chief Executive Officer and Chief Operating Officer, with violating, and aiding and abetting violations of, the antifraud, lying to auditors, periodic reporting, books and records, and internal controls provisions of the federal securities laws. The Commission is seeking disgorgement of all ill-gotten gains, civil money penalties, a permanent bar from acting as a director or officer of a publicly held company, and an injunction against future violations of the federal securities laws. The Commission brought this action in coordination with the Department of Justice Enron Task Force, which filed related criminal charges against Skilling. + + The charges, which amend the Commission's Complaint filed against Richard A. Causey, Enron's former Chief Accounting Officer, allege that Skilling and others engaged in a wide-ranging scheme to defraud by manipulating Enron's publicly reported financial results. As alleged, Skilling and others improperly used reserves within Enron's wholesale energy trading business, Enron Wholesale, to manufacture and manipulate reported earnings; manipulated Enron's "business segment reporting" to conceal losses at Enron's retail energy business, Enron Energy Services ("EES"); manufactured earnings by fraudulently promoting Enron's broadband unit, Enron Broadband Services ("EBS"); and improperly used special purpose entities ("SPEs") and the LJM partnerships to manipulate Enron's financial results. In addition, the Amended Complaint alleges that Skilling made false and misleading statements concerning Enron's financial results and the performance of its businesses, and that these misrepresentations were also contained in Enron's public filings with the Commission. The Amended Complaint further alleges that Skilling sold Enron stock while in possession of material, non-public information that generated unlawful proceeds of approximately $63 million. + + Specifically, the Commission's Amended Complaint alleges as follows: + + Manufacturing and Manipulating Reported Earnings through Improper Use of Reserves. From the third quarter of 2000 through the third quarter of 2001, Skilling and others fraudulently used reserve accounts within Enron Wholesale to mask the extent and volatility of its windfall trading profits, particularly its profits from the California energy markets; avoid reporting large losses in other areas of its business; and preserve the earnings for use in later quarters. By early 2001, Enron Wholesale's undisclosed reserve accounts contained over $1 billion in earnings. Skilling and others improperly used hundreds of millions of dollars of these reserves to ensure that analysts' expectations were met. In addition, Skilling and others improperly used the reserves to conceal hundreds of millions of dollars in losses within Enron's EES business unit from the investing public.   + +Further, Skilling and others approved the improper release of reserves in certain quarters prior to 2001, in order for Enron to make or exceed analysts' earnings estimates. For example, in mid-July 2000, well after the end of the second quarter, Skilling and others decided to beat Wall Street analysts' quarterly earnings expectations by two cents a share and publicly report an earnings-per-share figure of 34 cents. They did this despite knowing that Enron's performance for the quarter did not support the 34-cent earnings-per-share figure. In order to achieve this goal, they caused a senior Enron executive to release improperly millions of dollars of "prudency" reserves from Enron's energy trading business into earnings.   + + Concealing EES Failures. Skilling and others concealed massive losses in EES by fraudulently manipulating Enron's "business segment reporting." At the close of the first quarter of 2001, Skilling and others approved moving a large portion of EES's business into Enron Wholesale under the guise of reorganizing Enron's business segments. Skilling and others knew that the reorganization was designed to fraudulently conceal hundreds of millions of dollars in losses at EES, Enron's heavily touted retail energy trading business, losses which Enron otherwise would have had to report. Enron moved the losing portion of EES's business into Enron Wholesale because Enron Wholesale had ample earnings, including the massive reserve accounts described above, to absorb EES's huge losses while continuing to meet Enron's budget targets.   + + Promoting EBS to Manufacture Earnings. Skilling and others fraudulently promoted EBS at Enron's January 20, 2000 corporate analyst conference and manufactured earnings from the resulting increase in Enron's stock price. At the analyst conference, Skilling and others knowingly made false and misleading statements about the status of EBS's broadband network, EBS's proprietary "network control software," and the "conservative" value â€" $30 billion â€" of EBS's business. In reality, EBS had neither the broadband network that Skilling claimed, nor the critical proprietary network control software to run it. In addition, Skilling inflated the value of EBS by billions of dollars over what both internal and external valuations had advised.   Knowing about the planned EBS presentation, Skilling and others â€" prior to the analyst conference â€" constructed and approved a scheme that allowed Enron to recognize approximately $85 million in earnings from the increase in the value of its stock. The earnings were recorded through a partnership interest Enron held in a large energy investment named JEDI that held, as on of its investment holdings, Enron stock. In connection with the January 20, 2000 analyst conference, Enron and JEDI purportedly executed a series of transactions, known as "Project Greyhawk," that allowed JEDI's income to increase as the price of Enron's stock increased. Project Greyhawk allowed Enron to recognize, through its partnership interest in JEDI, approximately $85 million in earnings as a result of the manufactured increase in Enron stock from the false and misleading presentation at the analyst conference.   + + Use of SPEs and LJM Partnerships to Manipulate Financial Results. Enron entered into fraudulent transactions with LJM Cayman, L.P and LJM2 Co-Investment, L.P. (collectively "LJM"), two unconsolidated partnerships created and managed by Andrew Fastow, Enron's then-Chief Financial Officer, when Skilling and others knew that LJM was not a legitimate third party acting independently from Enron. Enron used transactions with LJM to manipulate its financial results.   For example, Enron and LJM engaged in a series of financial transactions with four SPEs called Raptor I, Raptor II, Raptor III and Raptor IV (collectively referred to as the "Raptors"). Skilling, Causey, Fastow and others used the Raptors to manipulate fraudulently Enron's reported financial results. They designed Raptor I, among other things, to protect Enron from having to report publicly decreases in value in large portions of its energy "merchant asset portfolio" and technology investments by allowing Enron to "hedge" the value of those investments with an allegedly independent third party, known as Talon. The Raptor I structure, however, was invalid under applicable accounting rules because, among other things, (i) Talon was not independent from Enron and LJM's investment in Talon was not at risk, and (ii) Causey and Fastow had entered into an oral side agreement that LJM would receive its initial investment in Talon ($30 million) plus a large profit ($11 million) from Enron, all prior to Talon engaging in any of the hedging transactions. As a quid pro quo for this payment, Fastow agreed with Causey that Enron employees could use Raptor I to manipulate Enron's financial statements, including by allowing Enron employees, without negotiation or due diligence by LJM, to select the values at which the Enron assets were hedged with Talon. Skilling was informed of and approved Fastow's deal with Causey in order to ensure that Enron achieved the financial reporting goals for which Raptor I was designed, even though it was clear that the Raptor I structure was not a true hedging device.   + +In another transaction â€" the "Cuiaba project" â€" Skilling and others used LJM to move a poorly performing asset temporarily off Enron's balance sheet, when in fact such off-balance-sheet treatment was improper. When no true third-party buyer could be found, Skilling and others caused Enron to "sell" a portion of Enron's interest in the Cuiaba project to LJM for $11.3 million. LJM agreed to "buy" this interest only because Skilling, Causey, Fastow and others, in an undisclosed side deal, agreed that Enron would buy back the interest, if necessary, at a profit to LJM. Based on this purported "sale," which was in fact an asset parking or warehousing arrangement, Enron improperly recognized approximately $65 million in income in the third and fourth quarters of 1999. In the spring of 2001, even though the project was approximately $200 million over budget, Skilling, Causey and Fastow agreed that Enron would buy back LJM's interest in the Cuiaba project at a considerable profit to LJM. After agreeing to execute the repurchase, Skilling, Causey, Fastow and others delayed consummating the deal until Fastow sold his interest in LJM so that Fastow's role in the transaction would not have to be publicly disclosed.   + +In the "Nigerian barge" transaction, Skilling and others agreed to a sham "sale" of an interest in certain power-producing barges off the coast of Nigeria to Merrill Lynch so that Enron could meet its fourth quarter 1999 budget targets. In order to induce Merrill Lynch to enter into the transaction, Enron promised â€" in an oral and undisclosed "handshake" deal â€" that Merrill Lynch would receive a return of its investment plus an agreed-upon profit within six months. As a result, Merrill Lynch's equity investment was not "at risk" and Enron should not have treated the transaction as a sale from which it could record earnings and cash flow. In June 2000, Enron delivered on its "handshake" promise. Causey and Fastow ensured that LJM repurchased the Nigerian barges from Merrill Lynch at the agreed-upon profit.   + + Insider Trading. Skilling profited from the scheme to defraud by selling large amounts of Enron stock at the inflated prices. These trades also occurred while Skilling was in possession of material non-public information, including information about Enron's actual financial performance and the failure of its business units as described above. From April 2000 to September 2001, Skilling sold over one million shares of Enron stock that generated unlawful proceeds of approximately $63 million. The Amended Complaint alleges that by engaging in the above-described conduct, Skilling violated and aided and abetted the violation of Sections 10(b) and 13(b)(5) of the Securities Exchange Act of 1934 ("Exchange Act") and Exchange Act Rules 10b-5, 13b2-1 and 13b2-2, and aided and abetted the violation of Sections 13(a), and 13(b)(2)(A) and (B) of the Exchange Act and Exchange Act Rules 12b-20 and 13a-1. + + The Commission's investigation is continuing. + + SEC Complaint in this matter + + + + +  + + + + + + + + + + + + + + + + + + + + + + + + + Return to top + + + + + SEC homepage + + + + + + + + + + + + + + About the SEC + + + + + + Budget & Performance + + + Careers + + + Commission Votes + + + Contact + + + Contracts + + + + + + + + Transparency + + + + + + Accessibility & Disability + + + Super Intelligence + + + FOIA + + + Inspector General + + + No FEAR Act Data + + + Ombuds + + + SEC Excess Personal Property Guidance + + + + + + + + Websites + + + + + + Investor.gov + + + Related Sites + + + USA.gov + + + + + + + + Site Information + + + + + + Plain Writing + + + Privacy & Security + + + Site Map + + + + + + + + + + + + + + + + + + Stay connected. 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Hall + + + + + + + + + + + + Christopher S. Hall + + + + + + + + + + + + + + + + + + + + + SECURITIES EXCHANGE ACT OF 1934 +Release No. 49307 / February 24, 2004 + + ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 1960 / February 24, 2004 + + ADMINISTRATIVE PROCEEDING +File No. 3-11408 + + + In the Matter of + CHRISTOPHER S. HALL, + Respondent. + + : : : : : : : : : + + ORDER INSTITUTING CEASE-AND-DESIST +PROCEEDINGS,MAKING FINDINGS, AND +IMPOSING A CEASE-AND-DESIST ORDER +PURSUANT TO SECTION 21C OF THE +SECURITIES EXCHANGE ACT OF 1934 I. + + The Securities and Exchange Commission ("Commission") deems it appropriate that cease-and-desist proceedings be, and hereby are, instituted pursuant to Section 21C of the Securities Exchange Act of 1934 ("Exchange Act") against Christopher S. Hall ("Hall" or "Respondent"). + + II. + + In anticipation of the institution of these proceedings, Respondent has submitted an Offer of Settlement (the "Offer") which the Commission has determined to accept. Solely for the purpose of these proceedings and any other proceedings brought by or on behalf of the Commission, or to which the Commission is a party and without admitting or denying the findings herein, except as to the Commission's jurisdiction over him and the subject matter of these proceedings, Respondent consents to the entry of this Order Instituting Cease-and-Desist Proceedings, Making Findings, and Imposing a Cease-and-Desist Order Pursuant to Section 21C of the Securities Exchange Act of 1934 ("Order"), as set forth below. + + III. + + On the basis of this Order and Respondent's Offer, the Commission finds 1 that + + A. + + Respondent + + Hall, 39, served as vice-president and controller of Ralphs Grocery Company ("Ralphs") from 1995 to 1997. In early 1997, Ralphs also appointed Hall its chief accounting officer. In June 1998, Ralphs promoted Hall to senior vice-president of finance and administration. On January 12, 1999, Hall received notice of his termination from Ralphs and his financial reporting and accounting responsibilities were transferred to other individuals at Ralphs. He left two months later shortly before the closing of the Kroger Company's acquisition of Ralphs. Hall has no professional license or certification. + + Other Relevant Entities + + Ralphs, a Delaware corporation with its principal executive offices in Compton, California, operates retail grocery stores in southern California as a division of The Kroger Company ("Kroger"). Prior to its acquisition by Kroger, Ralphs was a subsidiary of Food 4 Less Holdings, Inc. ("Food 4 Less") and Fred Meyer, Inc. ("Fred Meyer"). From at least 1997 through October 28, 1998, when Ralphs' separate reporting obligations ceased, Ralphs issued publicly traded debt and filed periodic reports with the Commission. Ralphs fiscal year ended January 28. + + Food 4 Less, was a Delaware corporation that served as a holding company for Ralphs. As discussed below, Fred Meyer and Kroger acquired Ralphs and Food 4 Less. From at least 1997 through June 1, 1998, when its separate reporting obligations ceased, Food 4 Less issued publicly traded debt and filed periodic reports with the Commission. + + Fred Meyer, a food, drug and jewelry retailer in the western United States, is a Delaware corporation with its principal executive offices in Portland, Oregon. In March 1998, Fred Meyer acquired Food 4 Less including Ralphs. From at least 1997 through June 8, 1999, when Fred Meyer's separate reporting obligations ceased, its common stock was registered with the Commission pursuant to Section 12(b) of the Exchange Act and traded on the New York Stock Exchange. + + Kroger, an Ohio corporation with its principal executive offices in Cincinnati, Ohio, operates retail grocery stores, food manufacturing facilities, convenience stores, and jewelry stores under its own name and through subsidiaries. In May 1999, Kroger acquired Fred Meyer, including Food 4 Less and Ralphs. Kroger's common stock is registered pursuant to Section 12(b) of the Exchange Act and trades on the New York Stock Exchange. + + B. + + Background + + Ralphs operates retail grocery stores in southern California. In March 1998, Fred Meyer acquired Ralphs and its parent Food 4 Less. At that time, Hall was Ralphs' controller and chief accounting officer. In June 1998, Ralphs promoted Hall to senior vice president of finance and administration. Hall served in that position until January 12, 1999. Four months later, in May 1999, Kroger acquired Fred Meyer, Food 4 Less, and Ralphs. Approximately sixteen months after the acquisition, Kroger's internal auditors confirmed the existence of seven general liability accounts on Ralphs' general ledger that were used for general and unspecified purposes (the "General Liability Accounts"). These General Liability Accounts contained insufficiently supported transactions. Kroger engaged outside professionals to investigate the activity in the General Liability Accounts. + + On March 5, 2001, Kroger announced that as a result of its investigation it would restate earnings for fiscal years 1998, 1999, and the first two quarters of 2000 to conform with generally accepted accounting principals (GAAP). In a press release dated March 5, 2001, Kroger stated that Ralphs had engaged in certain improper accounting practices that began more than one year before Fred Meyer acquired Ralphs. + + Kroger also announced specific adjustments to its financial statements. These adjustments restated amounts that had been improperly placed in the seven General Liability Accounts, and corrected the reduction of the General Liability Accounts in later periods. It affected Kroger's net income, earnings per share, and assets, and liabilities as follows: + +   + + 1998 * + 1999 + + Q1 2000 + + Q2 2000 + Net Income ($ millions + + 10 + + (14) + + (7) + + (8) + Basic Earnings per Share ($) + + .01 + + (.02) + + (.01) + + (.01) + Total Assets ($ millions) + + (32) + + (35) + + NP 2 + NP + Total Liabilities ($ millions) + + (42) + + (31) + + NP + + NP + As evidence of the effect on Kroger of the restatement, in its press release on March 5, 2001, Kroger disclosed the following changes to its prior financial statements: + + EARNINGS PER SHARE* + + Fiscal Period + + Reported + + Restated + 1998 * + $ 0.58 + + $ 0.59 + Q1, 1999 + + $ 0.24 + + $ 0.25 + Q2, 1999 + + $ 0.06 + + $ 0.06 + Q3, 1999 + + $ 0.15 + + $ 0.15 + Q4, 1999 + + $ 0.29 + + $ 0.27 + 1999 + + $ 0.74 + + $ 0.73 + Q1, 2000 + + $ 0.12 + + $ 0.12 + Q2, 2000 + + $ 0.26 + + $ 0.25 + Kroger's adjustments also affected the fiscal year 1998 pre-tax income of Fred Meyer. In that year, the adjustments, on balance, released amounts from the General Liability Accounts that had the effect of increasing Fred Meyer's reported income (before income taxes, extraordinary items, and adjustments for GAAP changes) by $16.36 million or 8.9 percent. According to the restatement, the reported earnings should have been greater than originally reported for Fiscal Year 1998. More specifically, Kroger's adjustments for the first three quarters of Fiscal Year 1998 (the three interim periods Hall was involved) amounted to $2.92 million of the total $16.36 million of adjustments for the year. + + Unsupported Balances in Balance Sheet Accounts + + For Ralphs' fiscal year 1998, Ralphs misstated its earnings. Ralphs placed excess income in the General Liability Accounts on its balance sheet instead of recognizing the income immediately through its income statement in conformity with GAAP. When an accounts receivable employee at Ralphs received an atypical, or non-recurring, check or other income receipt, Ralphs, on occasion, recorded that item in one of the General Liability Accounts that functioned without proper documentation or accounting basis as reserve accounts. Ralphs also inflated certain expenses and correspondingly built up the General Liability Accounts. Then, from time to time, Ralphs transferred amounts from the General Liability Accounts into income without proper documentation or accounting basis. + + One of these General Liability Accounts was Account 122118 (Accounts Receivable Transfers). By May 1998, Ralphs had recorded at least $1,302,000 in receipts related to Ralphs' racecar and $833,000 from fees collected from certain marketing promotions into subledgers of Account 122118. 3 On June 1, 1998, Ralphs transferred these amounts into a grocery income account. Likewise, by August 6, 1998, an additional $1,902,000 in racecar receipts and advance payments from an egg supplier had accumulated in subledgers to Account 122118. Ralphs also transferred these amounts into a grocery income account. Instead of being directed to the General Liability Accounts and held there pending a subsequent transfer into income, these receipts should have been consistently recognized as income when earned. + + Ralphs also placed excess expense accruals in the General Liability Accounts. By the end of a period, if operating expenses reported to the accounting department (such as repairs, maintenance, and supplies) lagged behind forecasted expenses, Ralphs booked additional, estimated expenses, often conforming expenses to forecast. At period end, Ralphs transferred the amount of expenses, as adjusted, into one of the General Liability Accounts, such as account number 239133 (Other Liabilities). + + + Quarter End Dispersals from the General Liability Accounts + + At the end of each quarter, including year-end, Ralphs used journal entries to transfer substantial portions of the balances of the General Liability Accounts to other liability accounts. At the beginning of the next period, Ralphs automatically reversed these journal entries and restored the pre-existing balances to the General Liability Accounts. This process had the effect of reducing the balances in the General Liability Accounts at quarter end. + + For the period 1997 to 1999, each of Ralphs' successive controllers made these reversing journal entries at quarter end on Ralphs' general ledger. In fact, no one other than the controller or his assistant made these adjustments to the trial balance at the end of the quarters. Ralphs continued to make unsupported adjustments, including reversing journal entries, at the end of each quarterly period for each of the three years. Hall's responsibility for overseeing the accounts ceased after the third quarter of 1998. + + Respondent's Conduct + + Respondent Hall served as Ralphs' controller and chief accounting officer until June 1998, when Ralphs promoted him to Senior Vice President for Finance and Administration. He served in that position until January 12, 1999. During that time, Ralphs transferred items into the General Liability Accounts without proper documentation or accounting basis. Hall knowingly failed to implement a system of internal accounting controls to detect or prevent this practice. As a result, Ralphs, and successively, Fred Meyer's, and Kroger's books, records, and accounts did not fairly reflect Ralphs' transactions and the dispositions of its assets as they accrued, and Ralphs and its parent companies failed to file accurate reports with the Commission. + + C. + + As a result of the conduct described above, Respondent Hall committed violations of Section 13(b)(5) of the Exchange Act and Rule 13b2-1 thereunder, and was a cause of Ralphs' violations of Sections 13(a), 13(b)(2)(A), and 13(b)(2)(B) of the Exchange Act, and Rules 13a-1 and 13a-13 thereunder that occurred during, or related to, Ralphs' first three quarters of 1998. + + IV. + + In view of the foregoing, the Commission deems it appropriate to impose the sanctions specified in Respondent Hall's Offer. + + Accordingly, it is hereby ORDERED that: + + Pursuant to Section 21C of the Exchange Act, Respondent Hall cease and desist from committing or causing any violations and any future violations of Section 13(b)(5) and Rule 13b2-1 thereunder, and from causing any violations and any future violations of Sections 13(a), 13(b)(2)(A), and 13(b)(2)(B) of the Exchange Act and Rules 13a-1, and 13a-13 thereunder. + + By the Commission. + +Jonathan G. Katz +Secretary + + Endnotes + 1 The findings herein are made pursuant to Respondent's Offer of Settlement and are not binding on any other person or entity in this or any other proceeding. + + * Hall ceased his financial accounting and reporting duties on January 12, 1999, prior to the year end audit. + + 2 Source: The Kroger Company Form 10-K for the fiscal year ended February 3, 2001. NP means Not Presented. + + 3 Ralphs received contributions from vendors for racecar programs that promoted various products. + +  + + + + + + + + + + + + + + + + + + + + + + + + + Return to top + + + + + SEC homepage + + + + + + + + + + + + + + About the SEC + + + + + + Budget & Performance + + + Careers + + + Commission Votes + + + Contact + + + Contracts + + + + + + + + Transparency + + + + + + Accessibility & Disability + + + Super Intelligence + + + FOIA + + + Inspector General + + + No FEAR Act Data + + + Ombuds + + + SEC Excess Personal Property Guidance + + + + + + + + Websites + + + + + + Investor.gov + + + Related Sites + + + USA.gov + + + + + + + + Site Information + + + + + + Plain Writing + + + Privacy & Security + + + Site Map + + + + + + + + + + + + + + + + + + Stay connected. 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Mortensen + + + + + + + + + + + + Steven L. Mortensen + + + + + + + + + + + + + + + + + + + + + SECURITIES EXCHANGE ACT OF 1934 +Release No. 49308 / February 24, 2004 + + ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 1961 / February 24, 2004 + + ADMINISTRATIVE PROCEEDING +File No. 3-11409 + + + In the Matter of + STEVEN L. MORTENSEN, + Respondent. + + : : : : : : : : : + + ORDER INSTITUTING CEASE-AND-DESIST +PROCEEDINGS,MAKING FINDINGS, AND +IMPOSING A CEASE-AND-DESIST ORDER +PURSUANT TO SECTION 21C OF THE +SECURITIES EXCHANGE ACT OF 1934 I. + + The Securities and Exchange Commission ("Commission") deems it appropriate that cease-and-desist proceedings be, and hereby are, instituted pursuant to Section 21C of the Securities Exchange Act of 1934 ("Exchange Act"), against Steven L. Mortensen ("Mortensen" or "Respondent"). + + II. + + In anticipation of the institution of these proceedings, Respondent has submitted an Offer of Settlement (the "Offer"), which the Commission has determined to accept. Solely for the purpose of these proceedings and any other proceedings brought by or on behalf of the Commission, or to which the Commission is a party, and without admitting or denying the findings herein, except as to the Commission's jurisdiction over Respondent and the subject matter of these proceedings, which are admitted, Respondent consents to the entry of this Order Instituting Cease-and-Desist Proceedings, Making Findings, and Imposing a Cease-and-Desist Order Pursuant to Section 21C of the Securities Exchange Act of 1934 ("Order"), as set forth below. + + III. + + On the basis of this Order and Respondent's Offer, the Commission finds 1 that + + A. + + Respondent + + Mortensen, 41, was director of accounting at Ralphs Grocery Company ("Ralphs") from 1996 until June 1998 and reported to the controller of Ralphs. In June 1998, he was promoted to vice president of finance and controller of Ralphs and through early 1999 continued to report to the former controller who had been promoted to Chief Accounting Officer. Mortensen continued to hold the position of vice president of finance and controller until December 1999, when he left Ralphs. During the period Mortensen served as controller, Ralphs was a division of a publicly-held retail firm. Mortensen left Ralphs to become a senior vice president and CFO of another supermarket chain. Currently Mortensen is CFO of a private company, which previously was a shareholder of Ralphs. Mortensen has a MS degree in accounting, but he has no professional license or certification. + + Other Relevant Entities + + Ralphs, a Delaware corporation with its principal executive offices in Compton, California, operates retail grocery stores in southern California as a division of The Kroger Company ("Kroger"). Prior to its acquisition by Kroger, Ralphs was a subsidiary of Food 4 Less Holdings, Inc. ("Food 4 Less") and Fred Meyer, Inc. ("Fred Meyer"). From at least 1997 through October 28, 1998, when Ralphs' separate reporting obligations ceased, Ralphs issued publicly traded debt and filed periodic reports with the Commission. Ralphs fiscal year ended January 28. + + Food 4 Less, was a Delaware corporation that served as a holding company for Ralphs. As discussed below, Fred Meyer and Kroger acquired Ralphs and Food 4 Less. From at least 1997 through June 1, 1998, when its separate reporting obligations ceased, Food 4 Less issued publicly traded debt and filed periodic reports with the Commission. + + Fred Meyer, a food, drug and jewelry retailer in the western United States, is a Delaware corporation with its principal executive offices in Portland, Oregon. In March 1998, Fred Meyer acquired Food 4 Less including Ralphs. From at least 1997 through June 8, 1999, when Fred Meyer's separate reporting obligations ceased, its common stock was registered with the Commission pursuant to Section 12(b) of the Exchange Act and traded on the New York Stock Exchange. + + Kroger, an Ohio corporation with its principal executive offices in Cincinnati, Ohio, operates retail grocery stores, food manufacturing facilities, convenience stores, and jewelry stores under its own name and through subsidiaries. In May 1999, Kroger acquired Fred Meyer, including Food 4 Less and Ralphs. Kroger's common stock is registered pursuant to Section 12(b) of the Exchange Act and trades on the New York Stock Exchange. + + + B. + + Background + + Ralphs operates retail grocery stores in southern California. In March 1998, Fred Meyer acquired Ralphs and its parent Food 4 Less. At that time, Mortensen was Director of Accounting, and reported to Ralphs' controller. In June 1998, Ralphs promoted Mortensen to Vice President of Finance and controller. In May 1999, Kroger acquired Fred Meyer, Food 4 Less, and Ralphs. In December 1999, Mortensen left Ralphs. + + In the fall of 2000, approximately sixteen months after the acquisition, Kroger's internal auditors confirmed the existence of seven general liability accounts on Ralphs' general ledger that were used for general and unspecified purposes (the "General Liability Accounts"). These General Liability Accounts contained insufficiently supported entries. Kroger engaged outside professionals to investigate the activity in the General Liability Accounts. + + On March 5, 2001, Kroger announced that as a result of its investigation it would restate earnings for fiscal years 1998, 1999, and the first two quarters of 2000 to conform with generally accepted accounting principals (GAAP). In a press release dated March 5, 2001, Kroger stated that Ralphs had engaged in certain improper accounting practices that began more than one year before Fred Meyer acquired Ralphs. + + Kroger also announced specific adjustments to its financial statements. These adjustments restated amounts that had been improperly placed in the seven General Liability Accounts, and corrected the reduction of the General Liability Accounts in later periods. It affected Kroger's net income, earnings per share, and assets, and liabilities as follows: + + +   + + 1998 + + 1999 + + Q1 2000 + + Q2 2000 + Net Income ($ millions + + 10 + + (14) + + (7) + + (8) + Basic Earnings per Share ($) + + .01 + + (.02) + + (.01) + + (.01) + Total Assets ($ millions) + + (32) + + (35) + + NP + + NP + Total Liabilities ($ millions) + + (42) + + (31) + + NP + + NP + As evidence of the effect on Kroger of the restatement, in its press release on March 5, 2001, Kroger disclosed the following changes to its prior financial statements: + + EARNINGS PER SHARE* + + Fiscal Period + + Reported + + Restated + 1998 * + $ 0.58 + + $ 0.59 + Q1, 1999 + + $ 0.24 + + $ 0.25 + Q2, 1999 + + $ 0.06 + + $ 0.06 + Q3, 1999 + + $ 0.15 + + $ 0.15 + Q4, 1999 + + $ 0.29 + + $ 0.27 + 1999 + + $ 0.74 + + $ 0.73 + Q1, 2000 + + $ 0.12 + + $ 0.12 + Q2, 2000 + + $ 0.26 + + $ 0.25 + Kroger's adjustments also affected the fiscal year 1998 pre-tax income of Fred Meyer. In that year, the adjustments, on balance, released amounts from the General Liability Accounts that had the effect of increasing Fred Meyer's reported income (before income taxes, extraordinary items, and adjustments for GAAP changes) by $16.36 million or 8.9 percent. + + Unsupported Balances in Balance Sheet Accounts + + For Ralphs' fiscal year 1998, Ralphs misstated its earnings. Ralphs placed excess income in the General Liability Accounts on its balance sheet instead of recognizing the income immediately through its income statement in conformity with GAAP. When an accounts receivable employee at Ralphs received an atypical, or non-recurring, check or other income receipt, Ralphs, on occasion, recorded that item in one of the General Liability Accounts that functioned without proper documentation or accounting basis as reserve accounts. Ralphs also inflated certain expenses and correspondingly built up the General Liability Accounts. Then, from time to time, Ralphs transferred amounts from the General Liability Accounts into income without proper documentation or accounting basis. + + Ralphs also placed excess expense accruals in the General Liability Accounts. By the end of a period, if operating expenses reported to the accounting department (such as repairs, maintenance, and supplies) lagged behind forecasted expenses, Ralphs booked additional, estimated expenses, often conforming expenses to forecast. At period end, Ralphs transferred the amount of expenses, as adjusted, into one of the General Liability Accounts, such as account number 239133 (Other Liabilities). + + In 1999, Ralphs significantly under-accrued for self-insurance and certain other expenses. In early 2000, in connection with the fiscal 1999 year-end closing, Ralphs transferred large amounts from the General Liability Accounts to meet those expenses, including $6.2 million transferred in accounting period 4 of 2000 from Account Number 239189 "Other Clearing." + + In addition, Ralphs had obtained more revenue than it needed to meet its fiscal year 1999 goal. Ralphs placed the extra funds in the General Liability Accounts. In March 2000, Ralphs transferred $2,100,000 of these amounts to a grocery department income account by debiting the General Liability Accounts for $2,100,000 and crediting the money to a grocery department account. + + + Quarter End Dispersals from the General Liability Accounts + + At the end of each quarter, including year-end, Ralphs used journal entries to transfer substantial portions of the balances of the General Liability Accounts to other liability accounts. At the beginning of the next period, Ralphs automatically reversed these journal entries and restored the pre-existing balances to the General Liability Accounts. This process had the effect of reducing the balances in the General Liability Accounts at quarter end. + + For the period 1997 to 1999, each of Ralphs' successive controllers made these reversing journal entries at quarter end on Ralphs' general ledger. In fact, no one other than the controller or his assistant made these adjustments to the trial balance at the end of the quarters. Ralphs continued to make unsupported adjustments, including reversing journal entries, at the end of each quarterly period for each of the three years. + + Respondent's Conduct + + Respondent served as controller of Ralphs. He generated or directed the generation of journal entries that booked income receipts into the General Liability Accounts. Respondent also created or approved journal entries that subsequently transferred amounts from the General Liability Accounts into income accounts. He also used automatic reversing entries at quarter end to disperse portions of the balances of the General Liability Accounts to other accounts. These dispersals had the effect of reducing the balances in the General Liability Accounts at quarter end below audit thresholds. As a result, Respondent circumvented the internal controls that then existed at Ralphs. + + C. + + As a result of the conduct described above, Respondent Stork committed violations of Section 13(b)(5) of the Exchange Act and Rules 13b2-1 and 13b2-2 thereunder. + + IV. + + In view of the foregoing, the Commission deems it appropriate to impose the sanctions specified in Respondent's Offer. + + Accordingly, it is hereby ORDERED that: + + Respondent Stork cease and desist from committing or causing any violations and any future violations of Section 13(b)(5) of the Exchange Act and Rules 13b2-1 and 13b2-2 thereunder. + + By the Commission. + +Jonathan G. Katz +Secretary + + Endnotes + 1 The findings herein are made pursuant to Respondent's Offer of Settlement and are not binding on any other person or entity in this or any other proceeding. + + 2 Source: The Kroger Company Form 10-K for the fiscal year ended February 3, 2001. 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ClearOne Communications, Inc et al. +Docket No. 2:03CV00055DAK (USDC, D.Ut.) + + On February 20, 2004 the Honorable Dale A. Kimball, U.S. District Court, District of Utah ordered permanent injunctions from future violations of the antifraud, reporting and issuer books and records requirements of the federal securities laws, against Frances M. Flood ("Flood"), former Chairman, CEO and President of ClearOne Communications, Inc and Susie Strohm ("Strohm") former CFO of ClearOne Communications, Inc. Both Flood and Strohm consented to the entry of final judgments without admitting or denying any of the allegations of the complaint. + + The Commission's complaint was filed on January 15, 2003 and alleged violations of Section 17(a) of the Securities Act of 1933 ("Securities Act"), Sections 10(b), 13(a) and 13(b) of the Exchange Act of 1934 ("Exchange Act") and Rules 10b-5, 12b-20, 13a-1, 13a-13, and 13b2-1 thereunder. The complaint alleged that since the quarter and fiscal year ended June 30, 2001, ClearOne Communications, Inc.'s management engaged in a program of inflating the company's revenues and net income by engaging in improper revenue recognition. This course of conduct, covering two annual reporting periods and four separate quarterly reporting periods, was effected primarily through a program of channel stuffing conceived and directed by Frances M. Flood, then ClearOne's Chairman, CEO and President. In addition, while this conduct was ongoing, ClearOne closed a $25.5 million private placement of common stock. + + The order against Flood prohibits violations of Section 10(b) of the Securities Exchange Act and Rule 10b-5 promulgated thereunder, violations of Section 17(a) of the +Securities Act and aiding and abetting violations of Section 13(a) and 13(b)(2)(A) of the Exchange Act and Rules 13a-1, 13a-13, 13b2-1 and 12b-20 promulgated thereunder. The order against Flood also provides for disgorgement in the amount of $71,000.00 along with prejudgment interest of $2,881.93, a civil penalty in the amount of $71,000.00, and prohibits Flood from acting as an officer or director of any issuer that has a class of securities registered pursuant to Section 12 of the Exchange Act or that is required to file reports pursuant to Section 15(d) of the Exchange Act. + + The order against Strohm prohibits violations of Section 17(a)(2) and (3) of the Securities Act and aiding and abetting violations of Section 13(a) and 13(b)(2)(A) of the Exchange Act and Rules 13a-1, 13a-13, and 12b-20 promulgated thereunder. The order against Strohm also provides for disgorgement in the amount of $25,000.00 together with prejudgment interest in the amount of $1,014.75 and a civil penalty in the amount of $25,00.00. + + + +  + + + + + + + + + + + + + + + + + + + + + + + + + Return to top + + + + + SEC homepage + + + + + + + + + + + + + + About the SEC + + + + + + Budget & Performance + + + Careers + + + Commission Votes + + + Contact + + + Contracts + + + + + + + + Transparency + + + + + + Accessibility & Disability + + + Super Intelligence + + + FOIA + + + Inspector General + + + No FEAR Act Data + + + Ombuds + + + SEC Excess Personal Property Guidance + + + + + + + + Websites + + + + + + Investor.gov + + + Related Sites + + + USA.gov + + + + + + + + Site Information + + + + + + Plain Writing + + + Privacy & Security + + + Site Map + + + + + + + + + + + + + + + + + + Stay connected. 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Individuals (SALI) + + + + + Enforcement Data Delivery Standards + + + + + Small Businesses + + + + + Appellate Briefs + + + + + Amicus / Friend of the Court Briefs + + + + + + + + + + + + + + + + + + + + + + + + + + Enforcement & Litigation + + + + + + + Litigation Releases + + + + + Administrative Proceedings + + + + + Administrative Law Judge Orders and Initial Decisions + + + + + Trading Suspensions + + + + + Distributions to Harmed Investors + + + + + Receiverships + + + + + Electronic Filings in Administrative Proceedings (eFAP) + + + + + Rules of Practice + + + + + Applications for Reentry + + + + + Reports of Investigations + + + + + Whistleblower Program + + + + + Public Alert: Unregistered Soliciting Entities (PAUSE) + + + + + SEC Action Lookup - Individuals (SALI) + + + + + Enforcement Data Delivery Standards + + + + + Small Businesses + + + + + Appellate Briefs + + + + + Amicus / Friend of the Court Briefs + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + Home + + + Enforcement and Litigation + + + Litigation Releases + + + Don-Allen Ruttenberg + + + + + + + + + + + + Don-Allen Ruttenberg + + + + + + + + + + + + + + + + + + + U.S. Securities and Exchange Commission + + Litigation Release No. 18595 / February 25, 2004 + + Accounting and Auditing Enforcement Release No. 1964 / February 25, 2004 + + SECURITIES AND EXCHANGE COMMISSION v. Don-Allen Ruttenberg, +Civil Action No. CV-04-P-0371-S (N.D.Al.). + + On February 25, 2004, the Securities and Exchange Commission filed a complaint in the U.S. District Court for the Northern District of Alabama against Don-Allen Ruttenberg, a former Executive Vice-President of Just for Feet, Inc., a large shoe and sports apparel retailer formerly headquartered in Birmingham, Alabama. The Complaint alleges that, in connection with the audit of Just for Feet's fiscal 1998 financial statements in the spring of 1999, Ruttenberg was instrumental in the acquisition of fraudulent confirmations used to confirm the validity of unearned receivables Just for Feet had recognized from its vendors. The complaint also alleges that Ruttenberg played a role in obtaining other confirmations that were fraudulently used to confirm the validity of income Just for Feet had improperly recognized through the acquisition of merchandise display booths from its vendors. The overstatement of income and assets resulting from this misconduct was reflected on Just for Feet's financial statements included in its Form 10-K filed for fiscal year 1998, Forms 10-Q filed for the first and second quarters of fiscal year 1999, and in its registration statements on Forms S-8 and S-4 filed in May and June of 1999, respectively. + + The Complaint seeks a permanent injunction enjoining Ruttenberg from further Section 17(a) of the Securities Act of 1933 and Sections 10(b) and 13(b)(5) of the Securities Exchange Act of 1934 and Rules 10b-5, 13b2-1 and 13b2-2 thereunder and his aiding and abetting violations by Just for Feet of Sections 13(a), 13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act and Rules 12b-20, 13a-1 and 13a-13 thereunder. In addition, the Complaint seeks an award of disgorgement, prejudgment interest thereon and a civil penalty. + + Also on this date, the United States Department of Justice and the Office of the U.S. Attorney for the Northern District of Alabama unsealed an information containing criminal charges against Ruttenberg in this matter. Ruttenberg has agreed to plead guilty to the charges. + + The Commission acknowledges the assistance of the United States Department of Justice, the Office of the U.S. Attorney for the Northern District of Alabama and the Alabama Securities Commission in this matter. The Commission's investigation is continuing. + +See also: L.R. 18575 (February 13, 2004); L.R. 18571 (February 6, 2004); L.R. 18139 (May 15, 2003). + + + SEC Complaint in this matter + + + + + +  + + + + + + + + + + + + + + + + + + + + + + + + + Return to top + + + + + SEC homepage + + + + + + + + + + + + + + About the SEC + + + + + + Budget & Performance + + + Careers + + + Commission Votes + + + Contact + + + Contracts + + + + + + + + Transparency + + + + + + Accessibility & Disability + + + Super Intelligence + + + FOIA + + + Inspector General + + + No FEAR Act Data + + + Ombuds + + + SEC Excess Personal Property Guidance + + + + + + + + Websites + + + + + + Investor.gov + + + Related Sites + + + USA.gov + + + + + + + + Site Information + + + + + + Plain Writing + + + Privacy & Security + + + Site Map + + + + + + + + + + + + + + + + + + Stay connected. 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Sullivan + + + + + + + + + + + + Scott D. Sullivan + + + + + + + + + + + + + + + + + + + + + Sullivan Consents to Anti-Fraud Injunction, Permanent Bar from Serving as an Officer and Director of a Public Company, and Permanent Suspension from Practicing as an Accountant Before the Commission + + Sullivan Also Pleads Guilty to Criminal Charges Filed by the Department of Justice, which Announces Related Indictment of Former WorldCom CEO Bernard J. Ebbers + + Securities and Exchange Commission v. Scott D. Sullivan, Civil Action No. 04 CV 1706 + + The Securities and Exchange Commission today filed a civil enforcement action against Scott D. Sullivan, the former Chief Financial Officer of WorldCom, Inc. The Commission charged Sullivan with engaging in a fraudulent scheme to conceal WorldCom's poor financial performance. The Commission alleged that Sullivan, with the consent and knowledge of WorldCom's former Chief Executive Officer, caused numerous improper adjustments and entries in WorldCom's books and records, often in the hundreds of millions of dollars, to make the Company's quarterly and yearly financial results appear to meet Wall Street's expectations. In addition, the Commission alleged that Sullivan made numerous false and misleading public statements about WorldCom's financial condition and performance, and signed a number of SEC filings that contained false and misleading material information. + + Also today, in connection with the same conduct, Sullivan pleaded guilty to criminal charges filed by the U.S. Attorney's Office for the Southern District of New York. In addition, that office announced today the related indictment of Bernard J. Ebbers, WorldCom's former Chief Executive Officer. + + The Commission's complaint against Sullivan alleges that by September 2000, Sullivan and other senior WorldCom executives knew that WorldCom's true operating performance and financial results were materially below the financial guidance they had given to Wall Street analysts and investors. Rather than disclose WorldCom's true financial condition and suffer the resulting decline in the company's share price, from approximately September 2000 through June 2002, Sullivan engaged in a scheme that fraudulently concealed WorldCom's true operational and financial results. The scheme involved improperly manipulating WorldCom's reported revenue, expenses, net income, earnings before interest, taxes, depreciation and amortization (EBITDA), and earnings per share. + + The complaint charges that as part of the scheme, Sullivan instructed subordinates to book certain fraudulent adjustments and entries in WorldCom's general ledger. The adjustments and entries were designed to falsely increase WorldCom's reported revenue and falsely decrease WorldCom's reported expenses. The false adjustments and entries, among other things, improperly reduced expenses by drawing down certain reserves and improperly capitalizing certain operating expenses commonly referred to in the telecommunications industry as "line costs." The complaint also alleges that Sullivan misrepresented or failed to disclose material changes in WorldCom's revenue recognition practices. During the same period, Sullivan and others made materially false or misleading statements or omissions to WorldCom's independent auditors in connection with audits and the preparation of filings with the Commission. + + Simultaneously with the filing of the complaint, Sullivan has agreed, without admitting or denying the allegations of the complaint, to the entry of an order permanently enjoining him from violating, directly or indirectly, numerous provisions of the federal securities laws, including the antifraud, reporting, books and records, internal controls, and lying-to-auditors provisions, Section 17(a) of the Securities Act of 1933 and Sections 10(b), 13(a), 13(b)(2) and 13(b)(5) of the Securities Exchange Act of 1934 and Rules 10b-5, 12b-20, 13a-1, 13a-13, 13b2-1 and 13b2-2 thereunder. Sullivan has also agreed to the entry of an order that would permanently bar him from serving as an officer or director of a public company. The order further provides that any monetary relief will be decided by the Court at a hearing to be held upon motion of the Commission or the instance of the Court and that the Court will retain jurisdiction of the action for all purposes, including the imposition of additional equitable remedies or sanctions, if any, as determined following a hearing. Sullivan has agreed that for the purpose of any such hearing, the allegations of the complaint shall be deemed true. The settlement is subject to the review by and approval of the Court. + + In addition, Sullivan has agreed to a Commission administrative order, based on the injunction, suspending him from appearing or practicing before the Commission as an accountant, under Rule 102(e) of the Commission's Rules of Practice. Sullivan has been licensed in the State of New York as a certified public accountant since 1985, although his registration lapsed in 1989. + + The Commission's action against Sullivan is its fifth civil enforcement action related to the WorldCom fraud. The first was filed against WorldCom, Inc. on June 27, 2002, the day after WorldCom announced that it intended to restate its financial results for five quartersâ€"all quarters in 2001 and the first quarter of 2002. ( Litigation Release No. 17588 ). The Commission sought, among other things, the appointment of a corporate monitor for WorldCom, and on July 3, 2002, U.S. District Judge Jed S. Rakoff appointed former SEC Chairman Richard Breeden to that position. Since then, WorldCom has admitted that beginning in 1999, as a result of undisclosed and improper accounting, it materially overstated the income it reported in its financial statements by at least $9 billion. It also filed for bankruptcy under Chapter 11 of the U.S. Bankruptcy Code. + + On Nov. 26, 2002, the Commission obtained a judgment against WorldCom that provided the full injunctive relief sought against the company. In addition, the judgment ordered WorldCom to undertake extensive reviews of its corporate governance and internal controls, as well as required the company to establish a training and education program for WorldCom officers and employees to minimize the possibility of future violations of the federal securities laws ( Litigation Release No. 17866 ). + + Subsequently, the U.S. District Court ordered WorldCom to satisfy the SEC's civil monetary penalty judgment by paying $500 million in cash and transferring $250 million worth of common stock in the reorganized company when it emerges from bankruptcy into a fund for later distribution to victims of the company's fraud, pursuant to Section 308 (Fair Funds for Investors) of the Sarbanes-Oxley Act of 2002. (Litigation Release Nos. 17829 , 18219 and 18277 ). + + Previously, the Commission filed civil actions against former WorldCom Controller David F. Myers ( Litigation Release No. 17753 ); former WorldCom Director of General Accounting Buford "Buddy" Yates, Jr. ( Litigation Release No. 17771 ); and Betty L. Vinson and Troy M. Normand, former accountants in WorldCom's General Accounting Department ( Litigation Release No. 17783 ). All of these actions are pending. + + The Commission acknowledges the assistance and cooperation of the U.S. Attorney's Office for the Southern District of New York and the Federal Bureau of Investigation. + + The Commission's investigation into matters related to WorldCom's financial fraud is continuing. + + SEC Complaint in this matter + + + + +  + + + + + + + + + + + + + + + + + + + + + + + + + Return to top + + + + + SEC homepage + + + + + + + + + + + + + + About the SEC + + + + + + Budget & Performance + + + Careers + + + Commission Votes + + + Contact + + + Contracts + + + + + + + + Transparency + + + + + + Accessibility & Disability + + + Super Intelligence + + + FOIA + + + Inspector General + + + No FEAR Act Data + + + Ombuds + + + SEC Excess Personal Property Guidance + + + + + + + + Websites + + + + + + Investor.gov + + + Related Sites + + + USA.gov + + + + + + + + Site Information + + + + + + Plain Writing + + + Privacy & Security + + + Site Map + + + + + + + + + + + + + + + + + + Stay connected. 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Individuals (SALI) + + + + + Enforcement Data Delivery Standards + + + + + Small Businesses + + + + + Appellate Briefs + + + + + Amicus / Friend of the Court Briefs + + + + + + + + + + + + + + + + + + + + + + + + + + Enforcement & Litigation + + + + + + + Litigation Releases + + + + + Administrative Proceedings + + + + + + + Information for Respondents in Administrative Proceedings  + + + + + Open Litigated Administrative Proceedings + + + + + Closed Litigated Administrative Proceedings + + + + + Commission Opinions and Adjudicatory Orders + + + + + Delinquent Filings + + + + + Stop Orders + + + + + + + + Administrative Law Judge Orders and Initial Decisions + + + + + Trading Suspensions + + + + + Distributions to Harmed Investors + + + + + Receiverships + + + + + Electronic Filings in Administrative Proceedings (eFAP) + + + + + Rules of Practice + + + + + Applications for Reentry + + + + + Reports of Investigations + + + + + Whistleblower Program + + + + + Public Alert: Unregistered Soliciting Entities (PAUSE) + + + + + SEC Action Lookup - Individuals (SALI) + + + + + Enforcement Data Delivery Standards + + + + + Small Businesses + + + + + Appellate Briefs + + + + + Amicus / Friend of the Court Briefs + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + Home + + + Enforcement and Litigation + + + Administrative Proceedings + + + DT Industries Inc. + + + + + + + + + + + + DT Industries Inc. + + + + + + + + + + + + + + + + + + + + + SECURITIES EXCHANGE ACT OF 1934 +Release No. 49364 / March 4, 2004 + + ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 1967 / March 4, 2004 + + ADMINISTRATIVE PROCEEDING +File No. 3-11421 + + + In the Matter of + DT INDUSTRIES INC., + Respondent. + + : : : : : : : : : : + + ORDER INSTITUTING CEASE-AND-DESIST PROCEEDINGS, MAKING FINDINGS, AND IMPOSING A CEASE-AND-DESIST ORDER PURSUANT TO SECTION 21C OF THE SECURITIES EXCHANGE ACT OF 1934. + I. + + The Securities and Exchange Commission ("Commission") deems it appropriate that cease-and-desist proceedings be, and hereby are, instituted pursuant to Section 21C of the Securities Exchange Act of 1934 ("Exchange Act") against DT Industries Inc. ("DTI"). + + II. + + In anticipation of the institution of these proceedings, DTI has submitted an Offer of Settlement (the "Offer") which the Commission has determined to accept. Solely for the purpose of these proceedings and any other proceedings brought by or on behalf of the Commission, or to which the Commission is a party, without admitting or denying the findings contained in this Order Instituting Cease-and-Desist Proceedings, Making Findings and Imposing a Cease-and-Desist Order Pursuant to Section 21C of the Securities Exchange Act of 1934 ("Order"), except as to the Commission's jurisdiction over it and the subject matter of these proceedings, as set forth below. + + III. + + On the basis of this Order and Respondent's Offer, the Commission finds that: + + Respondent + + 1. DTI is a Delaware corporation and is headquartered in Dayton, Ohio. DTI is a designer and manufacturer of automated production systems used to package, test and manufacture a variety of industrial and consumer products. DTI's stock is registered with the Commission pursuant to Section 12(g) of the Exchange Act and has been listed on the NASDAQ National Market since 1994. + + Other Relevant Entities + + 2. During the relevant period, Kalish Inc., ("Kalish") headquartered in Montreal, Canada, was a DTI subsidiary which designed and manufactured liquid filling and tablet packaging systems. Kalish was closed in late 2002. + + 3. During the relevant period, Sencorp Systems Inc., ("Sencorp") headquartered in Hyannis, Massachusetts, was a DTI subsidiary which designed and manufactured plastics processing equipment and packaging equipment and systems. Sencorp is currently doing business as DT Converting Technologies. + + 4. During the relevant period, Assembly Machines Inc., ("AMI") headquartered in Erie, Pennsylvania, was a DTI subsidiary which designed and manufactured high-speed assembly systems. AMI was closed in early 2003. + + Improper Accounting Entries + + 5. From July 1996 through June 2000, the former controller of Kalish failed to properly recognize costs associated with various projects in order to reach projected earnings. He then hid those costs in various accounts on Kalish's books such as inventory, costs and earnings in excess of billings, prepaid expenses and deferred tax accounts. The effect of these improper entries on Kalish's books was to understate cost of sales thereby resulting in both material overstatements of DTI's consolidated net income and material understatements of DTI's consolidated net losses in its quarterly and annual reports for fiscal years 1997, 1998 and 1999 and its quarterly reports for fiscal year 2000 as set forth in Paragraph 13 of this Order. + + 6. From July 1999 through June 2000, the former controller, cost accountant and general ledger accountant at Sencorp, in order to reach projected earnings, failed to properly recognize costs associated with various projects and recorded improper accounting entries that inflated Sencorp's gross profits. The effect of these improper entries on Sencorp's books was to understate cost of sales thereby resulting in both material overstatements of DTI's consolidated net income and material understatements of DTI's consolidated net losses in its quarterly reports for fiscal year 2000 as set forth in Paragraph 13 of this Order. + + 7. From July 1998 through February 2002, the former controller of AMI failed to properly recognize costs associated with various projects in order to reach projected earnings. He then hid those costs in an asset account known as "Costs and Estimated Earnings in Excess of Amounts Billed." The effect of these improper entries on AMI's books was to understate cost of sales thereby resulting in both material overstatements of DTI's consolidated net income and material understatements of DTI's consolidated net losses in its quarterly and annual reports for fiscal years 1999, 2000 and 2001 and its quarterly reports for fiscal year 2002 as set forth in Paragraph 14 of this Order. + + + Inadequate Internal Controls + + 8. During fiscal year 1997 through the third quarter of fiscal year 2002, DTI's internal accounting controls were deficient. As a result of numerous acquisitions, consolidations, rapid promotions, changes in personnel and shared responsibilities, DTI failed to devise and maintain an adequate system of internal accounting controls. + + 9. During fiscal year 1997 through the third quarter of fiscal year 2002, DTI had deficient cost accounting systems. The various DTI subsidiaries were operating on different accounting systems which made DTI's efforts to consolidate, audit and supervise results very difficult. Prior to June 1999, there was no formal cost accounting system at Kalish. Although Sencorp implemented an automated operating system to handle its cost accounting, the system did not function properly during the relevant time periods. The implementation of the system was premature and because of a lack of internal controls and proper training the system did not record costs accurately. In addition, at AMI the cost accounting system did not interface with the general ledger. The lack of interface necessitated manual journal entries to the general ledger, thereby creating the opportunity for false adjustments. + + 10. During fiscal years 1997 though the third quarter of fiscal year 2000, DTI failed to conduct analytical reviews of its subsidiaries' financial performance. DTI monitored its subsidiaries based upon the monthly financial reports submitted by the controllers of each individual subsidiary. Upon receiving the monthly financial reports from the subsidiaries, the information was merely consolidated without conducting any analytical tests of the financial results. + + 11. During fiscal years 1997 through the third quarter of fiscal year 2000, DTI's Internal Audit Department had inadequate practices and procedures. DTI's procedures did not require the Internal Audit Department to conduct routine operational and system audits to determine whether the financial reporting of DTI's subsidiaries was accurate. Furthermore, DTI's Internal Audit Department did not regularly assess whether DTI's policy and procedure manual was being followed by its subsidiaries. Only once between fiscal year 1997 and the third quarter of fiscal year 2000 did the Internal Audit Department assess DTI's subsidiaries' compliance with the policy and procedures manual. + + 12. In response to DTI's first restatement in October 2000 DTI began to tighten internal controls and improve its financial reporting system. Despite the policies that were being implemented to tighten internal controls and financial reporting, certain controls that had not yet been changed remained deficient. For two years, from January 2000 to January 2002, there was no independent president or general manager at AMI. During this time the same individual was acting as both controller and general manager of AMI, operating unsupervised at the subsidiary level. As a result, the conduct of the AMI controller went undetected. + + Effect On DTI's Consolidated Financial Statements + + 13. As a result of the DTI internal control deficiencies and the conduct at Kalish and Sencorp described above, DTI's consolidated financial statements included materially misstated cost of sales, gross profit and net income amounts for fiscal years 1997, 1998, 1999 and the first three quarters of fiscal year 2000. For fiscal year 1997, DTI's annual report contained an overstatement of net income by $1.6 million or 6%. For fiscal year 1998, DTI's annual report contained an overstatement of net income by $4.0 million or 13%. For fiscal year 1999, DTI's annual report contained an understatement of net loss by $3.4 million or 191%. For the first quarter of fiscal year 2000, DTI's quarterly report contained an understatement of net loss by $1.8 million or 532%, for the second quarter, the quarterly report contained an overstatement of net income by $1.7 million or 201%, and for the third quarter the quarterly report contained an overstatement of net income by $1.6 million or 60%. DTI included its misleading financial results in press releases and its filings with the Commission relating to these periods. In October 2000, DTI issued restated financial statements that reflected the above changes necessitated by the improper accounting entries at Kalish and Sencorp and DTI's inadequate internal controls. + + 14. DTI's continuing internal control deficiencies and the conduct at AMI described above resulted in further material misstatements in DTI's cost of sales, gross profit and net income in its restated financial statements for fiscal years 1999, and additional material misstatements in its cost of sales, gross profit and net income amounts in its consolidated financial statements for fiscal years 2000, 2001 and the first three quarters of fiscal year 2002. For fiscal year 1999, DTI's restated annual report contained an additional understatement of net loss by $1.4 million or 27%. For fiscal year 2000, DTI's annual report contained an understatement of net loss by $833,000 or 18%. For fiscal year 2001, DTI's annual report contained an understatement of net loss by $1.7 million or 2.4%. For the first quarter of fiscal year 2002, DTI's quarterly report contained an overstatement of net income by $250,000 or 29%, for the second quarter the quarterly report contained an understatement of net sales of $560,000, and an overstatement of net loss by $200,000 or 18%, for the third quarter the quarterly report contained an understatement of net loss by $142,000 or 1%. DTI included its misleading financial results in press releases and its filings with the Commission relating to these periods. In August 2002, DTI issued restated financial statements that reflected the above additional changes necessitated by the improper accounting entries at AMI and DTI's inadequate internal controls. + + DTI Violated Sections 13(a) of the Exchange Act and Rules 13a-1, 13a-13, and 12b-20 Thereunder + + 15. Section 13(a) of the Exchange Act and Rules 13a-1 and 13a-13 thereunder require issuers whose securities are registered with the Commission under Section 12 of the Exchange Act to file with the Commission quarterly and annual reports. These reports are required to be complete and accurate. SEC v. Savoy Industries, Inc., 587 F.2d 1149, 1165 (D.C. Cir. 1978), cert. denied, 440 U.S. 913 (1979). In addition, Rule 12b-20 further requires that all reports filed with the Commission include any additional material information that is necessary to make the reports, in light of the circumstances under which they were made, not misleading. + + 16. As result of the conduct described above, DTI, through its former subsidiary employees, violated Section 13(a) of the Exchange Act and Rule 13a-1, 13a-13 and 12b-20 by filing false and misleading annual and quarterly reports with the Commission that misrepresented DTI's financial results. + + DTI Violated Section 13(b)(2)(A) of the Exchange Act and Rule 13b2-1 Thereunder + + 17. Section 13(b)(2)(A) of the Exchange Act requires issuers whose securities are registered under Section 12 of the Exchange Act to "make and keep books, records, and accounts, which, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the issuer…" Rule 13b2-1 of the Exchange Act provides that no person shall, directly, or indirectly, falsify or cause to be falsified, any book, record or account subject to Section 13(b)(2)(A). + + 18. As a result of the conduct described above, DTI, through its former subsidiary employees, violated Section 13(b)(2)(A) of the Exchange Act and Rule 13b2-1 thereunder by failing to keep books, records and accounts that accurately and fairly reflected DTI's assets and financial results and by directly or indirectly, falsifying or causing to be falsified DTI's books, records and accounts. + + DTI Violated Sections 13(b)(2)(B) and 13(b)(5) of the Exchange Act + + 19. Section 13(b)(2)(B) of the Exchange Act requires issuers whose securities are registered under Section 12 of the Exchange Act to devise and maintain a system of internal accounting controls sufficient to provide reasonable assurances that, among other things, transactions are recorded as necessary to permit preparation of financial statements in conformity with generally accepted accounting practices ("GAAP"). Section 13(b)(5) of the Exchange Act provides that no person shall knowingly circumvent or knowingly fail to implement a system of internal accounting controls or knowingly falsify any book, record, or account described in Section 13(b)(2). + + 20. As a result of the conduct described above, DTI violated Section 13(b)(2)(B) and Section 13(b)(5) of the Exchange Act by failing to devise and maintain a system of adequate internal accounting controls and by failing to implement a system of internal accounting controls; or, through several former subsidiary employees, by knowingly circumventing a system of internal accounting controls or by knowingly falsifying DTI's books, records and accounts. + + IV. + + In view of the foregoing, the Commission deems it appropriate to impose the sanctions specified in DTI's Offer. + + Accordingly, it is hereby ORDERED: + + A. Pursuant to Section 21C of the Exchange Act, that DTI cease and desist from committing or causing any violations and any future violations of Sections 13(a), 13(b)(2)(A), 13(b)(2)(B) and 13(b)(5) of the Exchange Act and Rules 12b-20, 13a-1, 13a-13 and 13b2-1 thereunder. + + By the Commission. + + + +Jonathan G. 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Richard Rambahal, et al., (U.S.D.C. W.D. MO., Case Number 04-3086-CV-S-JCE, U.S.D.C. W.D. MO., filed March 4, 2004) + + The Securities and Exchange Commission announced that on March 4, 2004 it filed a Complaint in the United States District Court for the Western District of Missouri alleging that four former employees of DT Industries, Inc. (DTI), engaged in separate fraudulent schemes at three of DTI's subsidiaries to artificially inflate DTI's financial position. At the time of the conduct alleged in the Commission's Complaint, DTI was headquartered in Springfield, Missouri. The Commission named in its Complaint Richard Rambahal, the controller of DTI subsidiary Kalish, Inc., Paul H. Kofton and Joseph J. Barry, the controller and cost accountant of DTI subsidiary Sencorp Systems, Inc. and Michael Lesniewski, the general manager and controller of DTI subsidiary Assembly Machines, Inc. (Defendants). Specifically, the Commission's Complaint alleged that between 1996 and 2002, the Defendants knowingly or recklessly failed to properly recognize costs associated with various projects in order to reach their subsidiary's projected earnings targets set by DTI. The Commission's Complaint also alleged that the Defendants attempted to conceal their schemes in various ways, including, hiding unrecorded production costs in various balance sheet accounts that DTI consolidated into its financial statements and by creating false supporting documentation. According to the Commission's Complaint, the Defendants' improper entries on their respective subsidiary's books and records resulted in an understatement of the cost of sales and thereby caused material overstatements of DTI's consolidated net income and material understatements of DTI's consolidated net losses in various quarterly and annual reports that DTI filed with the Commission between 1997 and 2002. According to the Commission's Complaint, the overstatements of DTI's consolidated net income ranged from 1% to 532%. The Complaint seeks a permanent injunction enjoining Rambahal, Kofton, J. Barry and Lesniewski from violating Sections 10(b) and 13(b)(5) of the Securities Exchange Act of 1934 ("Exchange Act") and Rules 10b-5 and 13b2-1 thereunder and for aiding and abetting DTI's violations of Sections 13(a), 13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act and Rules 12b-20, 13a-1 and 13a-13 thereunder. The Complaint further seeks orders of disgorgement, plus prejudgment interest, from Rambahal, Kofton and Lesniewski and the imposition of civil monetary penalties against Kofton and Lesniewski. J. Barry, without admitting or denying the allegations of the Complaint, consented to the imposition of an order permanently enjoining him from the violations alleged in the Commission's Complaint. Also, in a related action, the Commission on March 4, 2004 issued an order instituting cease-and-desist proceedings requiring DTI to cease and desist from committing or causing any violations and any future violations of certain reporting, record keeping, and internal control provisions of the federal securities laws. + + SEC Complaint in this matter --> + + + + + + + + + + + + + + + + + + + + + + + + + + Return to top + + + + + SEC homepage + + + + + + + + + + + + + + About the SEC + + + + + + Budget & Performance + + + Careers + + + Commission Votes + + + Contact + + + Contracts + + + + + + + + Transparency + + + + + + Accessibility & Disability + + + Super Intelligence + + + FOIA + + + Inspector General + + + No FEAR Act Data + + + Ombuds + + + SEC Excess Personal Property Guidance + + + + + + + + Websites + + + + + + Investor.gov + + + Related Sites + + + USA.gov + + + + + + + + Site Information + + + + + + Plain Writing + + + Privacy & Security + + + Site Map + + + + + + + + + + + + + + + + + + Stay connected. 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Smyth, Arnold E. Johns, Jr., Michael J. Becker and Alan T. Davis + + + + + + + + + + + + Richard P. Smyth, Arnold E. Johns, Jr., Michael J. Becker and Alan T. Davis + + + + + + + + + + + + + + + + + + + + + The Securities and Exchange Commission ("Commission") announced today that the Honorable Clarence Cooper of the United States District Court for the Northern District of Georgia has entered a final judgment against Michael J. Becker ("Becker") of Marietta, Georgia directing payment of disgorgement in the amount of $191,127, along with prejudgment interest thereon in the amount of $33,873, and waiving prejudgment interest in excess of that amount. Becker consented to the entry of the final judgment without admitting or denying the allegations of the Commission's complaint and first amended complaint. In an earlier order of October 11, 2001, Becker, who had served as Vista 2000, Inc.'s ("Vista") vice president of finance and administration, was permanently enjoined from further violations of Section 17(a) of the Securities Act of 1933 and Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder. + The Commission's complaint and first amended complaint alleged a wide-range of securities law violations, including that misstatements were made by Vista in filings with the Commission. The allegations against Becker included that he recorded various transactions at Vista in contravention of generally accepted accounting principles, and engaged in insider trading in Vista securities at a time when Vista's revenues, income, earnings per share, and assets were overstated. + See also: L.R. 18607 (March 3, 2004); L. R. 17824 (November 1, 2002); L.R. 17566 (June 17, 2002); L.R. 17211 (October 30, 2001); L.R. 17175 (October 5, 2001) and L.R. 17044 (June 21, 2001). + + + SEC Complaint in this matter --> + + + + + + + + + + + + + + + + + + + + + + + + + + Return to top + + + + + SEC homepage + + + + + + + + + + + + + + About the SEC + + + + + + Budget & Performance + + + Careers + + + Commission Votes + + + Contact + + + Contracts + + + + + + + + Transparency + + + + + + Accessibility & Disability + + + Super Intelligence + + + FOIA + + + Inspector General + + + No FEAR Act Data + + + Ombuds + + + SEC Excess Personal Property Guidance + + + + + + + + Websites + + + + + + Investor.gov + + + Related Sites + + + USA.gov + + + + + + + + Site Information + + + + + + Plain Writing + + + Privacy & Security + + + Site Map + + + + + + + + + + + + + + + + + + Stay connected. 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Clark + + + + + + + + !function(){var e=navigator.userAgent,a=document.documentElement,n=a.className;n=n.replace("no-js","js"),/iPad|iPhone|iPod/.test(e)&&!window.MSStream&&(n+=" ua-ios"),a.className=n}(); + {"path":{"baseUrl":"\/","pathPrefix":"","currentPath":"node\/493606","currentPathIsAdmin":false,"isFront":false,"currentLanguage":"en"},"pluralDelimiter":"\u0003","suppressDeprecationErrors":true,"gtag":{"tagId":"","consentMode":false,"otherIds":[],"events":[],"additionalConfigInfo":[]},"ajaxPageState":{"libraries":"eJxdT0GOwzAI_JBdn_oei2DkeINNZLC22devlaZS2wtiBhhmcKNUTPo97jxyaXEH3GJpiZrFhQW38A4cMqgeYQGlV19JFTKpQ-kUmvQKXP7I0cO4tC2kPnbg2wVdFslM0SCHPMs3vsEPPD7J6hgOGdPCKJyoRxxqUuePHjLLAuzVjimenRJGSLW08NoBK9LUn6SHlrytVOlcpJShB63QLSpBx_WkOzHNePol4fRQo_qMPvQ36ZXsAmd99lMNr2t_GUR9n60EyX9a_wePd5ns","theme":"uswds_sec","theme_token":null},"ajaxTrustedUrl":[],"gtm":{"tagId":null,"settings":{"data_layer":"dataLayer","include_classes":false,"allowlist_classes":"","blocklist_classes":"","include_environment":false,"environment_id":"","environment_token":""},"tagIds":["GTM-TD3BKV"]},"data":{"extlink":{"extTarget":false,"extTargetAppendNewWindowDisplay":true,"extTargetAppendNewWindowLabel":"(opens in a new window)","extTargetNoOverride":false,"extNofollow":false,"extTitleNoOverride":false,"extNoreferrer":false,"extFollowNoOverride":false,"extClass":"0","extLabel":"(link is external)","extImgClass":false,"extSubdomains":true,"extExclude":".*\\.gov|http:\/\/www.xbrl.org\/utr\/2013-05-17\/utr.xml|http:\/\/www.xbrl.org\/dtr\/type\/numeric-2009-12-16.xsd|http:\/\/www.xbrl.org\/dtr\/type\/nonNumeric-2009-12-16.xsd|https:\/\/secir.secure.force.com\/ombudsman\/OMMSForm","extInclude":"","extCssExclude":".data-exempt","extCssInclude":"","extCssExplicit":"","extAlert":true,"extAlertText":"You are now leaving the SEC Website. 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Rinehart, Jonathan A. Beck, and Kevin P. Clark + + + + + + + + + + + + William H. Rinehart, Jonathan A. Beck, and Kevin P. Clark + + + + + + + + + + + + + + + + + + + + + The Securities and Exchange Commission today announced a settlement with Jonathan A. Beck, a former sales vice president at Critical Path, Inc., a California company that provides email services. The Commission's complaint-filed in August 2002-alleged that Beck fraudulently participated in a scheme to inflate Critical Path's revenue and earnings for fiscal 2000, and then illegally sold 27,348 shares of the company's stock based on non-public information about the fraud and the company's true financial condition. + Without admitting or denying the Commission's allegations, Beck consented to the entry of a Final Judgment-entered by the United States District Court for the Northern District of California on March 1, 2004-that (1) permanently enjoined Beck from violating Sections 10(b) and 13(b)(5) of the Securities Exchange Act of 1934 (Exchange Act) and Exchange Act Rule 10b-5 and 13b2-1, and from aiding and abetting violations of Exchange Act Sections 13(b)(2)(A) and 13(b)(2)(B); and (2) ordered Beck to disgorge $586,368 in losses he avoided from transactions in the securities of Critical Path, Inc., together with pre-judgment interest. Based on Beck's sworn representations in his Statement of Financial Condition, and other documents submitted to the Commission, the Court waived payment of all but $26,500 of the disgorgement, waived pre-judgment interest, and did not impose a civil penalty. + In a related criminal case-prosecuted by the United States Attorney for the Northern District of California-Beck pleaded guilty to insider trading in Critical Path stock. On January 14, 2004, United States District Judge Alsup sentenced Beck to three months in prison, and to two years of supervised release. + Beck is the fifth former Critical Path executive to have settled fraud charges brought by the Commission. In February 2002 the Commission filed a settled civil injunctive action against Critical Path's former president David A. Thatcher and a former sales vice president, Timothy J. Ganley (Litigation Release No. 17353). The Commission also suspended Thatcher from practicing before the Commission as an accountant (Exchange Act Release No. 45683). In August 2002 the Commission filed a civil injunctive action against William Rinehart (the former head of Critical Path's North and Latin American sales forces), Kevin P. Clark (a former regional vice president of sales at the company), and Beck (Litigation Release No. 17701). Rinehart and Clark settled with the Commission simultaneously with the filing of the complaint. + In February 2002 the Commission instituted and settled cease-and-desist proceedings against Critical Path (Exchange Act Release No. 34-45393). + + + + SEC Complaint in this matter --> + + + + + + + + + + + + + + + + + + + + + + + + + + Return to top + + + + + SEC homepage + + + + + + + + + + + + + + About the SEC + + + + + + Budget & Performance + + + Careers + + + Commission Votes + + + Contact + + + Contracts + + + + + + + + Transparency + + + + + + Accessibility & Disability + + + Super Intelligence + + + FOIA + + + Inspector General + + + No FEAR Act Data + + + Ombuds + + + SEC Excess Personal Property Guidance + + + + + + + + Websites + + + + + + Investor.gov + + + Related Sites + + + USA.gov + + + + + + + + Site Information + + + + + + Plain Writing + + + Privacy & Security + + + Site Map + + + + + + + + + + + + + + + + + + Stay connected. 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Solely for the purpose of these proceedings and any other proceedings brought by or on behalf of the Commission, or to which the Commission is a party, and without admitting or denying the findings herein, except as to the Commission's jurisdiction over it and the subject matter of these proceedings, which are admitted, Respondent consents to the entry of this Order Instituting Cease-and-Desist Proceedings, Making Findings, and Imposing a Cease-and-Desist Order, Pursuant to Section 21C of the Securities Exchange Act of 1934 ("Order"), as set forth below. + III. + On the basis of this Order and Respondent's Offer, the Commission finds that: + RESPONDENT + 1. BJ Services , a Delaware corporation based in Houston, Texas, provides oil field services, products, and equipment to petroleum producers worldwide. Its common stock is registered under Section 12(b) of the Exchange Act and is traded on the New York Stock Exchange. + OVERVIEW + 2. During 2001, BJ Services, through its wholly owned Argentinean subsidiary B.J. Services, S.A. ("BJSA"), made illegal or questionable payments, totaling approximately 72,000 pesos 1 to Argentinean customs officials. Further, from 1998 through April 2002 certain undocumented or improperly characterized payments were made totaling approximately 151,000 pesos. In certain instances, entries were made in BJSA's books and records to conceal the payments. During the same period, BJ Services experienced certain breaches in the existing accounting policies, controls and procedures in certain areas of its Latin American Region. 2 + JANUARY 2001 PAYMENT + 3. In January 2001, the Controller for BJSA learned that equipment BJSA was attempting to import into Argentina, and which was being awaited by BJSA for use on a project for a customer, had not been properly imported under Argentina's customs laws and was being held by a customs official. 3 The Controller also learned that the customs official had offered to release the equipment and overlook the customs law violation, if he were paid 75,000 pesos. + 4. The customs official stated that unless he received the payment, the equipment would be deported and BJSA would: (i) forfeit the import taxes it previously paid to import the equipment, 71,575 pesos; (ii) pay a penalty of 1 to 5 times the value of the equipment, valued at $122,420; and (iii) pay importation taxes again when it properly re-imported the equipment. In addition, if the payment was not made, BJSA would also have: incurred freight charges to export and then re-import the equipment; risked losing the business and accompanying revenue the equipment would have immediately begun generating; and possibly impaired the relationship with the customer awaiting the work to be performed with the equipment, resulting in an inability to retain that customer's business. + 5. Shortly after learning of the customs official's offer, the Controller contacted the Country Manager for BJ Services' Argentinean operations to obtain guidance on how to proceed. 4 The Country Manager told the Controller that he would check with BJ Services' Regional Manager for Latin American operations in order to get approval. 5 The Country Manager later called the Controller back and told him that: he had checked with the Regional Manager; the payment had been approved; and they should attempt to negotiate with the customs official to obtain a lower payment amount. + 6. Negotiations with the customs official ensued, through a third party agent previously hired to assist BJSA with Argentinean customs matters, and the customs official eventually agreed to reduce the amount to 65,000 pesos. Two BJSA checks totaling 65,000 pesos were issued in the name of a lower-level BJSA employee. She cashed the checks and provided the proceeds to the customs official. 6 The equipment was then released to BJSA. + 7. The Controller recorded the payment on BJSA's books as a debit to a "Vendor Payable Account" with a corresponding entry of 65,000 pesos due from BJ Services' Panamanian subsidiary in an attempt to have the payment charged to BJ Venezuela. The Panamanian subsidiary then recorded a payable to BJSA, improperly attaching the previously paid import tax invoice for the equipment as support. The 65,000 pesos expense was then allocated to Argentina for internal management reporting purposes by BJ Services' Panamanian subsidiary, which regularly accounts for and allocates expenses among BJ Services' various Latin American subsidiaries. The amount was improperly characterized as "Amortization - Fixed Costs." + MENDOZA PAYMENT + 8. In September 2001, BJSA's former Treasury and Purchasing Manager, who was then in charge of customs matters for BJSA, authorized payments totaling 7,000 pesos to an Argentinean customs official in Mendoza, Argentina so that the official would overlook a previous customs violation by BJSA and not fine the company. 7 In exchange for the payments, the customs official created false documentation so that the customs violation would not be uncovered. The payments were improperly characterized on BJSA's books and records as import duties paid to the third party customs agent. BJSA's books and records did not provide accurate support for those payments. + FACILITATION PAYMENT + 9. In October 2000, BJSA's former Treasury and Purchasing Manager approved a 10,994 peso payment to an official employed by Argentina's Secretary of Industry and Commerce. 8 The official was reviewing whether equipment being imported into Argentina by BJSA could be legally imported into the country. While BJSA personnel believed that the equipment could be imported under Argentina's laws, the payment was made to expedite the approval process. The payment was recorded in BJSA's books and records as an importation cost with an offsetting charge to the Panamanian subsidiary, and was improperly supported by an invoice from the third party customs agent for unspecified services. + INTERNAL CONTROLS ISSUES + 10. From 1998 through April 2002, certain areas of BJ Services' Latin American Region experienced certain breaches of its existing accounting policies, controls and procedures. An internal evaluation of Latin America's Regional Manager in 2000 noted that "Management of the [Latin American Region's] financial and accounting procedures has been extremely lackadaisical in the past several years …" 9 + INTERNAL INVESTIGATION AND DISCOVERY OF OTHER PAYMENTS + 11. In June 2002, while investigating seemingly unrelated financial issues in Argentina, BJ Services' senior management learned that violations of the Foreign Corrupt Practices Act might have occurred in Argentina. 10 At the direction of the board of directors, a full internal investigation ensued. The investigation provided details of the payments noted above. The internal investigation also uncovered an aggregate of 151,406 pesos in additional undocumented or improperly characterized payments made by BJSA during the period from January 1998 through April 2002, the largest of which was 10,994 pesos, with a few in the 3,000 to 7,400 pesos range, and the remainder under 3,000 pesos. Most of the payments were to the third party customs agent for unspecified customs charges and contained no supporting documentation. + COOPERATION AND REMEDIAL ACTIONS BY BJ SERVICES' MANAGEMENT + 12. Upon discovery of the aforementioned payments, BJ Services began an internal investigation of such payments and their accounting, engaged outside counsel in both the U.S. and Argentina and disclosed the matters to its outside auditors and its full board of directors. Upon completion of BJ Services' internal investigation, BJ Services voluntarily and promptly approached the Commission's staff, notified the staff of the results of the investigation, and cooperated with the staff's investigation, including declining to assert its attorney-client privilege with respect to communications during the relevant time period. + 13. Upon completion of BJ Services' internal investigation, BJ Services also undertook certain remedial actions. In particular, the company: arranged for proper classification of the equipment associated with the January 2001 payment to Argentine customs; revised the accounting treatment of the subject payments and included the appropriate supporting documentation in the accounting records; replaced the management of the Latin American Region; approved the expansion of its existing corporate internal audit department and placed an additional audit manager in the Latin American Region reporting directly to BJ Services' Director of Internal Audit; retained an additional independent auditor to conduct a forensic audit of its books and records in Argentina; and adopted an improved and expanded Foreign Corrupt Practices Act education and prevention program introduced in all of its regions worldwide. + FEDERAL SECURITIES LAW VIOLATIONS + 14. As a result of the conduct described above, BJ Services violated Section 30A of the Exchange Act, which makes it unlawful, in order to obtain or retain business, for any issuer with a class of securities registered pursuant to Section 12 of the Exchange Act to give, or authorize the giving of, anything of value to any foreign official for purposes of influencing the official or inducing the official to act in violation of his or her lawful duties. + 15. As a result of the conduct described above, BJ Services violated Section 13(b)(2)(A) of the Exchange Act, which requires reporting companies to make and keep books, records, and accounts which, in reasonable detail, accurately and fairly reflect their transactions and dispositions of their assets. + 16. As a result of the conduct described above, BJ Services violated Section 13(b)(2)(B) of the Exchange Act, which requires all reporting companies to devise and maintain a system of internal accounting controls sufficient to, among other things, provide reasonable assurances that transactions are recorded in accordance with management's general or specific authorization and access to assets is permitted only in accordance with management's general or specific authorization. + IV. + 17. In determining to accept the Offer, the Commission considered remedial actions promptly undertaken by the Respondent and cooperation afforded the Commission staff once the board of directors and senior management learned of the matters discussed herein. + V. + In view of the foregoing, and in consideration of BJ Services' cooperation with the Commission's investigation, the Commission deems it appropriate to impose the sanctions specified in Respondent's Offer. + Accordingly, it is hereby ORDERED that: + Respondent cease and desist from committing or causing any violations and any future violations of Sections 30A, 13(b)(2)(A), and 13(b)(2)(B) of the Exchange Act. + By the Commission. + + + + Jonathan G. Katz + Secretary + + + Endnotes + 1 Until January 4, 2002, the Argentinian peso was tied to the dollar, one to one, so that for almost all of the period addressed herein the value of the Argentinian peso was equal to the value of the U.S. dollar. + 2 BJ Services' operations are divided among international, geographical regions for example, the United States/Mexico Region, the Latin American Region, and the Middle East Region, etc. the results of which are consolidated for financial reporting purposes. + 3 The term "equipment" used when discussing the January 2001 payment actually refers to a component part that was coming from BJ Services' Venezuelan subsidiary and was meant for use in a larger piece of equipment at an oil well in Argentina. BJSA was attempting to import it into the country on a permanent basis, and only new or rebuilt equipment may be permanently imported into Argentina. The component part was used and had not been rebuilt and therefore was not permitted to be imported on a permanent basis, but only on a temporary basis. + 4 The Controller did not normally have responsibility for customs issues, but handled this matter for a vacationing colleague. He did not believe he had authority to approve the payment and contacted the Country Manager to get approval. The Country Manager was employed by Respondent (not by BJSA). + 5 The Regional Manager was also employed by Respondent (not by BJSA). + 6 This payment was made in violation of BJ Services' existing policies prohibiting payments of the kind made to the customs official. + 7 These payments were also made in violation of BJ Services' existing policies prohibiting payments of the kind made to the customs official. The former Treasury and Purchasing Manager was a mid-level employee of BJSA. There is no indication that anyone employed by Respondent, or who was part of BJSA's senior management, approved the payment. + 8 In this instance, as in the previous, there is no indication that anyone employed by Respondent, or who was part of BJSA's senior management, approved the payment. + 9 As a consequence of the breaches, BJ Services later replaced a Country Manager for failure to follow procedures for capital expenditures approval. In addition, BJ Services took corrective action with respect to regional management in January 2002. In April 2002, BJ Services' senior management uncovered all of the facts noted above and took further corrective action as noted subsequently herein. + 10 BJ Services was investigating the possible unauthorized use of funds in Argentina by BJ Services and BJSA personnel. The Foreign Corrupt Practices Act was enacted by Congress in 1977 after uncovering a series of questionable payments to foreign government officers by prominent U.S. corporations. Foreign Corrupt Practices Act of 1977, Exchange Act Release No. 34 17500 (Jan. 29, 1981). The purpose of the act was to prohibit such payments and require accurate accounting records and controls to ensure "that assets be safeguarded from unauthorized use, that corporate transactions conform to managerial authorizations, and that records be accurate." 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Individuals (SALI) + + + + + Enforcement Data Delivery Standards + + + + + Small Businesses + + + + + Appellate Briefs + + + + + Amicus / Friend of the Court Briefs + + + + + + + + + + + + + + + + + + + + + + + + + + Enforcement & Litigation + + + + + + + Litigation Releases + + + + + Administrative Proceedings + + + + + Administrative Law Judge Orders and Initial Decisions + + + + + Trading Suspensions + + + + + Distributions to Harmed Investors + + + + + Receiverships + + + + + Electronic Filings in Administrative Proceedings (eFAP) + + + + + Rules of Practice + + + + + Applications for Reentry + + + + + Reports of Investigations + + + + + Whistleblower Program + + + + + Public Alert: Unregistered Soliciting Entities (PAUSE) + + + + + SEC Action Lookup - Individuals (SALI) + + + + + Enforcement Data Delivery Standards + + + + + Small Businesses + + + + + Appellate Briefs + + + + + Amicus / Friend of the Court Briefs + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + Home + + + Enforcement and Litigation + + + Litigation Releases + + + Ed Johnson and MERL Holdings Inc.com + + + + + + + + + + + + Ed Johnson and MERL Holdings Inc.com + + + + + + + + + + + + + + + + + + + + + On March 8, 2004, following a two-week trial, a federal jury in Trenton, New Jersey found for the Commission on all counts in an accounting fraud, insider trading and false filing case against Ed Johnson, the former Chief Executive Officer, Chairman of the Board, and President of MERL Holdings Inc.com. In its complaint, the Commission had alleged that Johnson inflated the assets and financial results of MERL in two registration statements filed by the company with the Commission and disseminated to the public. The jury found that Johnson violated Section 17(a) of the Securities Act of 1933 ("Securities Act"), Section 10(b) of the Securities Exchange Act of 1934 ("Exchange Act"), and Rule 10b-5 promulgated thereunder, in connection with a multi-faceted fraud designed to raise $25 million in the public securities markets. + According to the complaint, Johnson, age 54, orchestrated the fraudulent scheme in four ways. First, Johnson improperly consolidated Essex Industries, Inc. ("Essex") in MERL's 1997 and 1998 financial statements, which accounted for all of the company's revenues recorded in the income statements for those years. Essex also comprised virtually all of MERL's assets in 1997 and for 363 days in 1998. The complaint alleged that MERL's consolidation of Essex was improper because, among other things, Johnson and MERL had been specifically enjoined by a Virginia state court from exerting any control over Essex. On July 24, 1998, Johnson entered into a Settlement and Security Agreement with Essex's owner which continued the severe restrictions on MERL's ability to control Essex. Because of the injunction and the Security Agreement, Johnson's consolidation of Essex's operating results in its financial statements violated Generally Accepted Accounting Principles ("GAAP"). + Furthermore, in MERL's second registration statement, a Report on Form 10-SB filed with the Commission on May 31, 2000, Johnson represented that Essex was still a subsidiary and business segment of MERL when, in reality, MERL no longer owned Essex. + Second, Johnson artificially inflated the value of assets that MERL had acquired from Hanold Bookstores, Inc. and Hanold Schoolwear, Inc. ("Hanold"), in exchange for shares of MERL's preferred stock (with a par value of $10.00 per share). Among other things, Johnson valued a Hanold customer list at $1.6 million when he knew that his valuation was not substantiated by any documentary or evidentiary support. The complaint alleged that Johnson's treatment of the customer list and other Hanold assets was improper and violated GAAP. + Third, the complaint alleged that the textual portions of both registration statements materially mischaracterized the financial health of MERL. An objective view of the company was that it was in dire financial straits because of severe liquidity problems, drastically declining sales, disappearing customers and numerous legal problems. For example, one of MERL's subsidiaries, MERL School Stores, Inc., had closed all of its stores and laid off all of its employees one month prior to the filing of the Form 10-SB. Yet the Form 10-SB represented that MERL intended to hire "additional employees" to accommodate an alleged growth in MERL School Stores' business. + The complaint alleged that Johnson had a clear understanding of MERL's bleak financial position and future prospects but, in the textual portions of the registration statements, improperly painted a falsely prosperous and optimistic picture of the company and did not disclose the liquidity problems, negative sales trends, and adverse developments that had battered the company. + Fourth, the complaint alleged that Johnson committed a fraudulent act in the Form 10-SB by representing that MERL did not believe that any of its officers or directors had been involved in any legal proceedings material to an evaluation of their ability or integrity when, in fact, Johnson himself had been criminally convicted in 1990 for willful misapplication of funds when he had been the CEO of Magnolia Federal Savings & Loan Association in Knoxville, Tennessee. + Finally, the complaint alleged that Johnson benefited from his fraudulent scheme by avoiding losses or becoming unjustly enriched by selling MERL stock and using material nonpublic information concerning MERL's accounting irregularities and true financial condition. + Although he resigned as Chief Executive Officer, Chairman of the Board and President of MERL shortly after this civil enforcement action commenced, Johnson continues with the company as a "consultant" and an "advisor" to the board of directors. His wife, G. Carol Johnson, is the acting President of MERL. + The Court will hold further proceedings concerning remedies. The Commission seeks to enjoin Johnson permanently from violating Section 17(a) of the Securities Act, Section 10(b) of the Exchange Act, and Rule 10b-5 promulgated thereunder, and seeks civil monetary penalties against Johnson. The Commission further seeks to bar Johnson permanently from serving as an officer or director of any public company and also seeks under section 603 of the Sarbanes-Oxley Act of 2002 to bar him permanently from any future participation in the offering of any penny stock. Finally, the Commission seeks disgorgement, prejudgment interest and penalties from Johnson for his insider trading. + + + SEC Complaint in this matter --> + + + + + + + + + + + + + + + + + + + + + + + + + + Return to top + + + + + SEC homepage + + + + + + + + + + + + + + About the SEC + + + + + + Budget & Performance + + + Careers + + + Commission Votes + + + Contact + + + Contracts + + + + + + + + Transparency + + + + + + Accessibility & Disability + + + Super Intelligence + + + FOIA + + + Inspector General + + + No FEAR Act Data + + + Ombuds + + + SEC Excess Personal Property Guidance + + + + + + + + Websites + + + + + + Investor.gov + + + Related Sites + + + USA.gov + + + + + + + + Site Information + + + + + + Plain Writing + + + Privacy & Security + + + Site Map + + + + + + + + + + + + + + + + + + Stay connected. 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Adams + + + + + + + + !function(){var e=navigator.userAgent,a=document.documentElement,n=a.className;n=n.replace("no-js","js"),/iPad|iPhone|iPod/.test(e)&&!window.MSStream&&(n+=" ua-ios"),a.className=n}(); + {"path":{"baseUrl":"\/","pathPrefix":"","currentPath":"node\/493636","currentPathIsAdmin":false,"isFront":false,"currentLanguage":"en"},"pluralDelimiter":"\u0003","suppressDeprecationErrors":true,"gtag":{"tagId":"","consentMode":false,"otherIds":[],"events":[],"additionalConfigInfo":[]},"ajaxPageState":{"libraries":"eJxdT0GOwzAI_JBdn_oei2DkeINNZLC22devlaZS2wtiBhhmcKNUTPo97jxyaXEH3GJpiZrFhQW38A4cMqgeYQGlV19JFTKpQ-kUmvQKXP7I0cO4tC2kPnbg2wVdFslM0SCHPMs3vsEPPD7J6hgOGdPCKJyoRxxqUuePHjLLAuzVjimenRJGSLW08NoBK9LUn6SHlrytVOlcpJShB63QLSpBx_WkOzHNePol4fRQo_qMPvQ36ZXsAmd99lMNr2t_GUR9n60EyX9a_wePd5ns","theme":"uswds_sec","theme_token":null},"ajaxTrustedUrl":[],"gtm":{"tagId":null,"settings":{"data_layer":"dataLayer","include_classes":false,"allowlist_classes":"","blocklist_classes":"","include_environment":false,"environment_id":"","environment_token":""},"tagIds":["GTM-TD3BKV"]},"data":{"extlink":{"extTarget":false,"extTargetAppendNewWindowDisplay":true,"extTargetAppendNewWindowLabel":"(opens in a new window)","extTargetNoOverride":false,"extNofollow":false,"extTitleNoOverride":false,"extNoreferrer":false,"extFollowNoOverride":false,"extClass":"0","extLabel":"(link is external)","extImgClass":false,"extSubdomains":true,"extExclude":".*\\.gov|http:\/\/www.xbrl.org\/utr\/2013-05-17\/utr.xml|http:\/\/www.xbrl.org\/dtr\/type\/numeric-2009-12-16.xsd|http:\/\/www.xbrl.org\/dtr\/type\/nonNumeric-2009-12-16.xsd|https:\/\/secir.secure.force.com\/ombudsman\/OMMSForm","extInclude":"","extCssExclude":".data-exempt","extCssInclude":"","extCssExplicit":"","extAlert":true,"extAlertText":"You are now leaving the SEC Website. 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Dick and James S. Adams + + + + + + + + + + + + Rollin S. Dick and James S. Adams + + + + + + + + + + + + + + + + + + + + + Securities and Exchange Commission v. Rollin M. Dick and James S. Adams, (United States District Court for the Southern District of Indiana, Case No. 01:04-cv-0457-SEB-VSS, filed March 10, 2004) + + The Securities and Exchange Commission announced that on March 10, 2004 it filed civil fraud charges against Rollin S. Dick and James S. Adams, formerly Chief Financial Officer and Chief Accounting Officer of Carmel, Indiana based Conseco, Inc., and its then wholly owned subsidiary, Conseco Finance Corporation. In its complaint, the Commission alleged that throughout 1999 and early 2000, Conseco and Conseco Finance made false and misleading statements about their earnings and income in filings made with the Commission and in public statements announcing their earnings, overstating their results by hundreds of millions of dollars. This massive overstatement occurred because defendants Dick and Adams conducted a fraudulent scheme to avoid huge write downs of certain assets held by Conseco Finance, known as interest-only securities. The complaint alleged that in order to avoid the charges to earnings associated with these write downs, Dick and Adams made improper adjustments to the historical basis of these securities, and also manipulated the valuation equation used to test these securities for impairments. Dick and Adams also made a number of unsupported and improper adjustments to the books and records of these companies to increase earnings. The complaint alleged that as a result of their activities, Dick and Adams violated the antifraud provisions of the federal securities laws and aided and abetted Conseco and Conseco Finance's violations of the reporting, record keeping and internal controls provisions. Specifically, the complaint alleged Dick and Adams violated Section 17(a) of the Securities Act of 1933, Sections 10(b) and 13(b)(5) of the Securities Exchange Act of 1934 (Exchange Act), and Rules 10b-5, 13b2-1 and 13b2-2 thereunder, and that Dick and Adams aided and abetted Conseco and Conseco Finance's violations of Sections 13(a), 13(b)(2)(A), 13(b)(2)(B) and 13(b)(5) of the Exchange Act and Rules 12b-20 and 13a-13 thereunder. The complaint seeks an injunction against further violations of the above provisions of the federal securities laws, disgorgement of the salaries and bonuses earned by Dick and Adams during their fraudulent scheme, civil penalties and officer and director bars. + + In separate administrative proceedings, the Commission ordered Conseco, Inc. to cease-and-desist from violating the reporting, record-keeping and internal controls provisions of the federal securities laws described above. Conseco, without admitting or denying the Commission's findings, agreed to the entry of the Commission's order. + + + + + SEC Complaint in this matter + + + +  + + + + + + + + + + + + + + + + + + + + + + + + + Return to top + + + + + SEC homepage + + + + + + + + + + + + + + About the SEC + + + + + + Budget & Performance + + + Careers + + + Commission Votes + + + Contact + + + Contracts + + + + + + + + Transparency + + + + + + Accessibility & Disability + + + Super Intelligence + + + FOIA + + + Inspector General + + + No FEAR Act Data + + + Ombuds + + + SEC Excess Personal Property Guidance + + + + + + + + Websites + + + + + + Investor.gov + + + Related Sites + + + USA.gov + + + + + + + + Site Information + + + + + + Plain Writing + + + Privacy & Security + + + Site Map + + + + + + + + + + + + + + + + + + Stay connected. 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Sherman + + + + + + + + + + + + David G. Sherman + + + + + + + + + + + + + + + + + + + + + The United States Attorney for the District of Colorado announced that on March 11, 2004, David G. Sherman was indicted by a federal grand jury on charges of securities fraud, wire fraud, false statements in reports to the Securities and Exchange Commission, false statements to auditors and keeping false books and records. Sherman, now a resident of Foothill Ranch, California, is the former CFO and CEO of the now defunct Vari-L Company, Inc. The thirteen-count indictment was filed in the U.S. District Court for the District of Colorado. + On September 27, 2001, the Commission filed a civil complaint against Sherman in the U.S. District Court for the District of Colorado, alleging that Sherman, other Vari-L employees, and Vari-L engaged in a massive financial reporting fraud designed to show consistently increasing revenue and earnings, instead of losses, from 1996 through the quarter ended March 31, 2000 by recognizing false revenue, improperly capitalizing and depreciating costs, overstating inventory, and improperly deferring period costs. On September 26, 2003, the U.S. District Court entered a final judgment of permanent injunction against Sherman pursuant to his consent. + For more information, see Litigation Release Nos. 18598 (February 27, 2004), 17671 (August 9, 2002) and 17155 (September 27, 2001). + + + SEC Complaint in this matter --> + + + + + + + + + + + + + + + + + + + + + + + + + + Return to top + + + + + SEC homepage + + + + + + + + + + + + + + About the SEC + + + + + + Budget & Performance + + + Careers + + + Commission Votes + + + Contact + + + Contracts + + + + + + + + Transparency + + + + + + Accessibility & Disability + + + Super Intelligence + + + FOIA + + + Inspector General + + + No FEAR Act Data + + + Ombuds + + + SEC Excess Personal Property Guidance + + + + + + + + Websites + + + + + + Investor.gov + + + Related Sites + + + USA.gov + + + + + + + + Site Information + + + + + + Plain Writing + + + Privacy & Security + + + Site Map + + + + + + + + + + + + + + + + + + Stay connected. 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Sullivan + + + + + + + + !function(){var e=navigator.userAgent,a=document.documentElement,n=a.className;n=n.replace("no-js","js"),/iPad|iPhone|iPod/.test(e)&&!window.MSStream&&(n+=" ua-ios"),a.className=n}(); + {"path":{"baseUrl":"\/","pathPrefix":"","currentPath":"node\/368306","currentPathIsAdmin":false,"isFront":false,"currentLanguage":"en"},"pluralDelimiter":"\u0003","suppressDeprecationErrors":true,"gtag":{"tagId":"","consentMode":false,"otherIds":[],"events":[],"additionalConfigInfo":[]},"ajaxPageState":{"libraries":"eJxdT0GOwzAI_JBdn_oei2DkeINNZLC22devlaZS2wtiBhhmcKNUTPo97jxyaXEH3GJpiZrFhQW38A4cMqgeYQGlV19JFTKpQ-kUmvQKXP7I0cO4tC2kPnbg2wVdFslM0SCHPMs3vsEPPD7J6hgOGdPCKJyoRxxqUuePHjLLAuzVjimenRJGSLW08NoBK9LUn6SHlrytVOlcpJShB63QLSpBx_WkOzHNePol4fRQo_qMPvQ36ZXsAmd99lMNr2t_GUR9n60EyX9a_wePd5ns","theme":"uswds_sec","theme_token":null},"ajaxTrustedUrl":[],"gtm":{"tagId":null,"settings":{"data_layer":"dataLayer","include_classes":false,"allowlist_classes":"","blocklist_classes":"","include_environment":false,"environment_id":"","environment_token":""},"tagIds":["GTM-TD3BKV"]},"data":{"extlink":{"extTarget":false,"extTargetAppendNewWindowDisplay":true,"extTargetAppendNewWindowLabel":"(opens in a new window)","extTargetNoOverride":false,"extNofollow":false,"extTitleNoOverride":false,"extNoreferrer":false,"extFollowNoOverride":false,"extClass":"0","extLabel":"(link is external)","extImgClass":false,"extSubdomains":true,"extExclude":".*\\.gov|http:\/\/www.xbrl.org\/utr\/2013-05-17\/utr.xml|http:\/\/www.xbrl.org\/dtr\/type\/numeric-2009-12-16.xsd|http:\/\/www.xbrl.org\/dtr\/type\/nonNumeric-2009-12-16.xsd|https:\/\/secir.secure.force.com\/ombudsman\/OMMSForm","extInclude":"","extCssExclude":".data-exempt","extCssInclude":"","extCssExplicit":"","extAlert":true,"extAlertText":"You are now leaving the SEC Website. 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Individuals (SALI) + + + + + Enforcement Data Delivery Standards + + + + + Small Businesses + + + + + Appellate Briefs + + + + + Amicus / Friend of the Court Briefs + + + + + + + + + + + + + + + + + + + + + + + + + + Enforcement & Litigation + + + + + + + Litigation Releases + + + + + Administrative Proceedings + + + + + + + Information for Respondents in Administrative Proceedings  + + + + + Open Litigated Administrative Proceedings + + + + + Closed Litigated Administrative Proceedings + + + + + Commission Opinions and Adjudicatory Orders + + + + + Delinquent Filings + + + + + Stop Orders + + + + + + + + Administrative Law Judge Orders and Initial Decisions + + + + + Trading Suspensions + + + + + Distributions to Harmed Investors + + + + + Receiverships + + + + + Electronic Filings in Administrative Proceedings (eFAP) + + + + + Rules of Practice + + + + + Applications for Reentry + + + + + Reports of Investigations + + + + + Whistleblower Program + + + + + Public Alert: Unregistered Soliciting Entities (PAUSE) + + + + + SEC Action Lookup - Individuals (SALI) + + + + + Enforcement Data Delivery Standards + + + + + Small Businesses + + + + + Appellate Briefs + + + + + Amicus / Friend of the Court Briefs + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + Home + + + Enforcement and Litigation + + + Administrative Proceedings + + + Scott D. Sullivan + + + + + + + + + + + + Scott D. Sullivan + + + + + + + + + + + + + + + + + + + + + SECURITIES ACT OF 1933 +Release No. 8402 / March 17, 2004 + + SECURITIES EXCHANGE ACT OF 1934 +Release No. 49431 / March 17, 2004 + + ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 1977 / March 17, 2004 + + ADMINISTRATIVE PROCEEDING +File No. 3-11435 + + + In the Matter of + SCOTT D. SULLIVAN, + Respondent. + + : : : : : : : : : : + + ORDER INSTITUTING ADMINISTRATIVE +PROCEEDINGS PURSUANT TO RULE +102(e) OF THE COMMISSION'S RULES OF +PRACTICE, MAKING FINDINGS, AND +IMPOSING REMEDIAL SANCTIONS I. + + The Securities and Exchange Commission ("Commission") deems it appropriate and in the public interest that public administrative proceedings be, and hereby are, instituted against Scott D. Sullivan ("Sullivan") pursuant to Rule 102(e)(3)(i) of the Commission's Rules of Practice. 1 + + II. + + In anticipation of the institution of these proceedings, Sullivan has submitted an Offer of Settlement (the "Offer"), which the Commission has determined to accept. Solely for the purpose of these proceedings and any other proceedings brought by or on behalf of the Commission, or to which the Commission is a party, and without admitting or denying the findings herein, except as to the Commission's jurisdiction over him and the subject matter of these proceedings, and the findings contained in Section III.3. below, which are admitted, Sullivan consents to the entry of this Order Instituting Administrative Proceedings Pursuant to Rule 102(e) of the Commission's Rules of Practice, Making Findings, and Imposing Remedial Sanctions ("Order"), as set forth below. + + III. + + On the basis of this Order and Sullivan's Offer, the Commission finds that: + + Sullivan, age 42, was a certified public accountant licensed to practice in the State of New York from 1985 until 1989, when his registration lapsed. Sullivan served as the Chief Financial Officer, Treasurer and Secretary of WorldCom, Inc. ("WorldCom") from 1994 to mid-2002. He also served as a Director for WorldCom from 1996 to mid-2002. In June 2002, WorldCom terminated Sullivan. + + WorldCom was at all relevant times a Georgia corporation with principal offices in Clinton, Mississippi. It provided a broad range of communications services to both U.S. and non-U.S. based businesses and consumers. At all relevant times, WorldCom's common stock was registered with the Commission pursuant to Section 12(g) of the Securities Exchange Act of 1934 ("Exchange Act"), and traded on the Nasdaq National Market System. WorldCom's fiscal year ended December 31. + + On March 8, 2004, a judgment was entered against Sullivan, by consent, permanently enjoining him from violating Section 17(a) of the Securities Act of 1933 and Sections 10(b) and 13(b)(5) of the Exchange Act and Rules 10b-5, 13b2-1 and 13b2-2 thereunder, and aiding and abetting violations of Sections 13(a), 13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act and Rules 12b-20, 13a-1 and 13a-13 thereunder, in a civil action in the United States District Court for the Southern District of New York, entitled Securities and Exchange Commission v. Scott D. Sullivan, Civil Action Number 04 CV 1706. Sullivan was also barred from serving as an officer or director of any issuer that has a class of securities registered pursuant to Section 12 of the Exchange Act or that is required to file reports pursuant to Section 15(d) of the Exchange Act. The determination of the amount of civil penalties, if any, and/or disgorgement, if any, to be paid by Sullivan in that civil action will be made at a later date. 2 + + The Commission's complaint alleged, among other things, the following: Starting at least as early as the third quarter of 2000, Sullivan and other senior WorldCom executives knew, or were reckless in not knowing, that WorldCom could not realistically achieve its publicized revenue and earnings goals. Sullivan and other senior executives and managers at WorldCom engaged in a course of conduct that caused WorldCom to, among other things, fraudulently report revenue and earnings for the third quarter of 2000 through the first quarter of 2002. In furtherance of this scheme, Sullivan and other senior executives and managers at WorldCom caused WorldCom to improperly disguise WorldCom's true operating revenue during 2000, 2001 and the first quarter of 2002. In addition, they caused WorldCom to reduce its operating expenses in at least two fraudulent ways. First, with the knowledge and consent of other senior WorldCom executives, Sullivan instructed subordinates to improperly release certain reserves against operating expenses. Second, again with the knowledge and consent of senior WorldCom executives, Sullivan directed these subordinates to improperly transfer certain operating costs to WorldCom's capital asset accounts. None of these practices were disclosed to investors, even though they artificially and materially inflated the revenues and income WorldCom reported to the public on its financial statements from the third quarter of 2000 through the first quarter of 2002. In fact, as Sullivan and others knew, beginning at least in the third quarter of 2000, WorldCom failed to meet revenue, income and earnings-per-share targets and was able to appear successful only because of the scheme to defraud. + IV. + + In view of the foregoing, the Commission deems it appropriate and in the public interest to impose the sanction agreed to in Sullivan's Offer. + + Accordingly, it is hereby ORDERED, effective immediately, that Sullivan is suspended from appearing or practicing before the Commission as an accountant. + + By the Commission. + +Jonathan G. Katz +Secretary + + + Endnotes + 1 Rule 102(e)(3)(i) provides, in relevant part, that: +The Commission, with due regard to the public interest and without preliminary hearing, may, by order, . . . suspend from appearing or practicing before it any . . . accountant . . . who has been by name . . . permanently enjoined by any court of competent jurisdiction, by reason of his or her misconduct in an action brought by the Commission, from violating or aiding and abetting the violation of any provision of the Federal securities laws or of the rules and regulations thereunder. + + 2 On March 2, 2004, in an action filed in the United States District Court for the Southern District of New York, Sullivan pleaded guilty to, and was convicted of, one count of conspiracy to commit securities fraud, in violation of 18 U.S.C. §371; one count of securities fraud, in violation of 15 U.S.C. §§78j(b) and 78ff, and 17 C.F.R. §240.10b-5; and one count of submitting a false filing with the SEC, in violation of 15 U.S.C. §§78m(a) and 78ff and 17 C.F.R. §240.13a-1. + + + + + +  + + + + + + + + + + + + + + + + + + + + + + + + + Return to top + + + + + SEC homepage + + + + + + + + + + + + + + About the SEC + + + + + + Budget & Performance + + + Careers + + + Commission Votes + + + Contact + + + Contracts + + + + + + + + Transparency + + + + + + Accessibility & Disability + + + Super Intelligence + + + FOIA + + + Inspector General + + + No FEAR Act Data + + + Ombuds + + + SEC Excess Personal Property Guidance + + + + + + + + Websites + + + + + + Investor.gov + + + Related Sites + + + USA.gov + + + + + + + + Site Information + + + + + + Plain Writing + + + Privacy & Security + + + Site Map + + + + + + + + + + + + + + + + + + Stay connected. 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Individuals (SALI) + + + + + Enforcement Data Delivery Standards + + + + + Small Businesses + + + + + Appellate Briefs + + + + + Amicus / Friend of the Court Briefs + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + Home + + + Enforcement and Litigation + + + Administrative Proceedings + + + CMS Energy Corp. and Terry Woolley + + + + + + + + + + + + CMS Energy Corp. and Terry Woolley + + + + + + + + + + + + + + + + + + + + + SECURITIES ACT OF 1933 +Release No. 8403 / March 17, 2004 + + SECURITIES EXCHANGE ACT OF 1934 +Release No. 49432 / March 17, 2004 + + ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 1978 / March 17, 2004 + + Administrative Proceeding +File No. 3-11436 + + + + In the Matter of + CMS Energy Corp. and +Terry Woolley, + Respondents. + + : : : : : : : : : : + + ORDER INSTITUTING CEASE-AND- +DESIST PROCEEDINGS PURSUANT +TO SECTION 8A OF THE SECURITIES +ACT OF 1933 AND SECTION 21C OF +THE SECURITIES EXCHANGE ACT +OF 1934, MAKING FINDINGS AND +IMPOSING A CEASE-AND-DESIST +ORDER I. + + The Securities and Exchange Commission ("Commission") deems it appropriate that cease-and-desist proceedings be, and hereby are, instituted pursuant to Section 8A of the Securities Act of 1933 (the "Securities Act") and Section 21C of the Securities Exchange Act of 1934 (the "Exchange Act") against CMS Energy Corp. ("CMS") and Terry Woolley ("Woolley") (collectively, "Respondents"). + + II. + + In anticipation of the institution of these proceedings, CMS and Woolley have submitted Offers of Settlement ("Offers") that the Commission has determined to accept. Solely for the purpose of these proceedings and any other proceedings brought by or on behalf of the Commission, or to which the Commission is a party, and without admitting or denying the findings contained herein, except that CMS and Woolley admit the Commission's jurisdiction over them and over the subject matter of these proceedings, CMS and Woolley consent to the entry of this Order Instituting Cease-and-Desist Proceedings Pursuant to Section 8A of the Securities Act of 1933 and Section 21C of the Securities Exchange Act of 1934, Making Findings and Imposing a Cease-and-Desist Order. + + III. + + FINDINGS + + The Commission makes the following findings: 1 + + A. Respondents + + CMS is a Michigan corporation with its principal place of business in Jackson, Michigan. CMS's shares are registered with the Commission under Section 12(b) of the Exchange Act and trade on the New York Stock Exchange under the symbol "CMS." CMS is an integrated energy company operating in the United States and in selected markets worldwide. During all relevant times, CMS, through its subsidiaries, owned and operated a regulated public utility, sold energy into various unregulated markets and engaged in independent power production and oil and gas exploration and production. During the relevant period, CMS's energy-trading division, CMS Marketing Services & Trading ("MS&T"), was active in retail marketing of electricity and wholesale trading of electricity and natural gas. + + Woolley , age 56, of Houston, Texas, was MS&T's Controller from January 1997 until December 2001, when he elected early retirement. As Controller, Woolley was responsible for MS&T's financial accounting. + + B. Facts + + 1. Introduction + + CMS materially overstated its revenues, expenses and energy-trading volumes in 2000 and 2001 through the use of undisclosed round-trip energy transactions conducted by its Houston-based energy-trading division, MS&T. 2 These overstatements appeared in Commission filings, earnings releases and investor presentations. The round-trip trades had no impact on CMS's net earnings. + + The round-trip trades were massive pre-arranged transactions involving simultaneous purchases and sales of electric power or natural gas with the same counterparty for the same volume and at the same price, with no delivery contemplated and with neither party making any profit. By recording revenues and expenses from the round-trip trades, CMS overstated its revenues and expenses by a total of $5.2 billion over a one-year period: $1.0 billion (10% of revenue) in 2000, and $4.2 billion (36% of revenue) for the first three quarters of 2001. Likewise, CMS overstated MS&T's reported energy-trading volume by 78% in 2000 and 72% in 2001. + + MS&T's round-trip trades lacked economic substance. Their purpose was to elevate MS&T into the top 20 tier ("Top 20") of industry publication volume rankings by inflating the division's apparent trading activity. MS&T's management thought that the appearance of robust business activity through MS&T's membership in the Top 20 would generate business for MS&T, specifically long-term power marketing arrangements and additional power trading. + + Although CMS conducted the round trip trades to boost its trading volume, the trades also had the effect of inflating artificially CMS's revenues and expenses. In fact, in part because of the inflated revenues CMS moved from number 287 on the 1999 Fortune 500 list - which is based on revenues - to number 156 on the 2001 Fortune 500 list. Over the course of the round-trip trading, CMS referenced revenue and trading volume that included the trades in its periodic filings with the Commission, registration statements, press releases, earnings conference calls and investor presentations. + + In early 2002, while auditing CMS's financial statements for inclusion in its 2001 Form 10-K, CMS's outside auditor required CMS to reclassify the revenues and expenses from the round-trip trades on a net, rather than gross basis - eliminating the financial statement impact of the trades. 3 Although CMS reclassified the revenues and expenses in the 2001 10-K, it did not disclose the relevant details of the energy trades, or disclose the amount - $4.2 billion - of revenue CMS eliminated from its financial statements. It was not until two months later, when the round-trip trades became the subject of the Commission's inquiry and media attention, that CMS finally disclosed the details underlying the reclassification. In addition, due to apparent oversight on the part of CMS and its auditor, CMS failed to eliminate from its financial statements the $1 billion of revenue associated with the round-trip trades CMS conducted in 2000. + + 2. Round-Trip Trading Begins at MS&T + + Before 2000, MS&T was a small component of CMS's business. In the Fall of 1999, CMS decided to expand into wholesale energy trading and recruited a new chief executive to head MS&T. 4 CMS, which operates the largest public utility in Michigan, was forecasting double-digit earnings growth at the time, based chiefly on the anticipated activities of CMS's unregulated business units, including MS&T. At the same time CMS publicly promoted MS&T as the primary vehicle for CMS's future growth. After hiring the new chief executive to expand MS&T's business, CMS moved MS&T's trading operations from Michigan to Houston, the hub of the energy-trading industry. MS&T developed a strategy that emphasized marketing to cooperatives and municipalities in the hope of landing long-term contracts for the sale of electric power. + + MS&T's chief executive believed increasing MS&T's trading volume would be helpful in marketing MS&T, in light of her conclusion that some municipalities and cooperatives conducted business only with prominently ranked energy companies, such as those in the Top 20. MS&T ranked 36 th among all power traders in 1998, but had fallen to 56 th by the end of the second quarter of 2000. + + 3. Round-Trip Electric Power Trading at MS&T + + The first round-trip trade occurred in July 2000. 5 This transaction, involving 10 million megawatt hours and priced at $380 million, was approximately 1,000 times larger than the typical power trade. MS&T had calculated this volume as sufficient to land CMS in the Top 20. MS&T's accounting system automatically recorded the revenues and expenses from the trade in MS&T's books and records on a gross basis. CMS's chief accounting officer approved recording the gross revenues and expenses from the trade. Thus, MS&T reported $380 million in revenue (for the purported sale) and $380 million in expenses (for the purported purchase). + + After the first trade, MS&T entered into additional round-trip trades each quarter in order to maintain a Top 20 ranking. The MS&T trader would communicate with his counterpart by telephone or e-mail in order to pre-arrange the trades' terms. The volumes were typically in the range of 10-20 million megawatt hours. MS&T recorded revenues and expenses from the trades in each instance. + + 4. CMS's Efforts to Avoid Public + + Detection of Round-Trip Trading + + Although the round-trip trades were no secret within MS&T, the MS&T trader responsible for the trades tried to conceal the practice, fearing that public detection would defeat the purpose of round-tripping by exposing the fiction behind MS&T's status as a major energy trader. Beginning in the fourth quarter of 2000, the MS&T trader responsible for the trades disguised the trades by splitting them into multiple increments, for delivery in different geographic regions, with slight price differentials. + + MS&T continued to disguise the trades in the first and second quarters of 2001. On June 1, 2001, an industry publication noted large volumes of trading activity between MS&T and Reliant: "CMS and Reliant traded about 20 million Mwh, lifting CMS up from the rank of 56 th a year ago to 18 th for first-quarter 2001." 6 In August 2001, a second industry publication article noted that MS&T "has Reliant as a counterparty for about 90% of its power sales." 7 The articles caused concern that the true nature of the trades would be detected, and prompted MS&T to seek out another round-trip counterparty. On November 15, 2001, MS&T and the new counterparty entered into what the latter called "Operation Volume" - two round-trip power trades so large that MS&T's counterparty had to override its trading platform's volume limits to execute them. The trades involved a combined total of more than 25 million megawatt hours of electricity. + + 5. MS&T's Natural Gas Round-Trip Trade + + In addition to the extensive electric power round-trip trading, MS&T conducted one natural gas round-trip trade. MS&T's chief executive personally directed one of MS&T's traders to enter the trade into MS&T's trading system, and personally furnished that trader with the terms. This large volume gas transaction occurred on June 1, 2001 and MS&T recorded the revenue, expense and volume for the trade. + + 6. The Auditor's Guidance + + a. Late 2000 and Early 2001 + + After a member of the independent auditor's team examining MS&T ("the MS&T audit team") discovered the first round trip trade in its third quarter 2000 review of CMS's financial statements, the audit engagement partner discussed it with CMS's chief accounting officer. At that time, the engagement partner had not fully analyzed the accounting treatment of the trade, but believed, from discussions between the MS&T audit team and MS&T representatives, that it was a one-time transaction (a "one-off"). On that basis CMS's auditor did not object to the recording of the gross revenues and expenses in CMS's third quarter 2000 financial statements filed with its Form 10-Q. 8 + + CMS engaged in approximately $620 million of round trip trades in the fourth quarter of 2000. The revenues and expenses from the fourth quarter 2000 trades were recorded in CMS' income statement appended to its 2000 Form 10-K filed with the Commission. There is no evidence that CMS' auditors explicitly approved, or even discussed with CMS, the recording of revenues and expenses associated with those round trip trades. + + Before CMS filed its Form 10-Q for the first quarter of 2001, CMS and its auditor discussed the inclusion of $1.2 billion of gross revenues and expenses from round-trip trades that occurred during the first quarter. CMS's auditor understood that the trades were simultaneous, with no physical delivery or margin, were documented the same as any other transaction and lacked economic substance. The auditor did not object to recording the gross revenues and expenses on CMS's first quarter 2001 financial statements, but stated that his staff would continue researching the accounting treatment of the round-trip trades. + + b. Second Quarter 2001 + + After CMS filed its first quarter 2001 Form 10-Q containing $1.2 billion in round-trip-trading revenue, CMS's independent auditor further researched whether the accounting for the trades was proper. Members of the MS&T audit team concluded in May 2001 that the revenues and expenses from the round-trip trades should be recorded on a net basis - contrary to MS&T's (and CMS's) practice. The MS&T audit team informed Woolley of its conclusion, but neither Woolley nor the MS&T audit team notified Woolley's CMS superiors in Michigan of the recommended change in accounting. + + During the review of MS&T's second quarter 2001 financial statements, the MS&T audit team specifically inquired whether additional round-trip trades had occurred. In response, Woolley told them that he believed there was only one relatively small ($50 million) round-trip trade, but in fact there was approximately $2 billion of round-trip trades in the quarter. CMS presented the revenues and expenses from the round-trip trades on a gross basis in the financial statements incorporated in its second-quarter 2001 Form 10-Q, despite the MS&T audit team's conclusion that such treatment was inappropriate. + + c. Third and Fourth Quarter 2001 + + In October 2001, but prior to the filing of CMS's third quarter Form 10-Q, CMS's auditor instructed CMS that the revenues and expenses from round-trip trades could be recorded only if: + The parties to the trade bear both credit and performance risk; + + Title to the related commodity transfers to the buyer; and + + Settlement is for the gross proceeds (checks must be exchanged and cashed for the gross amount of the transaction). + The round-trip trades - which involved no risk, no net transfer of title and no exchange of cash - could not satisfy these criteria. Nevertheless, CMS reported in the third quarter of 2001 the revenues and expenses from MS&T's third quarter round-trip trades, resulting in material financial misstatements. 9 As division controller, Woolley was responsible for communicating MS&T's financial information to CMS's chief accounting officer and he did not ensure that the results of the round-trip trades were removed from the financial data reported to CMS's chief accounting officer. + + 7. CMS's 2001 Form 10-K: CMS Reclassifies the Financial Results of the Round-Trip Trades + + On March 24, 2002, CMS's auditors advised CMS that the financial results of the round-trip trades conducted in 2001 would have to be reclassified to record them all on a net basis. 10 In the Form 10-K CMS filed with the Commission on March 29, 2002, operating revenues were reclassified to eliminate the results of round-trip trades. CMS, after consulting with its auditors, discussed the reclassification in the following footnote to CMS's financial statements: + + Reclassifications: During 2001, CMS Energy entered into several energy trading contracts with counterparties. The impact of these trades increased operating revenue with a corresponding increase in operating expenses. During the fourth quarter of 2001, it was determined that under SFAS No. 133 and related interpretations, these trades should have been recorded on a net basis. First, second, and third quarter operating revenue and operating expenses have been restated from the amounts previously reported to reflect these trades on a net basis. There was no impact on previously reported consolidated net income. + + CMS did not explain in the footnote that the round-trip trades were pre-arranged with a single counterparty, lacked economic substance and were conducted for the sole purpose of inflating MS&T's volume statistics. Nor did CMS indicate in the footnote the amount of revenue, $4.2 billion, subject to the reclassification. 11 As a result, the footnote was materially misleading. Moreover, CMS did not otherwise disclose the round-trip trades in the Management's Discussion and Analysis section of its 2001 Form 10-K. + + 8. Public References to Trading Volumes and Revenues + + During the period of round-trip trading - third quarter 2000 through year-end 2001 - CMS issued publicly materially misleading information. CMS included artificially inflated revenues and trading volumes associated with the round-trip trading in its periodic filings with the Commission, registration statements, quarterly earnings press releases, investor presentations, and reports to industry publications. + + a. Filings with the Commission + + CMS set forth the percentage increases in MS&T's trading volume in the "Results of Operations" portion of its Commission filings. CMS's third quarter 2000 Form 10-Q provided, "The volumes of marketed natural gas and power traded increased 72 percent and over 1000 percent respectively [as compared to third quarter 1999]." (Emphasis added). Similar statements regarding percentage increases appeared in each Form 10-Q during the relevant period, with the exception of the second quarter 2001, which contained only the raw volume statistics in terms of megawatts of power and btu's of natural gas. 12 Those volumes were also inflated due to round-trip trading. + + During the relevant period, CMS filed with the Commission several registration statements in connection with offerings of its securities. 13 The registration statements incorporate by reference the materially misleading Forms 10-Q and the 2000 Form 10-K, including the financial statements incorporated in the filings. + + b. Quarterly Earnings Releases + + CMS's quarterly earnings releases contained a paragraph citing the annual gross revenues of the company. This revenue figure increased dramatically each quarter, from $6 billion in the second quarter of 2000 to $15 billion in the third quarter of 2001, due chiefly to the round-trip trading. However, CMS failed to disclose in the releases the source of the increasing revenues (i.e., round-trip trades) or the amount of the related expenses. Beginning with the third quarter 2000 earnings release, CMS attributed the increasing revenues to "lower-margin" energy marketing and trading, without disclosing the existence and amount of "no-margin" trades. For example, the first quarter 2001 earnings release provides, "First quarter operating revenue totaled $4.13 billion, up 126 percent from $1.83 billion in the first quarter of 2000, due largely to significantly increased lower-margin energy marketing and trades." (Emphasis added). The phrase "lower-margin" implies that the trading involved some margin whereas, in fact, the round-trip trades were zero margin transactions. This phrase appeared in each quarterly earnings release through the year-end 2002 release, in which CMS abruptly dropped any mention of revenues. + + c. Investor Presentations + + Investor presentations and quarterly earnings web-cast conference calls occasionally involved discussions of MS&T's growth, specifically MS&T's increasing revenues and trading volumes. For example, during the first quarter 2001 earnings web-cast, a CMS executive emphasized MS&T's planned growth. Reading from web-cast slides that reflected graphically $4.5 billion in MS&T revenues, volume increases during 2000 of 1000% and planned doubling of volumes for 2001, one executive stated: " We don't focus on volumes for volume sake. We focus on really what kind of growth we're making in this business and I'll show you toward the end the overall growth in earnings that we've seen there as well." (Emphasis added). The referenced volumes were principally the result of round-trip trades, which had no impact on MS&T's or CMS's earnings, and which, in fact, were conducted to elevate MS&T's energy trading volume ranking. + + IV. + + LEGAL DISCUSSION + + + A. CMS's Antifraud Violations: Section 17(a) of the Securities Act, and Section 10(b) of the Exchange Act and Rule 10b-5 thereunder + + Section 17(a) of the Securities Act prohibits employing a fraudulent scheme or making material misrepresentations and omissions in the offer or sale of a security. Section 10(b) of the Exchange Act and Rule 10b-5, thereunder, prohibit the same conduct, if committed in connection with the purchase or sale of securities. To violate these provisions, the alleged misrepresentations or omitted facts must be material. Information is deemed material upon a showing of a substantial likelihood that the omitted facts would have been important to a reasonable investor. Basic, Inc. v. Levinson , 485 U.S. 224 (1988). + + Establishing violations of the antifraud provisions of the Securities Act and Exchange Act requires a showing of scienter . Aaron v. SEC , 446 U.S. 680 (1980). 14 Scienter is the "mental state embracing intent to deceive, manipulate or defraud." Ernst & Ernst v. Hochfelder , 425 U.S. 185, 193 (1976). The Fifth Circuit Court of Appeals has held that scienter is established by a showing that the defendants acted intentionally or with severe recklessness. See Broad v. Rockwell International Corp ., 642 F.2d 929 (5th Cir.) ( en banc ), cert. denied , 454 U.S. 965 (1981). + + CMS violated the antifraud provisions of the Securities Act and the Exchange Act. As demonstrated in this Order's findings, CMS's round-trip trading scheme created a false picture of robust business activity and dramatically overstated CMS's reported revenues, expenses and trading volumes - in violation of Section 17(a) of the Securities Act and Section 10(b) of the Exchange Act and Rule 10b-5 thereunder. Due to the round-trip trades' impact on CMS's financial statements and CMS's failure to disclose the round-trip trades, CMS materially misrepresented its revenues and expenses. There is a substantial likelihood that these false representations and omissions would have been important to a reasonable investor because they depicted business activity that was without economic substance. + + CMS's failure to disclose the round-trip trades would have violated the antifraud provisions, even if CMS's accounting for the trades had technically conformed to Generally Accepted Accounting Principles ("GAAP") - which it did not. CMS's accounting treatment did not conform to GAAP, as the round-trip trades did not constitute legitimate sales or generate any actual revenue. ( See Statement of Financial Accounting Concepts No. 5; see also Staff Accounting Bulletin 101). As the Fourth Circuit pointed out in Malone v. Microdyne Corp. : + + The Financial Accounting Standards of GAAP and the antifraud rules promulgated under § 10(b) of the 1934 Act serve similar purposes, and courts have often treated violations of the former as indicative that the latter were also violated. The prohibitions contained in GAAP and in Rule 10b-5, however, are not perfectly coextensive. In some circumstances, courts have found defendants liable for securities fraud under Rule 10b-5 despite having complied with GAAP. + + 26 F.3d 471, 478 (4 th Cir. 1994)(citations omitted). + + B. CMS's Reporting Violations: Section 13(a) of the + + Exchange Act and Rules 12b-20, 13a-1 and 13a-13 thereunder + + Section 13(a) of the Exchange Act requires issuers such as CMS to file periodic reports with the Commission containing such information as the Commission prescribes by rule. Exchange Act Rule 13a-1 requires issuers to file annual reports, and Exchange Act Rule 13a-13 requires issuers to file quarterly reports. Under Exchange Act Rule 12b-20, the reports must contain, in addition to disclosures expressly required by statute and rules, such other information as is necessary to ensure that the statements made are not, under the circumstances, materially misleading. The obligation to file reports includes the requirement that the reports be true and correct. United States v. Bilzerian, 926 F.2d 1285, 1298 (2d Cir.), cert. denied , 502 U.S. 813 (1991). The reporting provisions are violated if false and misleading reports are filed. SEC v. Falstaff Brewing Corp., 629 F.2d 62, 67 (D.C. Cir. 1980). Scienter is not an element of a Section 13(a) violation. SEC v. Savoy Indus., Inc., 587 F.2d 1149,1167 (D.C. Cir. 1978). + + CMS violated these provisions by filing a third quarter 2000 Form 10-Q, 2000 Form 10-K, first, second and third quarter 2001 Forms 10- Q and a 2001 Form 10-K that were false and misleading. By failing to disclose the round-trip trades in the reports, while, at the same time, recognizing the revenues, expenses and volumes associated with the trades, CMS filed misleading periodic reports. + + C. CMS's Books and Records and Internal Controls Violations: + + Sections 13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act + + Section 13(b)(2)(A) of the Exchange Act requires all issuers to make and keep books, records, and accounts that, in reasonable detail, accurately and fairly reflect their transactions and dispositions of their assets. Scienter and materiality are not elements of primary violations of this provision. SEC v. World-Wide Coin Inv., Ltd., 567 F. Supp. 724, 749-50 (N.D. Ga. 1983). CMS, through its treatment of the round-trip trades, violated Section 13(b)(2)(A) by failing to keep books, records and accounts that accurately and fairly reflected its assets and financial results. + + Section 13(b)(2)(B) of the Exchange Act requires issuers to devise and maintain an adequate system of internal accounting controls. Scienter and materiality are not elements of a violation of this provision. World-Wide Coin , 567 F. Supp. at 749-50. CMS violated Section 13(b)(2)(B) by failing to devise and maintain a system of internal controls sufficient to ensure that the results of round-trip trades would be excluded from CMS's public disclosures. Moreover, CMS's reporting of revenue derived from these transactions was inconsistent with GAAP. ( See Statement of Financial Accounting Concepts No. 5; see also Staff Accounting Bulletin 101). + + D. Woolley Caused CMS's Violations + + By recording revenues and expenses from the round-trip trades in MS&T's books and records and submitting the entries to CMS's accounting group for inclusion in CMS's periodic reports, press releases and earnings releases, Woolley was a cause of CMS's antifraud, reporting, record keeping and internal controls violations. Additionally, Woolley caused these violations by failing to notify his superiors of the MS&T auditor's recommendation to record the revenues and expenses associated with the round-trip trades on a net, rather than gross, basis. Specifically, Woolley was a cause of CMS's violations of Section 17(a) of the Securities Act, Sections 10(b), 13(a), 13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act, and Rules 10b-5, 12b-20, 13a-1 and 13a-13 thereunder. + + V. + + The Commission finds that CMS violated, and that Woolley was a cause of CMS's violations of Section 17(a) of the Securities Act, and Sections 10(b), 13(a), 13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act, and Rules 10b-5, 12b-20, 13a-1 and 13a-13 thereunder. + + VI. + + In view of the foregoing, the Commission deems it appropriate to impose the sanctions specified in the Respondents' Offers. + + Accordingly, IT IS HEREBY ORDERED, pursuant to Section 8A of the Securities Act and Section 21C of the Exchange Act, that: + + A. Respondent CMS cease and desist from committing or causing any violation and any future violation of Section 17(a) of the Securities Act, and Sections 10(b), 13(a), 13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act and Rules 10b-5, 12b-20, 13a-1 and 13a-13 thereunder; and that + + B. Respondent Woolley cease and desist from committing or causing any violation and any future violation of Section 17(a) of the Securities Act, and Section 10(b) of the Exchange Act and Rule 10b-5 thereunder, and from causing any violation of Sections 13(a), 13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act and Rules 12b-20, 13a-1 and 13a-13 thereunder. + + By the Commission. + + +Jonathan G. Katz +Secretary + + Endnotes + 1 The findings herein are made pursuant to Respondents' Offers and are not binding on any other person or entity in these or any other proceedings. + + 2 Round-trip trades have been referred to variously as "Brag-a-Watts," "volumetric" deals, "wash" trades, "net-zero" trades and "zero-margin" trades. The term "round-trip" came into common usage after the practice was made public in May 2002 and will be used in this Order. + + 3 The round-trip trades involve simultaneous purchases and sales at the same price; thus, they offset completely. If a company records them "gross," the company's financial statements will include revenues from the purported sale and expenses from the purported purchase. If the company records them "net," however, its financial statements will include neither revenue nor expense from the transactions, because they cancel each other out. + + 4 The executive had previously been employed as the head of the trading operations of another energy company, Reliant Energy, Inc. As discussed below, Reliant was the counterparty on the vast majority of CMS's round-trip transactions. On May 12, 2003, the Commission issued a settled cease-and-desist order arising in part from Reliant's round-trip trading. In the Matter of Reliant Resources, Inc. and Reliant Energy, Inc. , Rel. Nos. 33-8232 and 34-47828; AAE Rel. No. 1780. In the order, the Commission found that Reliant had violated the antifraud, reporting, record keeping and internal controls provisions of the federal securities laws. + + 5 In July 2000, prior to entering into the first round trip trade, MS&T entered into a netting agreement with Reliant. The agreement, which was standard with all MS&T counterparties, provided for the net settlement of financial obligations resulting from trades between the two parties. It is a common practice in the wholesale energy business to settle offsetting delivery obligations on a net basis with a book entry. To illustrate, if CMS sold 100 megawatts of electric power to a counterparty, and purchased 50 megawatts from the same counterparty at the same price, the net book entry would require delivery of only 50 megawatts by CMS to the counterparty. Likewise, there would be only one payment: the counterparty's payment to CMS for 50 megawatts. Because round-trip trades entail, by definition, the same quantities and prices of the same commodities at the same delivery point, the netting agreement and the book entry settlement eliminated the need for either CMS or Reliant to exchange commodities or cash. + + 6 Platt's Electric Power Daily, Latest Ranking of Power Sellers Shows Big Sales Boost: Are West's Woes Responsible? (June 1, 2001). + + 7 Platt's Power Markets Week, Volatility, Restructuring Boosts Volume; 2Q Reaches 1.5 Billion Mwh (Aug. 20, 2001). + + 8 CMS's fiscal year ends on December 31 st . + + 9 MS&T conducted additional round-trip trades in November and December of 2001, although the revenues from those trades never appeared in public filings. + + 10 CMS failed to take steps, however, to ensure that the round-trip trades conducted in 2000 were also reclassified. + + 11 The reclassification footnote cross-referenced a table in another portion of CMS's 2001 Form 10-K showing quarterly financial figures for 2000 and 2001, including the reclassified revenues. The table, however, did not provide a comparison with the previously reported revenues and expenses. + + 12 Specifically, such statements appeared in CMS's third-quarter 2000 Form 10-Q, 2000 Form 10-K, and Forms 10-Q for the first and third quarters of 2001, as well as the 2001 Form 10-K. + + 13 CMS filed the following registration statements during the relevant period: a Form S-3 on December 15, 2000, December 22, 2000, and December 12, 2001, and a Form S-8 on April 11, 2001. + + 14 While the scienter requirement applies to Section 17(a)(1) of the Securities Act, actions pursuant to Sections 17(a)(2) and 17(a)(3) of the Securities Act do not require such a showing. 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Individuals (SALI) + + + + + Enforcement Data Delivery Standards + + + + + Small Businesses + + + + + Appellate Briefs + + + + + Amicus / Friend of the Court Briefs + + + + + + + + + + + + + + + + + + + + + + + + + + Enforcement & Litigation + + + + + + + Litigation Releases + + + + + Administrative Proceedings + + + + + Administrative Law Judge Orders and Initial Decisions + + + + + Trading Suspensions + + + + + Distributions to Harmed Investors + + + + + Receiverships + + + + + Electronic Filings in Administrative Proceedings (eFAP) + + + + + Rules of Practice + + + + + Applications for Reentry + + + + + Reports of Investigations + + + + + Whistleblower Program + + + + + Public Alert: Unregistered Soliciting Entities (PAUSE) + + + + + SEC Action Lookup - Individuals (SALI) + + + + + Enforcement Data Delivery Standards + + + + + Small Businesses + + + + + Appellate Briefs + + + + + Amicus / Friend of the Court Briefs + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + Home + + + Enforcement and Litigation + + + Litigation Releases + + + Cedric Kushner Promotions, Inc., Cedric Kushner, James DiLorenzo, and Steven Angel + + + + + + + + + + + + Cedric Kushner Promotions, Inc., Cedric Kushner, James DiLorenzo, and Steven Angel + + + + + + + + + + + + + + + + + + + + + The Securities and Exchange Commission (Commission) announced today that it filed a complaint in the U.S. District Court for the Southern District of New York against Cedric Kushner Promotions, Inc. (CKP or the Company), its Chairman of the Board, Chief Executive Officer, President and Founder Cedric Kushner (Kushner), its Principal Financial and Accounting Officer, James DiLorenzo (DiLorenzo), and its former Executive Vice President and Secretary and a current director, Steven Angel (Angel) for violating the antifraud, record-keeping, and reporting provisions of the federal securities laws. As part of this action, the Commission alleges that Kushner and DiLorenzo violated the certification requirements of the Sarbanes-Oxley Act of 2002, and Rule 13a-14 of the Securities Exchange Act of 1934 (Exchange Act). + + According to the Commission's Complaint, on the evening of May 20, 2003, CKP filed a Form 10-KSB for the year ended December 31, 2002, that contained what purported to be unqualified independent auditor reports authorized and issued by its former auditor, BDO Seidman, LLP (BDO), and current auditor, Marcum & Kliegman LLP (Marcum). However, the Complaint charges, neither BDO nor Marcum had actually provided those reports to CKP, and CKP instead filed forged auditor reports. Moreover, CKP filed its Form 10-KSB without obtaining either independent auditor's consent. + + The Complaint alleges that the financial statements included in the May 20 filing contained material misstatements and substantial errors. For example, the Complaint alleges that the May 20 filing's statement of cash flows included in CKP's financial statements for 2002 reflected, among other things, an approximate $4 million cash deficit when, in fact, CKP's cash balance was $0 by year-end 2002. The Complaint alleges that the May 20 filing's statement of cash flows showed that $5.6 million had been used in operating activities in 2002 when, in fact, only $846,433 had been put to such uses. As a result, the Complaint alleges, CKP misstated its total assets by over 100%. The Complaint alleges further that the May 20 filing misstated in its financial footnotes the number of shares outstanding following CKP's April 2002 reverse merger by 8%. + + According to the Complaint, despite their failure to obtain a signed audit report and material errors in the Company's financial statements, Kushner and DiLorenzo each personally certified that the filing fairly and accurately presented CKP's financial condition, in violation of Commission rules adopted pursuant to Section 302 of the Sarbanes-Oxley Act, which require an issuer's principal executive and financial officer to certify financial and other information contained in the quarterly and annual reports. Prior to certifying, the Complaint alleges, Kushner failed to read either the Sarbanes-Oxley certification or the filing to which it was attached, or to take any steps to ascertain whether the filing was true and accurate. + + On May 21, both BDO and Marcum wrote letters protesting the forged auditor reports to CKP pursuant to Exchange Act Section 10A, which requires auditors to notify the appropriate level of management as soon as practicable once they detect, or otherwise become aware of, information indicating that an illegal act has or may have occurred. On May 23, the Company filed a Form 8-K containing the auditors' letters and simultaneously filed a Form 10-KSB/A removing the auditor reports, but including new materially inaccurate financial statements. The Complaint charges that DiLorenzo and Angel substantially participated in the creation of both the May 20 and May 23 filings. + + The Complaint seeks an injunction against CKP based on its violation of Sections 10(b), 13(a), 13(b)(2)(A), and 13(b)(2)(B) of the Exchange Act, and Exchange Act Rules 10b-5, 12b-20 and 13a-1. The Complaint also seeks an injunction, officer and director bars, and civil monetary penalties against Kushner and DiLorenzo based on their primary violations of Exchange Act Section 10(b) and Exchange Act Rules 10b-5 and 13a-14, and their aiding and abetting CKP's violations of Exchange Act Sections 13(a), 13(b)(2)(A) and 13(b)(2)(B), and Exchange Act Rules 12b-20 and 13a-1. The Complaint further charges that Kushner is liable for CKP's violations as a "control person" under Exchange Act Section 20(a). Lastly, the Complaint seeks an injunction, an officer and director bar, and a civil penalty against Angel based on his primary violations of Exchange Act Section 10(b) and Exchange Act Rule 10b-5 or, in the alternative, based on his aiding and abetting violations of Exchange Act Section 10(b) and Exchange Act Rule 10b-5 by CKP, Kushner and DiLorenzo, and his aiding and abetting violations of Exchange Act Sections 13(a), 13(b)(2)(A), 13(b)(2)(B), and Exchange Act Rules 12b-20 and 13a-1 by CKP. + + + SEC Complaint in this matter + + + + +  + + + + + + + + + + + + + + + + + + + + + + + + + Return to top + + + + + SEC homepage + + + + + + + + + + + + + + About the SEC + + + + + + Budget & Performance + + + Careers + + + Commission Votes + + + Contact + + + Contracts + + + + + + + + Transparency + + + + + + Accessibility & Disability + + + Super Intelligence + + + FOIA + + + Inspector General + + + No FEAR Act Data + + + Ombuds + + + SEC Excess Personal Property Guidance + + + + + + + + Websites + + + + + + Investor.gov + + + Related Sites + + + USA.gov + + + + + + + + Site Information + + + + + + Plain Writing + + + Privacy & Security + + + Site Map + + + + + + + + + + + + + + + + + + Stay connected. 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Klein, CPA + + + + + + + + + + + + Gary H. Klein, CPA + + + + + + + + + + + + + + + + + + + + + SECURITIES ACT OF 1933 +Release No. 8405 / March 29, 2004 + + SECURITIES EXCHANGE ACT OF 1934 +Release No. 49494 / March 29, 2004 + + ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 1980 / March 29, 2004 + + ADMINISTRATIVE PROCEEDING +File No. 3-11444 + + + In the Matter of + GARY H. KLEIN, CPA, + Respondent. + + : : : : : : : : : : + + ORDER INSTITUTING ADMINISTRATIVE +PROCEEDINGS PURSUANT TO RULE 102(e) +OF THE COMMISSION'S RULES OF PRACTICE, +MAKING FINDINGS, AND IMPOSING +REMEDIAL SANCTIONS I. + + The Securities and Exchange Commission ("Commission") deems it appropriate and in the public interest that public administrative proceedings be, and hereby are, instituted against Gary H. Klein ("Respondent" or "Klein") pursuant to Rule 102(e)(3)(i) the Commission's Rules of Practice. 1 + + II. + + In anticipation of the institution of these administrative proceedings, Klein has submitted an Offer of Settlement ("Offer") which the Commission has determined to accept. Solely for the purpose of these proceedings and any other proceedings brought by or on behalf of the Commission, or to which the Commission is a party, and without admitting or denying the findings herein, except as to the Commission's jurisdiction over him and the subject matter of these proceedings, and the findings contained in Section III.C. below, which are admitted, Klein consents to the entry of this Order Instituting Administrative Proceedings Pursuant to Rule 102(e) of the Commission's Rules of Practice, Making Findings, and Imposing Remedial Sanctions ("Order") and to the entry of the findings and imposition of the remedial sanctions set forth below. + + III. + + On the basis of this Order and Respondent's Offer, the Commission finds that: + + A. Klein, age 49, was a certified public accountant licensed to practice in the State of New York from November 23, 1987 to May 25, 1990, when he voluntarily allowed his license to lapse. Klein served as Candie's, Inc.'s ("Candie's") Vice President of Finance and Principal Accounting Officer during fiscal year 1998 and part of fiscal year 1999, and as Vice President of Investor Relations until Candie's terminated his employment in October 1998. + + B. Candie's was, at all relevant times, a Delaware corporation with its principal executive offices in Purchase, New York. Candie's is currently headquartered in Valhalla, New York. Candie's primary business is designing, marketing, and distributing moderately priced women's shoes, handbags, and other accessories. At all relevant times, Candie's common stock was registered with the Commission pursuant to Section 12(g) of the Securities Exchange Act of 1934 ("Exchange Act"), and traded on the Nasdaq National Market. Candie's reports quarterly and annual results based on a fiscal year end of January 31. + + C. On March 16, 2004, a final judgment was entered against Klein, permanently enjoining him from future violations of Section 17(a) of the Securities Act of 1933 ("Securities Act"), and Sections 10(b) and 13(b)(5) of the Exchange Act and Rules 10b-5 and 13b2-1 thereunder, and aiding and abetting violations of Sections 13(a), 13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act and Rules 12b-20, 13a-1 and 13a-13 thereunder, in the civil action entitled Securities and Exchange Commission v. Lawrence O'Shaughnessy, et al., Civil Action No. 03 CV 3022 (RMB), in the United States District Court for the Southern District of New York. Klein was ordered to pay $39,375 in disgorgement of ill-gotten gains, and $14,472.32 in prejudgment interest, and a $75,000 civil money penalty. + + D. The Commission's complaint alleged, among other things, the following: + + (1) Candie's senior management, including Klein, employed various fraudulent accounting practices designed to improve Candie's publicly reported financial condition and results of operations. As a result of these fraudulent accounting practices, Candie's falsely and materially inflated its reported financial results for the fiscal third quarter ended October 31, 1997, the fiscal year ended January 31, 1998, and for the quarters ended April 30, 1998 and July 31, 1998, as well as in corresponding press releases announcing results for those periods. + + (2) Klein negotiated an agreement with a barter company in August 1997, and signed the agreement on behalf of Candie's. Klein then arranged for Candie's to record a journal entry to recognize $1.3 million in revenue during the third quarter of fiscal year 1998 reflecting the purported sale of 133,000 pairs of shoes pursuant to the August 1997 agreement. Recognizing this revenue violated Generally Accepted Accounting Principles ("GAAP") and Candie's own revenue recognition policy because Candie's did not ship the 133,000 pairs of shoes to the barter company until July 1999. Klein knew or was reckless in not knowing that Candie's did not ship the 133,000 pairs of shoes to the barter company during the third quarter of fiscal year 1998. Candie's also improperly recognized $474,760 in revenue from the August 1997 barter agreement during the first quarter of fiscal year 1999, and improperly recognized $209,160 of revenue from the August 1997 barter agreement during the second quarter of fiscal year 1999, because Candie's recognized this revenue prior to shipping the shoes to the barter company. + + (3) On October 31, 1997, Klein improperly recorded a $1.6 million sales credit from Candie's buying agent on Candie's books and records. Klein recorded the sales credit knowing that it reduced Candie's expenses by $1.6 million and correspondingly increased pretax income by the same amount for the third quarter of fiscal year 1998. + + (4) Candie's former Chief Operating Officer directed employees to engage in a practice known as "bill and hold" that allowed Candie's prematurely to record revenue from various purchase orders calling for future delivery of shoes, by recording the orders as final sales prior to shipping the shoes to customers. As a result of the bill and hold practice (and other irregular shipping practices), Candie's prematurely recognized approximately $1.8 million in revenue on its books and records during the fourth quarter and fiscal year 1998. For its fiscal first quarter ended April 30, 1998, Candie's overstated the revenue and income figure by prematurely recognizing $991,573 of revenue through the bill and hold practice. Candie's prematurely recorded revenue of $1,698,000 through the bill and hold practice in Candie's fiscal second quarter ended July 31, 1998. Klein was aware that Candie's was engaged in the bill and hold practice. Employees questioned Klein about the bill and hold practice and distributed to Klein a schedule listing bill and hold invoices, but Klein failed to investigate the practice, stop the practice, or otherwise prevent Candie's from prematurely recognizing revenue from this practice. + + (5) During the audit of Candie's January 31, 1998 financial statements, Klein represented to the auditors that the financial statements had been prepared in conformity with GAAP when, in fact, they had not been. + + (6) Klein created false and misleading books and records by, among other things, permitting Candie's to recognize revenue prematurely through the bill and hold practice and by recognizing revenue from the sales transaction with the barter company. + + (7) Candie's failed to file with the Commission, in accordance with the Commission's rules and regulations, such annual and quarterly reports as the Commission has prescribed, and Candie's failed to include, in addition to the information expressly required to be stated in such reports, such further material information as was necessary to make the statements made therein, not misleading. Klein substantially assisted Candie's violations by, among other things, permitting Candie's to record revenue from the August 1997 sales transaction with the barter company and the bill and hold practice. + + (8) Klein signed Candie's Form 10-Q for the fiscal third quarter ended October 31, 1997, Form 10-K for the fiscal year ended January 31, 1998, Form 10-Q for the fiscal first quarter ended April 30, 1998, and Form 10-Q for the fiscal second quarter ended July 31, 1998 on behalf of Candie's. Klein also signed a Form S-4 dated May 4, 1998 to register the issuance of 2.9 million shares of Candie's stock, which contained Candie's fiscal year 1998 financial statements and incorporated by reference Candie's October 31, 1997 Form 10-Q. Klein improperly inflated Candie's reported financial results in press releases, Candie's Form S-4, Candie's Form 10-Q for the third quarter 1998, Candie's Form 10-K for fiscal year 1998, and Forms 10-Q for the first and second quarters of fiscal year 1999 by enabling Candie's to recognize improperly revenue and income from the bill and hold practice and the August 1997 sales transactions with the barter company. The Form S-4, Form 10-K and Forms 10-Q identified above, and the accompanying press releases announcing Candie's earnings, contained material misstatements of revenue and income. Klein knew, or was reckless in not knowing, that Candie's press releases, Form S-4, and periodic filings were materially false and misleading. + + IV. + + In view of the foregoing, the Commission deems it appropriate and in the public interest to impose the sanction agreed to in Respondent Klein's Offer. + + + Accordingly, it is hereby ORDERED, effective immediately, that: + + Klein is suspended from appearing or practicing before the Commission as an accountant. + + By the Commission. + + +Jonathan G. Katz +Secretary + + + + Endnotes + 1 Rule 102(e)(3)(i) provides, in relevant part, that: + + The Commission, with due regard to the public interest and without preliminary hearing, may, by order, . . . suspend from appearing or practicing before it any . . . accountant . . . who has been by name . . . permanently enjoined by any court of competent jurisdiction, by reason of his or her misconduct in an action brought by the Commission, from violating or aiding and abetting the violation of any provision of the Federal securities laws or of the rules and regulations thereunder. + + + + +  + + + + + + + + + + + + + + + + + + + + + + + + + Return to top + + + + + SEC homepage + + + + + + + + + + + + + + About the SEC + + + + + + Budget & Performance + + + Careers + + + Commission Votes + + + Contact + + + Contracts + + + + + + + + Transparency + + + + + + Accessibility & Disability + + + Super Intelligence + + + FOIA + + + Inspector General + + + No FEAR Act Data + + + Ombuds + + + SEC Excess Personal Property Guidance + + + + + + + + Websites + + + + + + Investor.gov + + + Related Sites + + + USA.gov + + + + + + + + Site Information + + + + + + Plain Writing + + + Privacy & Security + + + Site Map + + + + + + + + + + + + + + + + + + Stay connected. 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Hawkins + + + + + + + + + + + + Richard H. Hawkins + + + + + + + + + + + + + + + + + + + + + The Securities and Exchange Commission today announced civil fraud charges against the Chief Financial Officer of McKesson HBOC for his role in a massive accounting fraud. McKesson HBOC (now renamed McKesson Corporation) is a Fortune 100 company with its corporate headquarters in San Francisco. + + The SEC's complaint, filed in the Northern District of California, alleges that Richard Hawkins, age 53, of Atherton, California, violated the antifraud, lying-to-accountants, and books and records provisions of the federal securities law. Mr. Hawkins also was indicted today on criminal charges stemming from his role in the fraud. + + As alleged in the complaint, Mr. Hawkins participated in a fraudulent scheme with other former McKesson officers to artificially inflate the company's financial results for the fiscal quarter ended March 31, 1999, by fraudulently recognizing revenue on a $20 million transaction between McKesson and Data General Corporation. Mr. Hawkins and others caused revenue from the Data General transaction to be reported to the public as part of the company's earnings release on April 22, 1999, despite the fact that McKesson's independent auditors told Mr. Hawkins that revenue from the transaction could not be recognized. Soon after the fraud was discovered in April 1999, McKesson's stock tumbled from approximately $65 to $34 a share, a drop that slashed the company's market value by more than $9 billion. + + Mr. Hawkins was also formerly the Chief Financial Officer of San Francisco-based McKesson Corporation before the company's January 1999 merger with Atlanta-based HBOC & Company ("HBOC") to form McKesson HBOC. The charges relate to Mr. Hawkins conduct in the first fiscal quarter after the merger. + + Mr. Hawkins is the only former McKesson officer who was not employed by HBOC, to date, to be charged in the investigations into the accounting fraud at McKesson HBOC. Mr. Hawkins becomes the twelfth person charged civilly by the SEC in connection with this investigation. Six former HBOC executives have previously been charged criminally. + + According to the civil complaint, the charges against Hawkins stem from his involvement in a single fraudulent $20 million transaction between McKesson and Data General. The transaction allowed McKesson to report to the public that the company met Wall Street analysts's expectations for the quarter ended March 31, 1999, which was the first quarter of combined operations after McKesson's acquisition of HBOC. + + According to the complaint, the Data General transaction was fraudulent for three reasons: the deal was backdated, gave Data General an unconditional right to return the McKesson product, and was a swap that was not accounted for as a swap. + + According to the complaint, the Data General transaction was conceived, negotiated, and executed, in its entirety, after the close of the quarter. The transaction consisted of two separate contracts. The first contract was improperly backdated to March 31, 1999. The second contract was dated April 5, 1999. Both contracts were contingent upon each other and negotiated contemporaneously as part of the same transaction. The second contract also contained a provision requiring McKesson to buy back any software that Data General was unable to resell. + + According to the complaint, although McKesson HBOC's outside auditors informed Mr. Hawkins that revenue from the transaction could not be recognized under Generally Accepted Accounting Principles, Mr. Hawkins and others included the $20 million transaction in the company's earnings release on April 22, 1999. Hawkins also made false statements to the company's auditors regarding the Data General transaction. + + The SEC charges Mr. Hawkins with violating Sections 10(b) and 13(b)(5) of the Securities Exchange Act of 1934 ("Exchange Act") and Rules 10b-5, 13b2-1, and 13b2-2 thereunder. The Commission is seeking to enjoin Mr. Hawkins from committing future violations of these provisions, compel him to pay disgorgement, prejudgment interest, and civil monetary penalties, and to bar Mr. Hawkins from serving as an officer or director of a public company. + + + SEC Complaint in this matter + + + + + +  + + + + + + + + + + + + + + + + + + + + + + + + + Return to top + + + + + SEC homepage + + + + + + + + + + + + + + About the SEC + + + + + + Budget & Performance + + + Careers + + + Commission Votes + + + Contact + + + Contracts + + + + + + + + Transparency + + + + + + Accessibility & Disability + + + Super Intelligence + + + FOIA + + + Inspector General + + + No FEAR Act Data + + + Ombuds + + + SEC Excess Personal Property Guidance + + + + + + + + Websites + + + + + + Investor.gov + + + Related Sites + + + USA.gov + + + + + + + + Site Information + + + + + + Plain Writing + + + Privacy & Security + + + Site Map + + + + + + + + + + + + + + + + + + Stay connected. 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Gardner + + + + + + + + !function(){var e=navigator.userAgent,a=document.documentElement,n=a.className;n=n.replace("no-js","js"),/iPad|iPhone|iPod/.test(e)&&!window.MSStream&&(n+=" ua-ios"),a.className=n}(); + {"path":{"baseUrl":"\/","pathPrefix":"","currentPath":"node\/368206","currentPathIsAdmin":false,"isFront":false,"currentLanguage":"en"},"pluralDelimiter":"\u0003","suppressDeprecationErrors":true,"gtag":{"tagId":"","consentMode":false,"otherIds":[],"events":[],"additionalConfigInfo":[]},"ajaxPageState":{"libraries":"eJxdT0GOwzAI_JBdn_oei2DkeINNZLC22devlaZS2wtiBhhmcKNUTPo97jxyaXEH3GJpiZrFhQW38A4cMqgeYQGlV19JFTKpQ-kUmvQKXP7I0cO4tC2kPnbg2wVdFslM0SCHPMs3vsEPPD7J6hgOGdPCKJyoRxxqUuePHjLLAuzVjimenRJGSLW08NoBK9LUn6SHlrytVOlcpJShB63QLSpBx_WkOzHNePol4fRQo_qMPvQ36ZXsAmd99lMNr2t_GUR9n60EyX9a_wePd5ns","theme":"uswds_sec","theme_token":null},"ajaxTrustedUrl":[],"gtm":{"tagId":null,"settings":{"data_layer":"dataLayer","include_classes":false,"allowlist_classes":"","blocklist_classes":"","include_environment":false,"environment_id":"","environment_token":""},"tagIds":["GTM-TD3BKV"]},"data":{"extlink":{"extTarget":false,"extTargetAppendNewWindowDisplay":true,"extTargetAppendNewWindowLabel":"(opens in a new window)","extTargetNoOverride":false,"extNofollow":false,"extTitleNoOverride":false,"extNoreferrer":false,"extFollowNoOverride":false,"extClass":"0","extLabel":"(link is external)","extImgClass":false,"extSubdomains":true,"extExclude":".*\\.gov|http:\/\/www.xbrl.org\/utr\/2013-05-17\/utr.xml|http:\/\/www.xbrl.org\/dtr\/type\/numeric-2009-12-16.xsd|http:\/\/www.xbrl.org\/dtr\/type\/nonNumeric-2009-12-16.xsd|https:\/\/secir.secure.force.com\/ombudsman\/OMMSForm","extInclude":"","extCssExclude":".data-exempt","extCssInclude":"","extCssExplicit":"","extAlert":true,"extAlertText":"You are now leaving the SEC Website. 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Individuals (SALI) + + + + + Enforcement Data Delivery Standards + + + + + Small Businesses + + + + + Appellate Briefs + + + + + Amicus / Friend of the Court Briefs + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + Home + + + Enforcement and Litigation + + + Administrative Proceedings + + + Margaret M. Gardner + + + + + + + + + + + + Margaret M. Gardner + + + + + + + + + + + + + + + + + + + + + SECURITIES EXCHANGE ACT OF 1934 +Release No. 49510 / March 31, 2004 + + ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 1982 / March 31, 2004 + + ADMINISTRATIVE PROCEEDING +File No. 3-11452 + + + + In the Matter of + MARGARET M. GARDNER, + Respondent. + + : : : : : : : : : : + + ORDER INSTITUTING CEASE- +AND-DESIST PROCEEDINGS, MAKING +FINDINGS, AND IMPOSING A +CEASE-AND-DESIST ORDER PURSUANT +TO SECTION 21C OF THE +SECURITIES EXCHANGE ACT OF 1934 I. + + The Securities and Exchange Commission ("Commission") deems it appropriate that cease-and-desist proceedings be, and hereby are, instituted pursuant to Section 21C of the Securities Exchange Act of 1934 ("Exchange Act"), against Margaret M. Gardner ("Respondent" or "Gardner"). + + II. + + In anticipation of the institution of these proceedings, Respondent has submitted an Offer of Settlement (the "Offer"), which the Commission has determined to accept. Solely for the purpose of these proceedings and any other proceedings brought by or on behalf of the Commission, or to which the Commission is a party, and without admitting or denying the findings herein, except as to the Commission's jurisdiction over her and the subject matter of these proceedings, which are admitted, Respondent consents to the entry of this Order Instituting Cease-and-Desist Proceedings, Making Findings, and Imposing a Cease-and-Desist Order Pursuant to Section 21C of the Securities Exchange Act of 1934 ("Order"), as set forth below. + + III. + + On the basis of this Order and Respondent's Offer, the Commission finds 1 that: + + 1. Gardner, age 65, is a resident of Denver, Colorado. Gardner, who has never been a certified public accountant, has worked as an accountant for Michael Johnson & Co., LLC ("Johnson & Co.") since February 1998. + + 2. As an employee of Johnson & Co., Gardner participated in the audit of the financial statements for Winners Internet Network, Inc. ("Winners"), now known as American Television and Film Company ("American"), for the years ended December 31, 1997 and 1998, and participated in the compilation of financial statements for the ten months ended October 31, 1998 and October 31, 1999, which were included in a Form 10-SB registration of securities of a small business issuer filed by Winners with the Commission on December 23, 1999. + + 3. Gardner also participated in the preparation and audit of Winners' December 31, 1999 financial statements, which were included in a current report on Form 8-K filed by Winners with the Commission on May 15, 2000; and participated in the preparation and review of certain of Winners' financial statements for the quarters ended March 31, June 30 and September 30, 2000, versions of which were included in Forms 10-QSB and 10-QSB/A filed by Winners with the Commission on November 21 and 22, 2000 and December 6, 2000, respectively, under the name of Winners' wholly owned subsidiary, Glennaire Financial Services, Inc. + + 4. Winners, a former Nevada corporation with offices in St. Augustine, Florida and the country of Liechtenstein, offered online processing of Internet gaming and other financial transactions using its proprietary processing software between 1999 and June 2002. Thereafter, Winners had no operations. + + 5. In December 1999, Winners filed a general form of registration of securities of a small business issuer with the Commission on Form 10-SB, which Winners withdrew before it became effective. In May 2000, Winners' common stock became registered with the Commission pursuant to Section 12(g) of the Exchange Act, when Winners acquired Glennaire Financial Services, Inc., a corporation whose common stock was registered with the Commission pursuant to Section 12(g) of the Exchange Act, effective September 1999. On February 26, 2004, Winners terminated the registration of its common stock by filing a Form 15 with the Commission. Therefore, from May 2000 to at least February 26, 2004, Winners, now American, was required to file periodic reports with the Commission. American's stock is listed in the electronic quotation service operated by The Pink Sheets LLC. + + 6. Once its operations began in 1999, Winners maintained incomplete and inaccurate books and records for its European operations that encompassed accounts including its software asset, receivables, revenues, and the majority of its expenses and liabilities. In connection with the preparation of the financial statements identified in Paragraph 3, Gardner knowingly made false entries to certain of Winners' accounts. + + 7. The financial statements of Winners referred to in paragraphs 2 and 3 above materially overstated Winners' software asset by between $75,000 and $300,000, resulting in an overstatement of total assets by between 3% and 191%, by improperly capitalizing purported demonstration software costs in Winners' software asset account. + + 8. Winners' December 31, 1999 financial statements, which Gardner participated in preparing and purporting to audit and that were filed with the Commission in Winners' Form 8-K current report, materially overstated Winners' software asset by approximately $421,000 by improperly capitalizing operating expenses in the software asset account. This resulted in an overstatement of total assets by 416%. + + 9. Winners' December 31, 1999 financial statements also materially overstated Winners' licensing and processing revenues by approximately $372,000, resulting in an overstatement of total revenues by 83%, and accounts receivable by approximately $533,000, resulting in an overstatement of total assets by 528%, and understated expenses by $161,000, resulting in a 16% understatement of total expenses, by improperly: (a) recording licensing fees; (b) recognizing receivables from licensing fees Winners had little or no chance of collecting; and (c) recognizing revenue and receivables that had not been realized or earned by Winners. These overstatements enabled Winners to report net income of $5,067 instead of a net loss of over $501,000. + + 10. Financial statements for the initial three quarters of calendar year 2000 were included in Forms 10-QSB and 10-QSB/A filed by Winners with the Commission in November and December 2000. These financial statements improperly recognized a $1 million software asset from a transaction that lacked economic substance, resulting in an overstatement of total assets by between 73% and 2,550%. + + 11. Johnson & Co. issued audit reports accompanying Winners' year-end financial statements for 1997 and 1998 that contained a going concern qualification and an unqualified audit report for 1999. These reports falsely stated that the financial statements were presented fairly in all material respects in conformity with Generally Accepted Accounting Principles ("GAAP") and that the audits of these financial statements were conducted in accordance with Generally Accepted Auditing Standards ("GAAS"). These statements were false, since portions of the underlying financial statements were not presented in conformity with GAAP, which, in turn, rendered false the statements that the audits were conducted in accordance with GAAS, since the failure to address a deviation from GAAP in an audit report is a violation of GAAS. In addition, Johnson & Co.'s audit of Winners' 1999 financial statements was not in accordance with GAAS because, among other things, by participating in both the preparation and audit of these financial statements, Gardner failed to maintain her independence from Winners. + + 12. Gardner acted recklessly by participating in preparing, compiling, reviewing and auditing Winners' financial statements, which contained the false statements described in Paragraphs 6 through 11. + + 13. As a result of the conduct described above, Gardner: (a) violated and, with respect to Johnson & Co.'s audit reports, caused violations of Section 10(b) of the Exchange Act and Rule 10b-5 thereunder, which prohibit fraudulent conduct in connection with the purchase or sale of securities; (b) violated Section 13(b)(5) of the Exchange Act, which, among other things, prohibits any person from knowingly falsifying any book, record or account subject to Section 13(b)(2) of the Exchange Act; (c) violated Rule 13b2-1, which prohibits any person from directly or indirectly falsifying or causing to be falsified, any book record or account subject to Section 13(b)(2)(A) of the Exchange Act; (d) caused Winners' violations of Section 13(a) of the Exchange Act and Rules 12b-20, 13a-11 and 13a-13 thereunder, which require every issuer of a security registered pursuant to Section 12 of the Exchange Act to file with the Commission, in accordance with such rules and regulations as the Commission may prescribe as necessary or appropriate for the proper protection of investors and to insure fair dealing in the security, such quarterly and current reports as the Commission may prescribe; and (e) caused Winners' violations of Section 13(b)(2)(A) of the Exchange Act, which requires public companies to make and keep books and records which accurately and fairly reflect its transactions and dispositions of assets. + + IV. + + In view of the foregoing, the Commission deems it appropriate to impose the sanctions agreed to in Respondent Gardner's Offer. + + Accordingly, it is hereby ORDERED that Respondent Gardner cease and desist from committing or causing any violations and any future violations of Sections 10(b) and 13(b)(5) of the Exchange Act and Rules 10b-5 and 13b2-1 promulgated thereunder, and from causing any violations and any future violations of Sections 13(a) and 13(b)(2) of the Exchange Act and Rules 12b-20, 13a-11 and 13a-13 promulgated thereunder. + + By the Commission. + + + +Jonathan G. Katz +Secretary + + + + + + + + Endnotes + 1 The findings herein are made pursuant to Respondent's Offer of Settlement and are not binding on any other person or entity in this or any other proceeding. + + + + +  + + + + + + + + + + + + + + + + + + + + + + + + + Return to top + + + + + SEC homepage + + + + + + + + + + + + + + About the SEC + + + + + + Budget & Performance + + + Careers + + + Commission Votes + + + Contact + + + Contracts + + + + + + + + Transparency + + + + + + Accessibility & Disability + + + Super Intelligence + + + FOIA + + + Inspector General + + + No FEAR Act Data + + + Ombuds + + + SEC Excess Personal Property Guidance + + + + + + + + Websites + + + + + + Investor.gov + + + Related Sites + + + USA.gov + + + + + + + + Site Information + + + + + + Plain Writing + + + Privacy & Security + + + Site Map + + + + + + + + + + + + + + + + + + Stay connected. 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Johnson, Michael Johnson & Co., LLC, David C. Skinner, Jr. and American Television and Film Company f/k/a Winners Internet Network, Inc. + + + + + + + + + + + + Michael B. Johnson, Michael Johnson & Co., LLC, David C. Skinner, Jr. and American Television and Film Company f/k/a Winners Internet Network, Inc. + + + + + + + + + + + + + + + + + + + U.S. Securities and Exchange Commission + + LITIGATION RELEASE NO. 18652 / April 1, 2004 + + Accounting and Auditing Enforcement Release No. 1983 / April 1, 2004 + + SECURITIES AND EXCHANGE COMMISSION v. MICHAEL B. JOHNSON, MICHAEL JOHNSON & CO., LLC, DAVID C. SKINNER, JR. AND AMERICAN TELEVISION AND FILM COMPANY f/k/a WINNERS INTERNET NETWORK, INC. , No. 04-RB-0626 (USDC D. Colorado). + + The Securities and Exchange Commission ("Commission") announced that it filed an injunctive action on March 31, 2004 against Colorado resident Michael B. Johnson, his Colorado-based accounting firm, Michael Johnson & Co., LLC ("Johnson & Co."), American Television and Film Company f/k/a Winners Internet Network, Inc. ("Winners"), a Nevada corporation, and Florida resident David C. Skinner, Jr., Winners' former president and chairman of the board of directors. The Commission's complaint alleges that between December 1999 and December 2000, Winners and Skinner carried out a scheme to defraud investors by filing reports and a registration statement with the Commission containing false financial statements that fraudulently overstated Winners' revenues, income, assets and cash inflows and understated expenses. According to the complaint, Johnson and Johnson & Co. assisted in the scheme by performing a range of accounting functions for Winners, including purporting to audit financial statements they had previously prepared for Winners. Further, between January and October 2000, Skinner and Winners reviewed or disseminated three promotional "analyst reports" containing baseless financial projections. + + The Commission's complaint alleges that: (1) Johnson, Johnson & Co. and Skinner violated Sections 10(b) and 13(b)(5) of the Securities Exchange Act of 1934 ("Exchange Act") and Rules 10b-5 and 13b2-1 thereunder, and aided and abetted violations of Sections 13(a) and 13(b)(2) of the Exchange Act and Rules 12b-20, 13a-11 and 13a-13 thereunder; and (2) Winners violated Sections 10(b), 13(a) and 13(b)(2) of the Exchange Act and Rules 10b-5, 12b-20, 13a-1, 13a-11 and 13a-13 thereunder. The complaint seeks injunctions and third-tier civil penalties against all of the defendants; disgorgement and prejudgment interest from Johnson, Johnson & Co., and Skinner; and officer and director and penny stock bars against Skinner only. Without admitting or denying the Commission's allegations, Skinner has consented to the entry of an order that would enjoin him from future violations of the foregoing provisions and direct him to pay disgorgement and prejudgment interest in an amount to be determined after the completion of the Commission's discovery in this action; and in which he would agree to the Court's continuing jurisdiction over the action for the purpose of determining whether to assess civil penalties against him. + + + SEC Complaint in this matter + + + + + +  + + + + + + + + + + + + + + + + + + + + + + + + + Return to top + + + + + SEC homepage + + + + + + + + + + + + + + About the SEC + + + + + + Budget & Performance + + + Careers + + + Commission Votes + + + Contact + + + Contracts + + + + + + + + Transparency + + + + + + Accessibility & Disability + + + Super Intelligence + + + FOIA + + + Inspector General + + + No FEAR Act Data + + + Ombuds + + + SEC Excess Personal Property Guidance + + + + + + + + Websites + + + + + + Investor.gov + + + Related Sites + + + USA.gov + + + + + + + + Site Information + + + + + + Plain Writing + + + Privacy & Security + + + Site Map + + + + + + + + + + + + + + + + + + Stay connected. 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Thomson, CPA, and David T. Thomson PC + + + + + + + + + + + + David T. Thomson, CPA, and David T. Thomson PC + + + + + + + + + + + + + + + + + + + + + SECURITIES EXCHANGE ACT OF 1934 +Release No. 49516 / April 1, 2004 + + ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 1984 / April 1, 2004 + + Admin. Proc. File No. 3-11453 + + + + In the Matter of + David T. Thomson, CPA, and David T. Thomson PC + Respondents. + + : : : : : : : : : + Order Instituting Public Order Instituting Public Pursuant to Rule 102(E) of the Commission's Rules of Practice, Making Findings and Imposing Remedial Sanctions + I. + The Securities and Exchange Commission (the "Commission") deems it appropriate that public administrative proceedings be, and hereby are, instituted against David T. Thomson, CPA ("Thomson") and David T. Thomson PC ("Thomson PC"), pursuant to Rule 102(e)(1)(ii) of the Commission's Rules of Practice [17 C.F.R.§ 201.102(e)]. + II. + In anticipation of the institution of these proceedings, Thomson and Thomson PC (collectively, the "Respondents") have submitted an Offer of Settlement ("Offer"), which the Commission has determined to accept. Solely for the purpose of these proceedings and any other proceedings brought by or on behalf of the Commission or to which the Commission is a party, and without admitting or denying the findings herein, except that they admit to the jurisdiction of the Commission over them, and the subject matter of these proceedings, Respondents consent to the entry of this Order Instituting Public Administrative Proceedings Pursuant to Rule 102(e) of the Commission's Rules of Practice, Making Findings and Imposing Remedial Sanctions ("Order"), as set forth below. + III. + On the basis of this Order and Respondents' Offer, the Commission finds that: + A. RESPONDENTS + 1. David T. Thomson, CPA, age 53, is a certified public accountant who was duly licensed by the State of Utah at all relevant times, and is the sole owner of David T. Thomson PC. Thomson headed the audit of Powerball International, Inc. ("Powerball") for the fiscal year ended December 31, 2002. + 2. David T. Thomson PC is a Utah professional corporation located in Murray, Utah. Thomson PC was Powerball's independent auditor for the fiscal years 1999 through 2002. + B. RELATED ENTITY AND PERSON + 1. Powerball was at all relevant times a Utah corporation located in Salt Lake City, Utah. Powerball is a development stage company that manufactures alternative energy products. Powerball's common stock is registered with the Commission under Section 12(g) of the Securities Exchange Act of 1934 and trades on NASD's OTC Bulletin Board. + 2. William W. Freise ("Freise"), age 49, is a Utah resident. Freise was Powerball's President and Chief Operating Officer from December 2001 to April 2003. Freise was elected to Powerball's Board of Directors in December 2002. Freise was terminated by Powerball in April 2003. + C. FACTS + Thomson PC, Powerball's auditor, led by Thomson, performed the annual audit of Powerball's financial statements for the fiscal year ended December 31, 2002. During the audit, company management gave Thomson faxed copies of Powerball's bank statements that had been altered by Freise. Freise had altered these bank statements to conceal his non-payment of $40,000 that represented the exercise price for shares that he had received pursuant to warrants. In addition, Freise altered the company's bank statements to hide his improper use of $7,200 of company funds for personal expenses. As a result of Freise's actions, the altered bank statements overstated cash by $47,200. + Cash represented over two-thirds of Powerball's assets as of December 31, 2002. Despite this fact, Thomson relied on faxed copies of the company's bank statements and failed to confirm the true cash balances with Powerball's bank. During the course of the audit, Freise's alteration of Powerball's bank statements thus went undetected and the overstated cash balance was incorporated into the company's financial statements and its Form 10-KSB filed with the Commission. Thomson PC issued an audit report dated April 2, 2003 containing an unqualified opinion on the company's financial statements. By overstating its cash balance by $47,200, Powerball overstated its cash balance by 85.7% and its assets by 47.5% and, as a result, filed a materially false Form 10-KSB with the Commission on April 9, 2003. On May 22, 2003, the Company filed a Form 8-K stating, among other things, that it would need to restate its financial statements for fiscal year 2002. + D. LEGAL ANALYSIS + Rule 102(e) authorizes the Commission to "deny, temporarily or permanently, the privilege of appearing or practicing before it in any way to any person who is found ... (ii) to be lacking in character or integrity or to have engaged in unethical or improper professional conduct ...." The rule defines improper professional conduct to mean "[i]ntentional or knowing conduct, including reckless conduct, that results in a violation of applicable professional standards." A single instance of highly unreasonable conduct and repeated instances of unreasonable conduct also meet the definition of improper professional conduct. By failing to obtain bank confirmations, or otherwise obtain sufficient competent evidential matter to verify Powerball's cash balances, which represented over two-thirds of the company's assets, Thomson engaged in improper professional conduct. See Potts v. SEC, 151 F.3d 810, 811 (8th Cir. 1998) (upholding the Commission's Rule 102(e) sanction based on finding that auditor engaged in reckless professional conduct because, among other things, he failed to obtain documentary evidence, and relied on unsupported management representations despite contradictory documentary evidence). + Departures From Generally Accepted Auditing Standards + The Commission's rules require that auditors of public company financial statements adhere to Generally Accepted Auditing Standards ("GAAS"). Under GAAS, an auditor must exercise due professional care while conducting an audit and preparing the audit report. (See Codification of Statements on Auditing Standards ("AU") §§ 150.02, 230.01). Under AU § 230.04, "due professional care concerns what the independent auditor does and how well he does it." AU § 326.01 requires an auditor to obtain sufficient competent evidential matter to afford a reasonable basis for an audit report. Similarly, auditors are required to maintain an attitude of professional skepticism (AU § 230.07) and cannot simply rely on management representations (AU § 333.02). + Respondents' audit of Powerball's financial statements for the fiscal year ended December 31, 2002 failed to comply with GAAS because by failing to obtain confirmations of cash balances from Powerball's bank, or otherwise obtain sufficient competent evidential matter to verify Powerball's cash balances, and instead relying on faxed copies of bank statements, Respondents failed to exercise due professional care in violation of AU §§ 150.02, 230.01 and 230.04; failed to maintain an attitude of professional skepticism in violation of AU § 230.07; and failed to obtain sufficient competent evidential matter in violation of AU § 326.01. Obtaining bank confirmations is a fundamental audit requirement. This requirement was heightened by the fact that Powerball's cash balances represented over two-thirds of the company's assets. Thus, Thomson's failure to confirm Powerball's cash balances was highly unreasonable, and accordingly, constitutes "improper professional conduct." + IV. + Based on the foregoing, the Commission finds that Thomson and Thomson PC each engaged in improper professional conduct within the meaning of Rule 102(e)(1)(ii) of the Commission's Rules of Practice. + V. + In view of the foregoing, the Commission deems it appropriate to impose the sanctions agreed to in the Respondents' Offer. + Accordingly, it is hereby ORDERED, effective immediately, that: + + A. Thomson and Thomson PC are denied the privilege of appearing or practicing before the Commission as accountants. + B. After two (2) years from the date of this Order, Thomson and Thomson PC may request that the Commission consider their reinstatement by submitting an application (attention: Office of the Chief Accountant) to resume appearing or practicing before the Commission as: + 1. a preparer or reviewer, or a person responsible for the preparation or review, of any public company's financial statements that are filed with the Commission. Such an application must satisfy the Commission that Respondents' work in their practice before the Commission will be reviewed either by the independent audit committee of the public company for which they work or in some other acceptable manner, as long as they practice before the Commission in this capacity; and/or + 2. an independent accountant. Such an application must satisfy the Commission that: + (a) Thomson PC, or the public accounting firm with which Thomson is associated, is registered with the Public Company Accounting Oversight Board ("Board") in accordance with the Sarbanes-Oxley Act of 2002, and such registration continues to be effective; + (b) Thomson, or the registered public accounting firm with which he is associated, has been inspected by the Board and that inspection did not identify any criticisms of or potential defects in Thomson's or firm's quality control system that would indicate that the respondent will not receive appropriate supervision or, if the Board has not conducted an inspection, has received an unqualified report relating to his, or the firm's, most recent peer review conducted in accordance with the guidelines adopted by the SEC Practice Section of the American Institute of Certified Public Accountants Division for CPA Firms or an organization providing equivalent oversight and quality control functions; + (c) Respondents have resolved all disciplinary issues with the Board, and have complied with all terms and conditions of any sanctions imposed by the Board (other than reinstatement by the Commission); and + (d) The Respondents acknowledge their responsibility, as long as Respondents appear or practice before the Commission as an independent accountant, to comply with all requirements of the Commission and the Board, including, but not limited to, all requirements relating to registration, inspections, concurring partner reviews and quality control standards. + C. The Commission will consider an application by Respondents to resume appearing or practicing before the Commission provided that Thomson's state CPA license is current and he has resolved all other disciplinary issues with the applicable state boards of accountancy. However, if state licensure is dependant on reinstatement by the Commission, the Commission will consider an application on its other merits. The Commission's review may include consideration of, in addition to the matters referenced above, any other matters relating to Thomson's character, integrity, professional conduct, or qualifications to appear or practice before the Commission. + + + + By the Commission. + + + Jonathan G. 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Freise; David T. Thomson CPA, and David T. Thomson PC + + + + + + + + + + + + William W. Freise; David T. Thomson CPA, and David T. Thomson PC + + + + + + + + + + + + + + + + + + + + + On March 31, 2004, the Commission filed an injunctive action against William W. Freise ("Freise"), alleging that during the period June 2002 through April 2003, Freise, the former president and director of Powerball International Inc. ("Powerball"), falsified company records to hide his theft of $7,200, and to hide his failure to pay $40,000 for stock he had received through the exercise of warrants. The Complaint alleges that in order to conceal his fraud, Freise altered monthly bank statements for Powerball's bank account, which made that account appear to contain a substantially higher cash balance than it actually contained. The Complaint alleges that Freise knew that Powerball's financial statements and its reports to the Commission would reflect such false cash balances. As a result of such conduct, Powerball materially misstated its financial statements for the quarters ended June 30, 2002 and September 30, 2002 and for the year ended December 31, 2002. + The Complaint alleges that Freise violated Section 17(a) of the Securities Act of 1933 (the "Securities Act"), Sections 10(b) and 13(b)(5) of the Securities Exchange Act of 1934 (the "Exchange Act") and Rules 10b-5, 13b2-1 and 13b2-2 thereunder. The Complaint also alleges that Freise aided and abetted Powerball's violations of Sections 13(a), 13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act and Rules 12b-20, 13a-1 and 13a-13 promulgated thereunder. The Complaint seeks a permanent injunction prohibiting Freise from future violations of these provisions, disgorgement, prejudgment interest and civil penalties pursuant to Section 21(d)(3) of the Exchange Act and Section 20(d)(1) of the Securities Act. The Commission also seeks an order permanently barring Freise from serving as an officer or director of a public company. + On April 1, 2004, the Commission issued an Order instituting public administrative proceedings against Powerball's former auditors, David T. Thomson, CPA ("Thomson") and David T. Thomson PC ("Thomson PC"), pursuant to Rule 102(e)(1)(ii) of the Commission's Rules of Practice [17 C.F.R.§ 201.102(e)]. The Order denies Thomson and Thomson PC the privilege of appearing or practicing before the Commission as accountants, with the right to request that the Commission consider their reinstatement by submitting an application after two years. The Order finds that Thomson and Thomson PC failed to comply with generally accepted auditing standards ("GAAS") in their audit of Powerball's financial statements for the fiscal year ended December 31, 2002. The Order further finds that Thomson and Thomson PC failed to obtain confirmations of cash balances from Powerball's bank, or otherwise obtain sufficient competent evidential matter to verify Powerball's cash balances and instead relied on faxed copies of bank statements. Obtaining bank confirmations is a fundamental audit requirement that was heightened in this case by the fact that Powerball's cash balances represented over two-thirds of the company's assets. Based on such conduct, the Commission found that Thomson and Thomson PC engaged in improper professional conduct. Thomson and Thomson PC consented to the Order, but neither admitted nor denied the findings in the Order. See In the Matter of David T. Thomson, CPA and David T. Thomson PC. , Admin. Proc. 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Individuals (SALI) + + + + + Enforcement Data Delivery Standards + + + + + Small Businesses + + + + + Appellate Briefs + + + + + Amicus / Friend of the Court Briefs + + + + + + + + + + + + + + + + + + + + + + + + + + Enforcement & Litigation + + + + + + + Litigation Releases + + + + + Administrative Proceedings + + + + + Administrative Law Judge Orders and Initial Decisions + + + + + Trading Suspensions + + + + + Distributions to Harmed Investors + + + + + Receiverships + + + + + Electronic Filings in Administrative Proceedings (eFAP) + + + + + Rules of Practice + + + + + Applications for Reentry + + + + + Reports of Investigations + + + + + Whistleblower Program + + + + + Public Alert: Unregistered Soliciting Entities (PAUSE) + + + + + SEC Action Lookup - Individuals (SALI) + + + + + Enforcement Data Delivery Standards + + + + + Small Businesses + + + + + Appellate Briefs + + + + + Amicus / Friend of the Court Briefs + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + Home + + + Enforcement and Litigation + + + Litigation Releases + + + Lawrence O'Shaughnessey, et al. + + + + + + + + + + + + Lawrence O'Shaughnessey, et al. + + + + + + + + + + + + + + + + + + + + + The Securities and Exchange Commission announced today that on March 16, 2004, the Honorable Richard M. Berman of the United States District Court for the Southern District of New York entered a final judgment against defendant Gary H. Klein of Harrison, New York. During 1998 and 1999, Klein served as the Vice President of Finance and Principal Accounting Officer for Candie's, Inc., a wholesaler of branded women's shoes. + + Without admitting or denying the allegations in the Commission's complaint, Klein consented to the entry of the final judgment, which permanently enjoins him from violating the antifraud, issuer reporting, and books and records provisions of the federal securities laws. + + In the complaint filed on April 30, 2003, the Commission alleged that Candie's senior management, including Klein, engaged in a fraudulent scheme to inflate artificially Candie's financial results over two fiscal years. The complaint alleged that Klein negotiated an agreement with a barter company, and that during fiscal years 1998 and 1999 Candie's fraudulently recognized approximately $1.9 million in revenue pursuant to the agreement. In addition, the complaint alleged that Klein improperly recorded a $1.6 million credit against amounts owed to Candie's Asian sourcing agent during the third quarter of fiscal year 1998, which had the effect of decreasing expenses and therefore increasing income by the same amount. Finally, the complaint alleged that Klein was aware that Candie's employed a "bill and hold" practice, and that during fiscal years 1998 and 1999 Candie's fraudulently recorded approximately $4.4 million in revenue pursuant to the "bill and hold" and other irregular shipping practices. + + The final judgment permanently enjoins Klein from violating Section 17(a) of the Securities Act of 1933, Sections 10(b) and 13(b)(5) of the Securities Exchange Act of 1934 ("Exchange Act"), and Rules 10b-5 and 13b2-1, and from aiding and abetting violations of Sections 13(a), 13(b)(2)(A), and 13(b)(2)(B) of the Exchange Act, and Rules 12b-20, 13a-1, and 13a-13. The judgment also orders Klein to pay a civil monetary penalty of $75,000 and to pay disgorgement of $39,375, representing the proceeds from his sales of Candie's securities, plus prejudgment interest of $14,472.32. Finally, the final judgment permanently bars Klein from serving as an officer or director of a public company. + + The Commission also announced today that it simultaneously instituted and settled administrative proceedings against Klein. Without admitting or denying the findings, Klein consented to the entry of an Order, pursuant to Rule 102(e)(3) of the Commission's Rules of Practice, suspending him from appearing or practicing as an accountant before the Commission. + + For further information about earlier developments in this matter, see Litigation Release No. 18120 and Accounting and Auditing Enforcement Release No. 1766 (April 30, 2003). + + + + +  + + + + + + + + + + + + + + + + + + + + + + + + + Return to top + + + + + SEC homepage + + + + + + + + + + + + + + About the SEC + + + + + + Budget & Performance + + + Careers + + + Commission Votes + + + Contact + + + Contracts + + + + + + + + Transparency + + + + + + Accessibility & Disability + + + Super Intelligence + + + FOIA + + + Inspector General + + + No FEAR Act Data + + + Ombuds + + + SEC Excess Personal Property Guidance + + + + + + + + Websites + + + + + + Investor.gov + + + Related Sites + + + USA.gov + + + + + + + + Site Information + + + + + + Plain Writing + + + Privacy & Security + + + Site Map + + + + + + + + + + + + + + + + + + Stay connected. 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Share sensitive information only on official, secure websites. + + + + + + + + + + + + + + + + + SEC homepage + + + + + + + Menu + + + + + + + + + + + + + + Close + + + + + + + + + + + + + Search SEC.gov & EDGAR + + + + + + Search + + + + + + + + + + + + + + + + + Search Filings + + + + + + + + + Search Filings + + + + + + + + + Full Text Search + + + + + + Latest Filings + + + + + + Mutual Fund Search + + + + + + Variable Insurance Products Search + + + + + + SIC Codes + + + + + + CIK Lookup + + + + + + Public Dissemination Service (PDS) + + + + + + Search Assistance + + + + + + + + + + + + + Submit Filings + + + + + + + + + Submit Filings + + + + + + + + + EDGAR Filer Management Portal + + + + + + EDGAR Filing Portal + + + + + + Online Forms Management Portal + + + + + + EDGAR Next + + + + + + Forms Index + + + + + + Filer Support & Resources + + + + + + + + + + + + + Data & Research + + + + + + + + + Data & Research + + + + + + + + + Data Library + + + + + + Statistics & Data Visualizations + + + + + + Structured Data + + + + + + Investment Management Data + + + + + + Open Data at the SEC + + + + + + + + + + + + + Rules, Enforcement, & Compliance + + + + + + + + + + + + + + + + + + + + Rules & Regulations + + + + + + + + + Rulemaking Activity + + + + + + Submit Public Comments + + + + + + Staff Guidance + + + + + + No-Action, Interpretive, and Exemptive Letters + + + + + + Self-Regulatory Organization Rulemaking + + + + + + Public Petitions for Rulemaking + + + + + + + + + + + + + + + + + Enforcement & Litigation + + + + + + + + + Litigation Releases + + + + + + Administrative Proceedings + + + + + + Administrative Law Judge Orders and Initial Decisions + + + + + + Trading Suspensions + + + + + + Distributions to Harmed Investors + + + + + + Receiverships + + + + + + + + + + + + + + + + + Compliance + + + + + + + + + Examination Priorities + + + + + + Risk Alerts + + + + + + Compliance Outreach Program + + + + + + + + + + + + + + + + + + + + + + + Proposed Rules + + + + + + What's New + + + + + + Whistleblower Program + + + + + + + + + + + + + + + + + + + Featured Topics + + + + + + + + + Featured Topics + + + + + + + + + Crypto Task Force + + + + + + Cybersecurity + + + + + + Market Structure Analytics + + + + + + Saving and Investing for Military Personnel + + + + + + Saving and Investing for Teachers + + + + + + SEC-CFTC Harmonization Initiative + + + + + + Treasury Clearing Implementation + + + + + + + + + + + + + About + + + + + + + + + About + + + + + + + + + Mission + + + + + + Commissioners + + + + + + Divisions & Offices + + + + + + Division & Office Directors + + + + + + Advisory Committees + + + + + + Budget & Performance + + + + + + Reports & Publications + + + + + + Commission Votes + + + + + + Contact the SEC + + + + + + Careers + + + + + + + + + + + + + Submit a Tip or Complaint + + + + + + + + + + + + + + + + + Newsroom + + + | + + + Investors + + + Small Businesses + + + Whistleblowers + + + + + + + + + + + + + + + Newsroom + + + | + + + Investors + + + Small Businesses + + + Whistleblowers + + + + + + + + + + + + + + + + + Search SEC.gov & EDGAR + + + + + + Search + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + More in this Section + + + + + + + + + + + + + Enforcement & Litigation + + + + + + + Litigation Releases + + + + + Administrative Proceedings + + + + + + + Information for Respondents in Administrative Proceedings  + + + + + Open Litigated Administrative Proceedings + + + + + Closed Litigated Administrative Proceedings + + + + + Commission Opinions and Adjudicatory Orders + + + + + Delinquent Filings + + + + + Stop Orders + + + + + + + + Administrative Law Judge Orders and Initial Decisions + + + + + Trading Suspensions + + + + + Distributions to Harmed Investors + + + + + Receiverships + + + + + Electronic Filings in Administrative Proceedings (eFAP) + + + + + Rules of Practice + + + + + Applications for Reentry + + + + + Reports of Investigations + + + + + Whistleblower Program + + + + + Public Alert: Unregistered Soliciting Entities (PAUSE) + + + + + SEC Action Lookup - Individuals (SALI) + + + + + Enforcement Data Delivery Standards + + + + + Small Businesses + + + + + Appellate Briefs + + + + + Amicus / Friend of the Court Briefs + + + + + + + + + + + + + + + + + + + + + + + + + + Enforcement & Litigation + + + + + + + Litigation Releases + + + + + Administrative Proceedings + + + + + + + Information for Respondents in Administrative Proceedings  + + + + + Open Litigated Administrative Proceedings + + + + + Closed Litigated Administrative Proceedings + + + + + Commission Opinions and Adjudicatory Orders + + + + + Delinquent Filings + + + + + Stop Orders + + + + + + + + Administrative Law Judge Orders and Initial Decisions + + + + + Trading Suspensions + + + + + Distributions to Harmed Investors + + + + + Receiverships + + + + + Electronic Filings in Administrative Proceedings (eFAP) + + + + + Rules of Practice + + + + + Applications for Reentry + + + + + Reports of Investigations + + + + + Whistleblower Program + + + + + Public Alert: Unregistered Soliciting Entities (PAUSE) + + + + + SEC Action Lookup - Individuals (SALI) + + + + + Enforcement Data Delivery Standards + + + + + Small Businesses + + + + + Appellate Briefs + + + + + Amicus / Friend of the Court Briefs + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + Home + + + Enforcement and Litigation + + + Administrative Proceedings + + + Gerber Scientific, Inc. + + + + + + + + + + + + Gerber Scientific, Inc. + + + + + + + + + + + + + + + + + + + + + SECURITIES EXCHANGE ACT OF 1934 +Release No. 49541 / April 8, 2004 + + ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 1987 / April 8, 2004 + + ADMINISTRATIVE PROCEEDING +File No. 3-11455 + + + In the Matter of + GERBER SCIENTIFIC, INC., + Respondent. + + : : : : : : : : : : + + + ORDER INSTITUTING CEASE-AND- +DESIST PROCEEDINGS, MAKING +FINDINGS, AND IMPOSING A +CEASE-AND-DESIST ORDER +PURSUANT TO SECTION 21C OF THE +SECURITIES EXCHANGE ACT OF 1934 + I. + + The Securities and Exchange Commission ("Commission") deems it appropriate that cease-and-desist proceedings be, and hereby are, instituted pursuant to Section 21C of the Securities Exchange Act of 1934 ("Exchange Act"), against Gerber Scientific, Inc. ("Gerber," "Company," or "Respondent"). + + II. + + In anticipation of the institution of these proceedings, Respondent has submitted an Offer of Settlement (the "Offer"), which the Commission has determined to accept. Solely for the purpose of these proceedings and any other proceedings brought by or on behalf of the Commission, or to which the Commission is a party, and without admitting or denying the findings herein, except as to the Commission's jurisdiction over it and the subject matter of these proceedings, which Respondent admits, Respondent consents to the entry of this Order Instituting Cease-and-Desist Proceedings, Making Findings, and Imposing a Cease-and-Desist Order Pursuant to Section 21C of the Securities Exchange Act of 1934 ("Order"), as set forth below. + + + III. + + On the basis of this Order and Respondent's Offer, the Commission finds 1 as follows: + + RESPONDENT + + Gerber , a Connecticut corporation with its headquarters in South Windsor, Connecticut, is a provider of sign making and specialty graphics, apparel and flexible materials, and ophthalmic lens processing goods and services. During the relevant time, Gerber conducted its business primarily through four subsidiaries: Gerber Scientific Products, Inc. ("GSP"); Spandex PLC; Gerber Technology, Inc.; and Gerber Coburn Optical, Inc. ("Gerber Coburn"). Gerber uses a fiscal year that ends on April 30. Its common stock is registered with the Commission pursuant to Section 12(b) of the Exchange Act and is listed on the New York Stock Exchange. + + SUMMARY + + Gerber violated the antifraud provisions of the federal securities laws when it issued materially inaccurate financial information and failed to correct such information after discovering that it had made an error. While preparing its annual report on Form 10-K for fiscal year 2000, senior management learned that, for the fourth quarter, the Company had failed to record approximately $1.5 million of a $6.2 million decrease in the value of the inventory of the Company's GSP subsidiary. Notwithstanding this information, the Company did not disclose this mistake by correcting its previously issued press release reporting earnings for the quarter and year ended April 30, 2000, and then filed its annual report on Form 10-K with materially inaccurate financial statements and related disclosures. Without disclosure, the Company then sought to eliminate the error by improperly amortizing the $1.5 million error over its next four fiscal quarters. + + In addition, the Company violated financial reporting, record-keeping, and internal controls provisions of the federal securities laws in connection with the $1.5 million error and also in connection with certain reserves. 2 Gerber improperly (a) established reserves for contingencies that did not exist or, at best, were general or unspecified contingencies, (b) established other reserves in amounts for which it lacked support, (c) overstated earnings by using previously established reserves to reduce current period expenses, and (d) overstated operating income by using excess reserves for income tax contingencies to offset unrelated operating expenses. As a result, Gerber's financial statements filed with the Commission for periods at least as early as its fiscal year 1998 and as late as its fiscal quarter ended January 31, 2002 were materially misstated and not in conformity with Generally Accepted Accounting Principles ("GAAP"). + + FACTS + + On August 27, 2002, Gerber filed its annual report on Form 10-K for its fiscal year ended April 30, 2002. In that Form 10-K, Gerber included restated financial statements for its fiscal years ended April 30, 2000 and April 30, 2001, and for the seven quarters ended January 31, 2002; and it also restated its retained earnings as of April 30, 1999. Among other things, the Company included a restatement for its failure to record $1.5 million of a $6.2 million charge to write down the value of the inventory of its GSP subsidiary as well as for the Company's improper establishment and use of various reserves. + + Gerber's Failure to Record $1.5 Million of a $6.2 Million Charge for the +GSP Inventory Overstatement + + By late February 2000, Gerber's senior management was aware of a large discrepancy between the estimated value of GSP's physical inventory, and the value of that inventory reflected on the Company's books. As a result, Gerber senior management ordered an expanded annual review of GSP's inventory. The review was begun by GSP personnel and then completed by a special internal audit team formed to determine the precise amount of the discrepancy. By no later than April 25, 2000, the special audit team informed senior management that GSP's inventory was overstated by approximately $6 million. + + On April 26, 2000, Gerber issued a press release disclosing that it would record a charge of approximately $6 million to write down the value of GSP's inventory. The Company reported that the charge equated to $.17 per share and that, before any restructuring charges, it expected earnings for the fourth quarter of fiscal year 2000 to be reduced to $.08 to $.12 per share and earnings for the year to be $1.16 to $1.20 per share. Prior to the release, analyst expectations for Gerber had been $.42 per share for the fourth quarter and $1.50 per share for the year. + + By early May 2000, the special audit team informed Gerber senior management that the exact amount of the overstatement of GSP's inventory was $6.2 million. On May 25, 2000, Gerber issued a press release announcing its results for the fourth quarter and year ended April 30, 2000. Gerber reported net earnings of $1.7 million or $.08 per share, for the quarter and net earnings of $25.9 million, or $1.16 per share, for the year. Gerber gave the write-down as one of two principal reasons why its earnings for the quarter were lower than the prior year's fourth quarter earnings and stated that, without the write-down, per share earnings for the year would have been $1.34 and thus would have exceeded the prior year's earnings of $1.29 per share. + + During GSP's budgeting process in June 2000, GSP management discovered that the Company actually had recorded only $4.7 million of the $6.2 million charge for the inventory overstatement. GSP management immediately informed Gerber senior management of the error. Had Gerber recorded the entire $6.2 million in the fourth quarter of 2000, reported net earnings would have been $725,000, or $.04 per share, for the quarter and $24.9 million, or $1.12 per share, for the year. 3 + + Upon discovery of the error, Gerber did not correct its May 25, 2000, earnings release. It also did not initially inform its auditor of the error. Instead, on July 27, 2000, Gerber filed its annual report on Form 10-K that included financial statements that reported the same results that Gerber had reported in its May 25, 2000, press release. Those results did not include $1.5 million of the $6.2 million charge required to write-down the value of GSP's inventory. Although the financial results included only $4.7 million of the charge, the Company, in footnotes to the financial statements and other disclosures in the Form 10-K, misstated that it had recorded the entire $6.2 million charge. + + Gerber amortized the $1.5 million error in $375,000 increments in each of the next four quarters (i.e., the four quarters of its fiscal year 2001) even though such amortization was not a permissible method under GAAP to account for the error. 4 No later than August 2000, Gerber discussed the $1.5 million error with its auditor, and the auditor approved a different way of accounting for the error, which Gerber did not use. + + Gerber's Improper Establishment and Use of Reserves + + Gerber also restated its financial statements in August 2002 for the improper establishment and use of reserves. That conduct resulted in both overstatements and understatements of net earnings as well as in overstatements of the Company's operating income. + + The Corporate Reserves + + In approximately 1986, the Company established accounts receivable and inventory reserves on its corporate level books ("corporate reserves"). When Gerber established these reserves, it did not have accounts receivable or inventory held at the corporate level, and the corporate reserves were not established to provide for a specific contingency at any of the Company's subsidiaries. 5 The corporate reserves remained at a relatively constant level, totaling approximately $4 million, until fiscal year 1998. + + During fiscal year 1998, Gerber used $2 million of the corporate reserves to reduce a variety of expenses that it otherwise would have had to record for its Gerber Coburn subsidiary, including expenses related to a company that Gerber acquired during fiscal year 1998. During fiscal year 1999, Gerber used the remaining $2 million of corporate reserves to offset additional Gerber Coburn expenses. 6 These uses of the corporate reserves were improper under GAAP and resulted in an overstatement of net earnings of 25.4%, or $.06 per share, for fiscal year 1998 and of 4.5%, or $.06 per share, for fiscal year 1999. + + Reserve Recorded in Connection with the Sale of a Subsidiary + + In March 1998, Gerber sold one of its subsidiaries. In connection with that sale, the Company recorded a "non-recurring special charge" in the amount of $25 million to write down the value of certain assets of the subsidiary. Part of that charge was used to establish a reserve of approximately $4.2 million ostensibly for unfulfilled customer obligations and other potential liabilities. When Gerber recorded the charge, however, the Company lacked support for the reserved amount. + + During fiscal year 1999, Gerber used the reserve for approximately $1.2 million of costs related to the sale of the subsidiary. The Company, however, also used the reserve to offset $1 million of unrelated severance costs. Then, while it was preparing its annual report on Form 10-K for fiscal year 1999, Gerber and the purchaser of the subsidiary resolved their outstanding claims against one another. 7 The resolution of the claims ended any basis for Gerber to maintain the reserve on its books. The Company reversed the remaining $2 million reserve balance into income for fiscal year 1999, which increased Gerber's reported income for that year. Establishing a reserve without support for the amount recorded and using a reserve for purposes unrelated to the purpose for which the reserve was established are improper under GAAP. Gerber's establishment and subsequent uses of the reserve thus were improper under GAAP and resulted in an understatement of net earnings of 23.7%, or $.10 per share, for fiscal year 1998 and an overstatement of net earnings of 7.1%, or $.09 per share, for fiscal year 1999. 8 + + The Income Tax Reserve + + At all relevant times, Gerber maintained a reserve for income tax contingencies. At the start of each fiscal year, the Company estimated the amount of income tax expenses that it would incur for the current fiscal year and compared that amount to the amount of the reserve recorded on its books. It then recorded quarterly adjustments to the reserve so that the reserve would equal the amount of the anticipated income tax expenses for the year. During the 1990s, Gerber senior management determined that, in any year in which the outstanding reserve exceeded the anticipated income tax expense for the year, the Company would use the excess to reduce certain operating expenses for the year. 9 Using the excess reserve in this manner is improper under GAAP and caused operating income to be overstated. 10 + + For fiscal years 1999 through 2001, Gerber had excess reserves for income tax contingencies. For these years, Gerber used the excess to reduce operating expenses by $1.5 million in 1999, $2 million in 2000, and $0.8 million in 2001. As a result, Gerber's operating income for those years was overstated by 2.8%, 4.3%, and 4% respectively. + + DISCUSSION + + Section 10(b) of the Exchange Act and Exchange Act Rule 10b-5 prohibit, among other things, the making of material misrepresentations or omissions, with scienter, in connection with the purchase or sale of any security. These provisions also make it unlawful to make any untrue statement of a material fact or to omit to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading. A statement is deemed material if there is a "substantial likelihood that a reasonable investor would consider it important" in deciding whether to purchase or sell securities or that a reasonable investor would have viewed disclosure of the omitted fact as altering the "total mix" of information available. Basic Inc. v. Levinson, 485 U.S. 224, 231-32 (1988). + + Section 13(a) of the Exchange Act requires issuers of registered securities to file periodic reports with the Commission containing information prescribed by specific Commission rules. Rule 13a-1 requires the filing of annual reports on Form 10-K. Rule 13a-13 requires the filing of quarterly reports on Form 10-Q. Rule 12b-20 requires, in addition to information required by Commission rules to be included in periodic reports, such further material information as may be necessary to make the required statements not misleading. These reports are required to be complete and accurate. See SEC v. Savoy Industries , 587 F.2d 1149, 1165 (D.C. Cir. 1978). + + Section 13(b)(2)(A) of the Exchange Act requires issuers to "make and keep books, records, and accounts, which in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the issuer." "A company's 'books and records' include not only general ledgers and accounting entries, but also memoranda and internal corporate reports." Gibson Greetings, Inc. , Exchange Act Release No. 34-36357, 60 SEC Docket 1401 (Oct. 11, 1995). Section 13(b)(2)(B) of the Exchange Act requires issuers to devise and maintain a system of internal accounting controls sufficient to provide reasonable assurances that transactions are recorded as necessary to permit preparation of financial statements in conformity with GAAP. + + Gerber's Materially False and Misleading Statements Arising Out of the Failure to Record $1.5 Million of the Inventory Write-Down + + Gerber materially misstated its financial statements when it failed to record $1.5 million of the $6.2 million decrease in the value of GSP's inventory in the fourth quarter of fiscal year 2000. Gerber's financial results reported in its May 25, 2000, press release and financial statements and related disclosures in the Company's annual report on Form 10-K for fiscal year 2000 were, therefore, materially inaccurate. 11 After learning of the $1.5 million error, the Company failed to correct the press release, 12 proceeded to file its Form 10-K with material misstatements, informed its independent accountant it would correct the error in the first quarter of fiscal 2001, failed to do so, and then sought to eliminate the error in a manner that contravened GAAP and hid its true impact. Gerber's actions after the discovery of the $1.5 million error were knowing or reckless and violated Section 10(b) of the Exchange Act and Exchange Act Rule 10b-5. + + Gerber's Inaccurate Periodic Reports and Inadequate Books, Records, and Accounts and Internal Controls + + Companies registered with the Commission pursuant to Section 12 of the Exchange Act, such as Gerber, are required to comply with GAAP in financial statements included in its filings with the Commission. 13 Gerber did not satisfy this requirement because of the misstatements discussed above, including the $1.5 million error and the above-described reserve errors. Those misstatements were due in part to the Company's failure to make and keep accurate books, records, and accounts and to maintain a system of internal accounting controls sufficient to provide reasonable assurances that the company's financial statements were prepared in conformity with GAAP. The inventory valuation system that gave rise to the need for the $6.2 million inventory write-down, the $1.5 million error, and the lack of support for the establishment and use of reserves reflect the inadequacy of the Company's books, records, and accounts and internal controls. As a result of the foregoing, Gerber violated Sections 13(a), 13(b)(2)(A), and 13(b)(2)(B) of the Exchange Act and Exchange Act Rules 12b-20, 13a-1 and 13a-13. + + IV. + + In view of the foregoing, the Commission deems it appropriate to impose the sanctions specified in Respondent Gerber's Offer. + + ACCORDINGLY, THE COMMISSION HEREBY ORDERS THAT , pursuant to Section 21C of the Exchange Act, Gerber cease and desist from committing or causing any violations of, and committing or causing any future violations of, sections 10(b), 13(a), 13(b)(2)(A), and 13(b)(2)(B) of the Exchange Act, and Exchange Act Rules 10b-5, 12b-20, 13a-1, and 13a-13. + + By the Commission. + + + +Jonathan G. Katz +Secretary + + + + + Endnotes + 1 The findings herein are made pursuant to Respondent's Offer of Settlement and are not binding on any other person or entity in this or any other proceeding. + + 2 A "reserve" is a liability account that is reflected on the company's balance sheet. + + 3 Excluding the entire $6.2 million charge, Gerber's reported earnings per share for fiscal year 2000 would have been $.01 per share more than the $1.29 per share that the Company reported for fiscal year 1999, not the $.05 per share increase that the Company reported in its May 25, 2000, press release. + + 4 The amortization resulted in misstatements of earnings in each of the four quarters of fiscal year 2001. When Gerber restated its financial statements, it recorded the $1.5 million in the fourth quarter of fiscal year 2000. + + 5 Thus, these reserves were, at best, for general or unspecified contingencies, which are not allowed under GAAP: "General or unspecified business risks do not meet the conditions for accrual . . ., and no accrual for loss shall be made." Accounting for Contingencies, Statement of Financial Accounting Standards No. 5, Financial Accounting Standards Board (1975). Rather, GAAP provides for a company to establish a reserve if, prior to the issuance date of the company's financial statements, the company has information available that it is probable that an asset has been impaired or a liability has been incurred and the amount of the loss reasonably can be estimated. Id . § 8. + + 6 At least some of the corporate reserves used in 1998 and 1999 were used for expenses related to inventory. Other portions of the reserves were used for expenses unrelated to inventory or accounts receivable, such as severance costs. + + 7 The resolution of the claims provided for the purchaser of the subsidiary to make a payment to Gerber and for Gerber to release claims to royalties for certain future equipment sales. + + 8 As a result of the lack of support for the original reserve amount, when Gerber restated its financial statements, it used the actual amount of the costs incurred in connection with the sale as the reserve amount for fiscal year 1998. + + 9 The operating expenses to be offset were selling, general, and administrative expenses. + + 10 The use of the excess reserves to offset operating expenses would not have altered the amount of net earnings that Gerber would have reported had it accounted for the excess reserve properly. Proper accounting under GAAP for the excess reserve would have been to record the amount of the excess reserves as a reduction of income tax expenses. This would result in the same amount of net earnings as was reported when Gerber used the reserve improperly to reduce operating expenses. The difference, however, is that Gerber's improper application of the excess reserves to reduce operating expenses caused operating earnings to be unduly large. Thus, the effect of Gerber's improper use of this reserve was to create the appearance of greater operating profitability than was the case. + + 11 The improper amortization of the $1.5 million over the four quarters of fiscal year 2001 also resulted in misstatements in the Company's earnings for each of those quarters. + + 12 After it learned that the information in the press release was materially inaccurate, the Company had a duty to correct the information. See, e.g., Stransky v. Cummins Engine Co. , 51 F.3d 1329, 1331 (7th Cir. 1995). + + 13 See 17 C.F.R. § 210.4-01(a)(1). + + + + + +  + + + + + + + + + + + + + + + + + + + + + + + + + Return to top + + + + + SEC homepage + + + + + + + + + + + + + + About the SEC + + + + + + Budget & Performance + + + Careers + + + Commission Votes + + + Contact + + + Contracts + + + + + + + + Transparency + + + + + + Accessibility & Disability + + + Super Intelligence + + + FOIA + + + Inspector General + + + No FEAR Act Data + + + Ombuds + + + SEC Excess Personal Property Guidance + + + + + + + + Websites + + + + + + Investor.gov + + + Related Sites + + + USA.gov + + + + + + + + Site Information + + + + + + Plain Writing + + + Privacy & Security + + + Site Map + + + + + + + + + + + + + + + + + + Stay connected. 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Individuals (SALI) + + + + + Enforcement Data Delivery Standards + + + + + Small Businesses + + + + + Appellate Briefs + + + + + Amicus / Friend of the Court Briefs + + + + + + + + + + + + + + + + + + + + + + + + + + Enforcement & Litigation + + + + + + + Litigation Releases + + + + + Administrative Proceedings + + + + + Administrative Law Judge Orders and Initial Decisions + + + + + Trading Suspensions + + + + + Distributions to Harmed Investors + + + + + Receiverships + + + + + Electronic Filings in Administrative Proceedings (eFAP) + + + + + Rules of Practice + + + + + Applications for Reentry + + + + + Reports of Investigations + + + + + Whistleblower Program + + + + + Public Alert: Unregistered Soliciting Entities (PAUSE) + + + + + SEC Action Lookup - Individuals (SALI) + + + + + Enforcement Data Delivery Standards + + + + + Small Businesses + + + + + Appellate Briefs + + + + + Amicus / Friend of the Court Briefs + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + Home + + + Enforcement and Litigation + + + Litigation Releases + + + Ira Zar, David Rivard, and David Kaplan + + + + + + + + + + + + Ira Zar, David Rivard, and David Kaplan + + + + + + + + + + + + + + + + + + + U.S. Securities and Exchange Commission + + Litigation Release No. 18665 / April 8, 2004 + + Accounting and Auditing Enforcement Release No. 1988 / April 8, 2004 + + + SEC v. Ira Zar , 04 Civ. 1463 (E.D.N.Y.)(Glasser, I.L.); + + SEC v. David Rivard , 04 Civ. 1464 (E.D.N.Y.)(Glasser, I.L.); + + SEC v. David Kaplan , 04 Civ. 1465 (E.D.N.Y.)(Glasser, I.L.). + + On April 8, 2004, the Securities and Exchange Commission filed three related actions against Ira Zar, the former Chief Financial Officer at Computer Associates International, Inc., ("CA"), and David Rivard and David Kaplan, former vice presidents of finance at CA, charging each defendant with committing accounting fraud while at CA. The Commission's complaints, filed in the United States District Court for the Eastern District of New York, allege that Zar, Rivard, and Kaplan participated in a widespread practice that resulted in the improper recognition of revenue by CA, one of the world's largest software companies. During at least CA's fiscal year 2000, which ran from April 1, 1999 through March 31, 2000 ("FY2000"), CA prematurely recognized revenue from software contracts that had not yet been consummated, in violation of Generally Accepted Accounting Principles ("GAAP"). The Commission's complaints allege that, based on this conduct, Zar, Rivard and Kaplan violated Sections 10(b) and 13(b)(5) of the Securities Exchange Act of 1934 ("Exchange Act"), and Rules 10b-5, 13b2-1 and 13b2-2 thereunder. The Complaints further allege that Zar, Rivard and Kaplan are also liable for aiding and abetting CA's violations of Sections 10(b), 13(a) and 13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act, and Rules 10b-5, 12b-20, 13a-1 and 13a-13 thereunder. Without admitting or denying the allegations of the Complaints, Zar, Rivard and Kaplan each consented to a permanent injunction and officer and director bar, as described more fully below. + + Specifically, the Commission's complaints allege as follows: + + Through the conduct of certain members of CA management, including Zar, Rivard and Kaplan, CA engaged in a practice in which CA held its books open after the end of each quarter and improperly recorded, in that elapsed quarter, revenue from contracts that had not been finalized and executed before the expiration of the quarter (the "Extended Quarters practice"). CA personnel sometimes concealed the Extended Quarters practice by using licensing contracts that falsely bore preprinted signature dates for the last day of the quarter that had just expired, rather than the subsequent dates on which the contracts actually were executed. + + As a result of this improper practice, CA made material misrepresentations and omissions about its revenue and earnings in Commission filings and other public statements for at least FY2000. For the First, Second, Third and Fourth Quarters of FY2000, respectively, at least 18%, 33%, 26% and 7% of CA's reported quarterly revenues pertained to contracts not executed by CA or the company's clients by the quarter's end. For all quarters of FY2000 combined, CA prematurely recognized over $1.4 billion in revenue from at least 116 contracts that the client or CA signed after the quarter close. + + CA's FY2000 reported revenues and earnings per share appeared to meet or exceed the consensus estimates of Wall Street analysts, but CA failed to disclose that those reported results improperly included prematurely recognized revenue and did not comply with GAAP. When CA refrained from recognizing revenue prematurely during the First Quarter of FY2001, the company missed its earnings estimate and CA's stock price dropped over 43% in a single day. + The Commission further alleges that, among other things: + + Zar, as CFO, helped orchestrate CA's improper revenue recognition in FY2000 by directing the improper extensions of fiscal quarters, and by signing and overseeing the preparation of CA's Forms 10-Q and 10-K while aware that those filings reported revenue improperly under GAAP. Zar also backdated his own signature on a large customer contract and authorized the backdating of other contracts. + + Rivard, as head of Sales Accounting, allowed CA to record revenue from contracts in prior quarters while aware that the contracts were executed later, knew that CA customers were backdating signatures on contracts, and actually backdated his own signature on some contracts. + + Kaplan, as a Divisional Vice President and the head of Financial Reporting, oversaw the preparation of CA's financial statements for inclusion in its Forms 10-Q and 10-K while aware that those statements included revenue from backdated contracts in violation of GAAP. + + Zar, Rivard and Kaplan also each misled CA's outside auditors regarding the existence of CA's Extended Quarters practice. + In its lawsuits, the Commission seeks judgments: (a) permanently enjoining Zar, Rivard and Kaplan from violating, and aiding and abetting violations of, the securities laws; (b) requiring Zar, Rivard and Kaplan to disgorge their ill-gotten gains together with prejudgment interest; (c) imposing civil money penalties; and (d) barring Zar, Rivard and Kaplan from acting as officers or directors of any publicly held company. + + Concurrently with the filing of the Commission's complaint, Zar, Rivard and Kaplan, without admitting or denying the allegations of the Complaint, each consented to entry of a permanent injunction prohibiting them from violating Sections 10(b) and 13(b)(5) of the Exchange Act and Rules 10b-5, 13b2-1, and 13b2-2 thereunder, and from aiding and abetting any violations of Sections 10(b), 13(a), 13(b)(2) of the Exchange Act and Rules 10b-5, 12b-20, 13a-1 and 13a-13. They each also consented to a permanent bar from serving as an officer or director of a publicly held company. Litigation against Zar, Rivard, and Kaplan with respect to the Commission's claims of disgorgement and penalties is continuing. + + The Commission acknowledges the assistance of the United States Attorney's Office for the Eastern District of New York and the Federal Bureau of Investigation in this matter. The Commission's investigation is continuing. + + See prior Litigation Release No. 18552 . + + + SEC Complaint in this matter (David Kaplan) + + + + SEC Complaint in this matter (David Rivard) + + + + SEC Complaint in this matter (Ira Zar) + + + + + + +  + + + + + + + + + + + + + + + + + + + + + + + + + Return to top + + + + + SEC homepage + + + + + + + + + + + + + + About the SEC + + + + + + Budget & Performance + + + Careers + + + Commission Votes + + + Contact + + + Contracts + + + + + + + + Transparency + + + + + + Accessibility & Disability + + + Super Intelligence + + + FOIA + + + Inspector General + + + No FEAR Act Data + + + Ombuds + + + SEC Excess Personal Property Guidance + + + + + + + + Websites + + + + + + Investor.gov + + + Related Sites + + + USA.gov + + + + + + + + Site Information + + + + + + Plain Writing + + + Privacy & Security + + + Site Map + + + + + + + + + + + + + + + + + + Stay connected. 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Individuals (SALI) + + + + + Enforcement Data Delivery Standards + + + + + Small Businesses + + + + + Appellate Briefs + + + + + Amicus / Friend of the Court Briefs + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + Home + + + Enforcement and Litigation + + + Administrative Proceedings + + + John Luczycki, CPA + + + + + + + + + + + + John Luczycki, CPA + + + + + + + + + + + + + + + + + + + SECURITIES ACT OF 1933 +Release No. 8406 / April 14, 2004 + + SECURITIES EXCHANGE ACT OF 1934 +Release No. 49561 / April 14, 2004 + + ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 1989 / April 14, 2004 + + ADMINISTRATIVE PROCEEDING +File No. 3-11457 + + + + + + + + In the Matter of + + JOHN LUCZYCKI, CPA, + + Respondent. + + + : + : + : + : + : + : + : + : + : + : + + ORDER INSTITUTING PUBLIC + ADMINISTRATIVE AND CEASE- + AND-DESIST PROCEEDINGS + PURSUANT TO SECTION 8A OF + THE SECURITIES ACT OF 1933, + SECTION 21C OF THE SECURITIES + EXCHANGE ACT OF 1934 AND RULE + 102(e) OF THE COMMISSION'S + RULES OF PRACTICE, MAKING + FINDINGS, AND IMPOSING + REMEDIAL SANCTIONS AND A + CEASE-AND-DESIST ORDER + + + + + I. + + The Securities and Exchange Commission ("Commission") deems it appropriate that public administrative and cease-and-desist proceedings be, and hereby are, instituted against John Luczycki, CPA ("Respondent" or "Luczycki") pursuant to Section 8A of the Securities Act of 1933 ("Securities Act"), Section 21C of the Securities Exchange Act of 1934 ("Exchange Act") and Rule 102(e)(1)(iii) of the Commission's Rules of Practice. 1 + + II. + + In anticipation of the institution of these proceedings, Respondent has submitted an Offer of Settlement (the "Offer") which the Commission has determined to accept. Solely for the purpose of these proceedings and any other proceedings brought by or on behalf of the Commission, or to which the Commission is a party, and without admitting or denying the findings herein, except as to the Commission's jurisdiction over him and the subject matter of these proceedings, Respondent consents to the entry of this Order Instituting Public Administrative and Cease-and-Desist Proceedings Pursuant to Section 8A of the Securities Act of 1933, Section 21C of the Securities Exchange Act of 1934 and Rule 102(e) of the Commission's Rules of Practice, Making Findings, and Imposing Remedial Sanctions and a Cease-and-Desist Order ("Order"), as set forth below. + + III. + + On the basis of this Order and Respondent's Offer, the Commission finds that: + + A. RESPONDENT + + 1. John Luczycki, age 42, is a resident of Yorktown Heights, New York. From December 2000 to July 2002, Luczycki was the Chief Accounting Officer and controller of Vivendi Universal, S.A. ("Vivendi"). During this time period, Luczycki assisted in the preparation of Vivendi's Commission filings, shared responsibility for Vivendi's system of internal controls, and helped to maintain Vivendi's books, records, and accounts. Luczycki has been licensed as a CPA in New York since 1988. Luczycki recently placed his CPA license on inactive status. + + B. RELEVANT ENTITY + + 2. Vivendi is a French corporation which, during 2001 and 2002, maintained corporate offices in Paris, France and in New York, New York. Vivendi's current headquarters are in Paris. During all relevant times, Vivendi's American Depository Shares were registered with the Commission pursuant to Section 12(g) of the Exchange Act and were traded on the New York Stock Exchange, and Vivendi was required to file annual reports on Form 20-F with the Commission pursuant to Section 13(a) of the Exchange Act and Rule 13a-1 thereunder. + + C. FACTS + + Luczycki's Participation in Improper Adjustments to Increase Vivendi's Reported Earnings Before Interest, Taxes, Depreciation, and Amortization ("Ebidta") for The Second and Third Quarters Of 2001 + + 3. During two quarters in 2001, Vivendi met ambitious earnings targets by improperly making adjustments to the reserve accounts of certain Vivendi subsidiaries, and by making other improper accounting entries. As a result, this financial information was misleading and was not reported in conformity with U.S. Generally Accepted Accounting Principles ("GAAP"). + + 4. In or about December 2000, Vivendi publicly predicted that it would generate annual EBITDA growth of 35% during 2001. This EBITDA target was repeated on numerous occasions in filings that Vivendi made with the Commission during 2000 and 2001. + + Second Quarter 2001 EBITDA Adjustments + + 5. In late June 2001, Vivendi's senior executives became concerned that its EBITDA growth for the quarter ended June 30, 2001 might not meet or exceed market expectations. As a result, Luczycki and other senior executives made various improper adjustments that raised Vivendi's EBITDA by almost €59 million 2 , or 5% of the total EBITDA of €1.12 billion that Vivendi reported for that quarter. + + 6. In the weeks leading up to Vivendi's earnings release for the second quarter of 2001, Luczycki and others increased Vivendi's EBITDA primarily by causing Cegetel Group ("Cegetel"), a French telecommunications company in which Vivendi, at the time, held a 44% interest, to depart from its historical methodology for determining the level of its reserve for bad debts (accounts receivable). That departure resulted in Cegetel taking a lower provision for bad debts during that quarter than its historical methodology required. This improper departure caused Cegetel's bad debts reserve for the second quarter of 2001 to be €45 million less than it should have been. As a result, Vivendi's overall EBITDA for that period was increased by the same amount. + + 7. During the relevant time period, Cegetel's financial results were fully consolidated into Vivendi's financial statements, which at that time were prepared in accordance with GAAP in France, but reconciled to U.S. GAAP. Under U.S. GAAP, Statement of Financial Accounting Standards No. 5 ("FAS 5") precludes the use of reserves, including excess reserves, for general or unknown business risks, and the systemic or time release of reserves into income. Further, FAS 5, paragraph 23, states that an estimate of losses on accounts receivable "normally depend[s] on, among other things, the experience of the enterprise… and appraisal of the receivables in light of the current economic environment." + + 8. Luczycki was at least reckless in not knowing that Cegetel's reduction to its provision for bad debts during the second quarter of 2001 was made without the level of documentation and analysis that was required. Further, the decision to take a lower provision for bad debts in the second quarter of 2001 occurred at a time when Cegetel was actually having more difficulty collecting on its bad debts. + + 9. In addition to taking a lesser bad debt provision in the second quarter of 2001, Cegetel also improperly deferred to the third quarter of 2001 approximately €14 million in provisions for potential future payments and potential liabilities that Cegetel properly should have booked in the second quarter of 2001. Altogether, those adjustments at Cegetel totaled €59 million and enabled Vivendi to show overall EBITDA growth of 35% for the second quarter of 2001. + + 10. At the time that Luczycki incorporated Cegetel's results into Vivendi's consolidated earnings release, he was at least reckless in not knowing that the accounting adjustments at Cegetel were made without proper supporting documentation. As a result, Vivendi's reconciled U.S. GAAP financial statements (which incorporated Cegetel's results) were not in conformity with the requirements of FAS 5. + + 11. Vivendi issued a press release on July 23, 2001 boasting that it had achieved 35% EBITDA growth for the second quarter of 2001. The press release also represented that, except for Canal+ (the French cable company Vivendi acquired in December 2000) and certain publishing operations, the results contained in the press release were "U.S. GAAP based." As a result of the various improper adjustments made to Cegetel's reserve accounts in the second quarter of 2001, these representations in Vivendi's press release were misleading. + + 12. Vivendi also made misleading claims in this press release about the increase in the performance of its "telecoms," including Cegetel, over the second quarter of 2000, when in reality over 8% of the telecoms' EBITDA came from the improper adjustments of accounting reserves in violation of FAS 5. + + 13. The market reacted favorably to Vivendi's July 23, 2001 press release. For example, analysts observed that Vivendi had beaten the expectations and results of its main competitors in the media industry. One analyst noted that Vivendi's results were a "pleasant surprise," while another news report specifically noted that the results of Cegetel and Vivendi's other telecommunications businesses "defied ... the telecommunications meltdown." On the day that Vivendi announced its results, its share price increased by 5% in the United States and 5.5% on the Paris exchange. + + Third Quarter 2001 EBITDA Adjustments + + 14. Improper adjustments to Vivendi's EBITDA also occurred in the third quarter of 2001, affecting the results of Vivendi's music division, Universal Music Group ("UMG"). Luczycki and others participated in making these adjustments so that Vivendi could reach a pre-determined EBITDA target of €250 million. + + 15. In late October 2001, Luczycki and other senior executives at Vivendi temporarily reduced the amount of corporate overhead charges it allocated to UMG by €7 million. This reduction in the corporate overhead charges equaled the exact amount of additional earnings that Vivendi's senior executives determined that UMG would need in order to reach €250 million in EBITDA for the quarter ended September 30, 2001. + + 16. The corporate overhead adjustment occurred after UMG had submitted its accounts to Vivendi for the quarter. Moreover, this accounting adjustment to UMG's EBITDA was made without proper documentation and was not in conformity with U.S. GAAP. The reduction in allocated overhead charges was not in conformity with U.S. GAAP because it did not comply with Statement of Financial Accounting Concepts No. 6 ("SFAC 6") or Statement of Financial Accounting Standards No. 131 ("SFAS 131"). SFAC 6, "Elements of Financial Statements," states that allocations are assigned and distributed "according to a plan or a formula." SFAS 131, "Disclosures about Segments of an Enterprise and Related Information," provides that amounts allocated to reported segment profit or loss "shall be allocated on a reasonable basis." In contrast, Luczycki and others based the overhead allocation charged to UMG not on a plan or formula, but on a desire to reach a specific EBITDA target. + + 17. This improper adjustment increased UMG's reported EBITDA for the third quarter ended September 30, 2001, by at least €7 million, or approximately 3% of UMG's total EBITDA of €250 million for that quarter. + + 18. Luczycki incorporated UMG's improperly adjusted results into Vivendi's third quarter earnings release. + + Luczycki's Participation in Vivendi's Concealment of €1.1 Billion in Material Commitments + + 19. Luczycki knew or was reckless in not knowing that Vivendi failed to disclose a side agreement that Vivendi entered into in February 2001 to purchase an additional €1.1 billion stake in Maroc Telecom, a telecommunications operator of fixed line and mobile telephony and Internet services based in Morocco. + + 20. In December 2000, the Moroccan government sponsored an auction of 35% of the state-owned Maroc Telecom. Vivendi won the auction with a bid of €2.35 billion. Under the terms of the auction, the Moroccan government, which would retain a 65% stake in Maroc Telecom, required Vivendi to execute a shareholder agreement that would maintain the Moroccan government's control over Maroc Telecom's operations. The terms of that shareholder agreement precluded Vivendi from consolidating Maroc Telecom's results. + + 21. Vivendi, however, wanted to gain control of Maroc Telecom and consolidate its results because Maroc Telecom carried little debt and generated substantial EBITDA. By consolidating Maroc Telecom, Vivendi hoped to increase its EBITDA performance and, more importantly, improve the debt/EBITDA ratio used by credit rating agencies to evaluate Vivendi's credit. + + 22. In February 2001, Vivendi and the Moroccan government entered into a side agreement that required Vivendi to purchase an additional 16% of Maroc Telecom's shares in February 2002 for approximately €1.1 billion. In return, the Moroccan government granted Vivendi certain management rights over the operations of Maroc Telecom upon which Vivendi based its consolidation of Maroc Telecom. + + 23. Luczycki and others knew or were reckless in not knowing about the existence and terms of the side agreement and failed to disclose that Vivendi had committed to purchasing an additional 16% stake in Maroc Telecom, contingent upon the Moroccan government's exercise of the irrevocable put, by February 2002 for €1.1 billion. Vivendi failed to disclose these facts in its public filings with the Commission, the Commission des Op©rations de Bourse ("COB"), the French securities regulator, and in other public statements that it made in 2001. + + 24. For example, on July 2, 2001, Vivendi filed its Form 20-F for the fiscal year ended December 31, 2000, approved by senior executives, which disclosed the following about Maroc Telecom: + + PURCHASE OF INTEREST IN MAROC TELECOM +In December 2000, we announced that we had acquired a 35% stake in Moroccan telecommunications operator Maroc Telcom for approximately €2.3 billion. Maroc Telecom, which operates fixed-line and mobile telephone networks in Morocco, is estimated to have generated revenue of approximately €1.3 billion in 2000. In cooperation with Maroc Telecom, we intend to contribute our telecoms experience to the modernization of the telecommunications industry in Morocco. + + 25. By omitting to disclose the Maroc Telecom side agreement, and in particular Vivendi's commitment to pay an additional €1.1 billion in February 2002 for additional shares of Maroc Telecom, Vivendi's Form 20-F was materially false and misleading. + + 26. Vivendi also failed to disclose its commitment with respect to Maroc Telecom in its periodic filing with the COB for the six-month period ended June 30, 2001. On October 17, 2001, Vivendi furnished an English translation of that filing to the Commission on Form 6-K. The COB filing and Vivendi's Form 6-K were reviewed and allowed to be filed by Luczycki and other Vivendi senior executives. + + Luczycki's Participation in Vivendi's Failure to Disclose All Material Facts Concerning the Telco Transaction + + 27. Luczycki also participated in Vivendi's failure to disclose in a timely manner all material facts concerning its investment in a fund that purchased a 2% stake in Telco, a Polish telecommunications holding company. + + 28. In June 2001, Vivendi, which owned 49% of Telco's equity, publicly announced its intention to purchase an additional 2% of Telco's shares from Vivendi's partner in the Telco joint venture. This purchase would have increased Vivendi's ownership of Telco equity from 49% to 51%. Vivendi anticipated that it would have to pay approximately €100 million for the additional Telco shares. + + 29. After this announcement, Vivendi learned that Poland's antitrust authorities would have to approve the acquisition, a process that could have taken several months. Vivendi also learned that the market in general, and the credit rating agencies in particular, might react negatively to Vivendi's acquisition of additional Telco shares. As a result, rather than directly purchasing the 2% interest in Telco, Vivendi deposited $100 million into an investment fund administered by Soci©t© G©n©rale Bank & Trust Luxembourg. That fund subsequently purchased a 2% stake in Telco in September 2001, and continues to own those shares. + + 30. Vivendi did not disclose all material details about this transaction until 2003. Instead, Vivendi's Form 20-F for the fiscal year ended December 31, 2001, the relevant portion of which Luczycki edited and approved, states only the following concerning Vivendi's interest in Telco: + + Participation in Elektrim - In September 2001, Elektrim Telekomunikacja (Telco), in which Vivendi Universal has a 49% interest, acquired all of Elektrim S.A.'s landline telecommunications and Internet assets. + + 31. Vivendi's statements and omissions concerning Telco in its Form 20-F for the fiscal year ended December 31, 2001 created the false and misleading impression that Vivendi maintained no more than a 49% financial interest in Telco, whether directly or indirectly, and failed to disclose that it had invested in a fund that purchased a 2% stake in Telco. + + E. VIOLATIONS + + 32. Based on the foregoing, the Commission finds that Luczycki (a) willfully violated Section 17(a) of the Securities Act of 1933 ("Securities Act") and Sections 10(b) and 13(b)(5) of the Exchange Act and Rules 10b-5 and 13b2-1 promulgated thereunder; and (b) willfully aided and abetted and caused Vivendi's violations of Sections 13(a), 13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act, and Rules 12b-20 and 13a-1 promulgated thereunder. + + IV. + + In view of the foregoing, the Commission deems it appropriate to impose the sanctions agreed to in Respondent Luczycki's Offer + + Accordingly, it is hereby ORDERED, effective immediately, that: + + + + + + + + + Luczycki shall cease and desist from committing or causing any violations and any future violations of Section 17(a) of the Securities Act and Sections 10(b) and 13(b)(5) of the Exchange Act and Rules 10b-5 and 13b2-1 promulgated thereunder; and from causing any violations and any future violations of Sections 13(a), 13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act, and Rules 12b-20 and 13a-1 promulgated thereunder; + Luczycki is denied the privilege of appearing or practicing before the Commission as an accountant. + After 3 years from the date of this order, Respondent may request that the Commission consider his reinstatement by submitting an application (attention: Office of the Chief Accountant) to resume appearing or practicing before the Commission as: + + + + + + a preparer or reviewer, or a person responsible for the preparation or review, of any public company' s financial statements that are filed with the Commission. Such an application must satisfy the Commission that Respondent's work in his practice before the Commission will be reviewed either by the independent audit committee of the public company for which he works or in some other acceptable manner, as long as he practices before the Commission in this capacity; and/or + an independent accountant. Such an application must satisfy the Commission that: + + + (a) Respondent, or the public accounting firm with which he is associated, is registered with the Public Company Accounting Oversight Board ("Board") in accordance with the Sarbanes-Oxley Act of 2002, and such registration continues to be effective; + + (b) Respondent, or the registered public accounting firm with which he is associated, has been inspected by the Board and that inspection did not identify any criticisms of or potential defects in the respondent's or the firm's quality control system that would indicate that the respondent will not receive appropriate supervision or, if the Board has not conducted an inspection, has received an unqualified report relating to his, or the firm's, most recent peer review conducted in accordance with the guidelines adopted by the former SEC Practice Section of the American Institute of Certified Public Accountants Division for CPA Firms or an organization providing equivalent oversight and quality control functions; + + (c) Respondent has resolved all disciplinary issues with the Board, and has complied with all terms and conditions of any sanctions imposed by the Board (other than reinstatement by the Commission); and + + (d) Respondent acknowledges his responsibility, as long as Respondent appears or practices before the Commission as an independent accountant, to comply with all requirements of the Commission and the Board, including, but not limited to, all requirements relating to registration, inspections, concurring partner reviews and quality control standards. + + + The Commission will consider an application by Respondent to resume appearing or practicing before the Commission provided that his state CPA license is current and he has resolved all other disciplinary issues with the applicable state boards of accountancy. However, if state licensure is dependant on reinstatement by the Commission, the Commission will consider an application on its other merits. The Commission's review may include consideration of, in addition to the matters referenced above, any other matters relating to Respondent's character, integrity, professional conduct, or qualifications to appear or practice before the Commission. + + + + By the Commission. + + + Jonathan G. Katz +Secretary + + Endnotes + + + + + + + 1 Rule 102(e)(1)(iii) provides, in relevant part, that: +The Commission may deny, temporarily or permanently, the privilege of appearing or practicing before it to any person who is found…to have willfully violated, or willfully aided and abetted the violation of any provision of the Federal securities laws or the rules and regulations thereunder. + + 2 During the relevant time period the exchange rate for Euros to U.S. Dollars ranged from a high of approximately €1.18 to the U.S. Dollar to a low of €1.01 to the U.S. Dollar. + + + + + + + + + + + + + + + + + + + + + + + + + Return to top + + + + + SEC homepage + + + + + + + + + + + + + + About the SEC + + + + + + Budget & Performance + + + Careers + + + Commission Votes + + + Contact + + + Contracts + + + + + + + + Transparency + + + + + + Accessibility & Disability + + + Super Intelligence + + + FOIA + + + Inspector General + + + No FEAR Act Data + + + Ombuds + + + SEC Excess Personal Property Guidance + + + + + + + + Websites + + + + + + Investor.gov + + + Related Sites + + + USA.gov + + + + + + + + Site Information + + + + + + Plain Writing + + + Privacy & Security + + + Site Map + + + + + + + + + + + + + + + + + + Stay connected. 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Winger and Paul R. Humphreys + + + + + + + + + + + + Kenneth W. Winger and Paul R. Humphreys + + + + + + + + + + + + + + + + + + + + + SECURITIES EXCHANGE ACT OF 1934 +Release No. 49565 / April 15, 2004 + + ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 1990 / April 15, 2004 + + ADMINISTRATIVE PROCEEDING +File No. 3-11458 + + + In the Matter of + KENNETH W. WINGER, +Chartered Accountant, and +PAUL R. HUMPHREYS, +Chartered Accountant, + Respondents. + + : : : : : : : : : : : : : + + ORDER INSTITUTING PUBLIC +ADMINISTRATIVE PROCEEDING AND +IMPOSING A TEMPORARY SUSPENSION +PURSUANT TO RULE 102(e)(3) OF THE +COMMISSION'S RULES OF PRACTICE I. + + The Securities and Exchange Commission ("Commission") deems it appropriate and in the public interest to issue an order temporarily suspending Kenneth W. Winger ("Winger") and Paul R. Humphreys ("Humphreys") ("Respondents") pursuant to Rule 102(e)(3) of the Commission's Rules of Practice. 1 + + II. + + The Commission's public files disclose that: + + Winger was Safety-Kleen Corp.'s ("Safety-Kleen") President and Chief Executive Officer and a member of its Board of Directors until his resignation in May 2000. Winger, 65 years old, is a Canadian citizen, resides in Canada, and, at all relevant times, was licensed in Canada as a chartered accountant. + + Humphreys was Safety-Kleen's Senior Vice President and Chief Financial Officer until his resignation in May 2000. Humphreys, 44 years old, is a Canadian citizen, resides in Canada, and, at all relevant times, was licensed in Canada as a chartered accountant. On December 12, 2002, Humphreys was indicted by a federal grand jury in the Southern District of New York on one count each of conspiracy, securities fraud, and bank fraud. + + Safety-Kleen is a Delaware corporation that was headquartered in Columbia, South Carolina during the relevant time period. Safety-Kleen's stock was registered with the Commission pursuant to Section 12(b) of the Securities Exchange Act of 1934 ("Exchange Act") and was listed for trading on the New York Stock Exchange until it was delisted on June 12, 2000. On June 9, 2000, Safety-Kleen and 73 of its wholly-owned domestic subsidiaries filed a voluntary petition for reorganization under Chapter 11 of the Bankruptcy Code. On December 24, 2003, Safety-Kleen emerged from bankruptcy as a private company. + III. + + The Commission makes the following findings: + + On December 12, 2002, the Commission filed a complaint against Safety-Kleen, Winger, Humphreys, and two other senior executives in SEC v. Safety-Kleen Corp., et al., 02 Civ. 9791 (S.D.N.Y.). The Commission alleged, among other things, that Winger and Humphreys knowingly or recklessly engaged in a fraudulent accounting scheme in which Commission filings made by Safety-Kleen between November 1998 and March 2000, and press releases issued by the company during the same time period, contained materially false and misleading financial statements and disclosures. The complaint also alleged that Winger and Humphreys made false and misleading statements and omissions to auditors. In addition, the complaint alleged that Humphreys knowingly circumvented and failed to implement internal accounting controls and knowingly falsified and caused others to falsify the company's books, records, and accounts. The Complaint alleged that Humphreys violated Section 17(a) of the Securities Act of 1933 ("Securities Act") [15 U.S.C. §77q(a)] and Sections 10(b) and 13(b)(5) of the Exchange Act [15 U.S.C. § 78j(b) and 78m(b)(5)] and Rules 10b-5, 13b2-1, and 13b2-2 [17 C.F.R. 240. §§10b-5, 13b2-1, and 13b2-2] thereunder; and that Winger violated Section 17(a) of the Securities Act [15 U.S.C. §77q(a)] and Section 10(b) of the Exchange Act [15 U.S.C. § 78j(b)] and Rules 10b-5 and 13b2-2 [17 C.F.R. 240. §§10b-5 and 13b2-2] thereunder. + + On November 18, 2003, the court entered a final judgment, by default, finding that Winger and Humphreys violated Section 17(a) of the Securities Act of 1933, Section 10(b) of the Securities Exchange Act of 1934 and Rules 10b-5 and 13b2-2 promulgated thereunder, that Humphreys violated Section 13(b)(5) of the Exchange Act and Rule 13b2-1 thereunder, and enjoining Winger and Humphreys from future violations of those same provisions. The court also ordered that Winger and Humphreys be prohibited from acting as an officer or director of any public company, that Winger pay disgorgement and prejudgment interest in the amount of $249,323.55, and a civil penalty in the amount of $190,471.58, and that Humphreys pay disgorgement and prejudgment interest in the amount of $85,832.46, and a civil penalty in the amount of $65,562.00. + IV. + + Based on the foregoing, the Commission finds that Winger and Humphreys have been enjoined and have been found to have violated provisions of the federal securities laws within the meaning of Rule 102(e)(3) of the Commission's Rules of Practice. In view of this finding the Commission deems it necessary and appropriate and in the public interest that Winger and Humphreys be temporarily suspended from appearing or practicing before the Commission. + + Accordingly, it is hereby ORDERED, effectively immediately, that Winger and Humphreys are temporarily suspended from appearing or practicing before the Commission. + + It is FURTHER ORDERED that Winger and Humphreys may within thirty (30) days after service of this Order, file a petition with the Commission to lift the temporary suspension. If no petition is received by the Commission within thirty (30) days after service of the Order, the suspension shall become permanent pursuant to Rule 102(e)(3)(ii). + + If a petition is received within thirty (30) days after service of this Order, the Commission shall either lift the temporary suspension, or set the matter down for a hearing at a time and place to be designated by the Commission, or both. If a hearing is ordered, following the hearing, the Commission may lift the suspension, censure the petitioner, or disqualify the petitioner from appearing or practicing before the Commission for a period of time or permanently pursuant to Rule 102(e)(3)(iii). + + This Order shall be served upon Winger and Humphreys personally or by certified mail. + + + By the Commission. + + + + + + + +Jonathan G. Katz +Secretary + + Endnotes + 1 Rule 102(e)(3) of the Commission's Rules of Practice provides, in pertinent part, that: + + (i) The Commission, with due regard to the public interest and without preliminary hearing, may, by order, temporarily suspend from appearing or practicing before it any . . . accountant . . . who has been by name . . . permanently enjoined by any court of competent jurisdiction, by reason of his or her misconduct in an action brought by the Commission, from violating or aiding and abetting the violation of any provision of the Federal securities laws or of the rules and regulations thereunder. + + +  + + + + + + + + + + + + + + + + + + + + + + + + + Return to top + + + + + SEC homepage + + + + + + + + + + + + + + About the SEC + + + + + + Budget & Performance + + + Careers + + + Commission Votes + + + Contact + + + Contracts + + + + + + + + Transparency + + + + + + Accessibility & Disability + + + Super Intelligence + + + FOIA + + + Inspector General + + + No FEAR Act Data + + + Ombuds + + + SEC Excess Personal Property Guidance + + + + + + + + Websites + + + + + + Investor.gov + + + Related Sites + + + USA.gov + + + + + + + + Site Information + + + + + + Plain Writing + + + Privacy & Security + + + Site Map + + + + + + + + + + + + + + + + + + Stay connected. 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Reid + + + + + + + + + + + + James E. Reid + + + + + + + + + + + + + + + + + + + + + SEC v. James E. Reid (United States District Court for the District of Massachusetts, Civil Action No. 04-CV-10832-JLT). + + The Commission announced today that it has filed a civil fraud action against James E. Reid, a Canadian businessman, for causing Firepond, Inc., a software development company formerly based in Waltham, Massachusetts, to materially misstate its financial results for two quarters in 2002. The Commission's complaint alleges that in January and April 2002, Reid caused Firepond to make these material misstatements by fabricating license agreements with three purported customers of the software developer, forging signatures and correspondence, and engaging in an elaborate scheme with confederates and impersonators to prevent Firepond from discovering his wrongdoing. Earlier today, Reid was arrested on federal criminal charges involving the same conduct charged in the Commission's complaint and made an initial appearance in federal court in Buffalo on the criminal charges. Prior to his appearance, an indictment presented by the U.S. Attorney's Office for the District of Massachusetts and returned by a federal grand jury sitting in Boston was unsealed. + + According to the Commission's complaint, Reid, who was acting vice president of North American sales at Firepond for much of the relevant period, conducted several sales meetings on behalf of Firepond with Bombardier, Inc., a large equipment manufacturer based in Montreal, Canada. Although the sales meetings stalled and Bombardier never purchased Firepond software, on December 19, 2001, Reid provided Firepond management with a purported executed license agreement between Firepond and Bombardier worth approximately $3.5 million in revenue. According to the Commission's complaint, Reid had forged the name of a high-level Bombardier executive to the agreement. Reid was paid over $156,000 in commissions for the forged Bombardier deal. The Commission's complaint also alleges that Reid used similar methods to create forged contracts with two other Firepond customers. Firepond is now headquartered in Minnesota. + + In its Complaint, the Commission further alleged that, due to Reid's deception, Firepond filed materially misleading financial statements for the two fiscal quarters ended January 31, 2002 and April 30, 2002 and issued misleading press and earnings releases, all of which reported results that included revenue and other information from the agreements Reid had falsified. The Commission's complaint alleged that Reid's conduct violated certain provisions of the federal securities laws, specifically Sections 10(b) and 13(b)(5) of the Securities Exchange Act of 1934 and Rules 10b-5, 13b2-1 and 13b2-2 thereunder. The Commission's complaint also alleged that Reid aided and abetted Firepond's uncharged violation of Sections 13(a) and 13(b)(2)(A) of the Exchange Act and Rules 12b-20 and 13a-13 thereunder. + + The Commission's civil case has been assigned to the Honorable Joseph L. 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Bakal, et al. + + + + + + + + !function(){var e=navigator.userAgent,a=document.documentElement,n=a.className;n=n.replace("no-js","js"),/iPad|iPhone|iPod/.test(e)&&!window.MSStream&&(n+=" ua-ios"),a.className=n}(); + {"path":{"baseUrl":"\/","pathPrefix":"","currentPath":"node\/493966","currentPathIsAdmin":false,"isFront":false,"currentLanguage":"en"},"pluralDelimiter":"\u0003","suppressDeprecationErrors":true,"gtag":{"tagId":"","consentMode":false,"otherIds":[],"events":[],"additionalConfigInfo":[]},"ajaxPageState":{"libraries":"eJxdT0GOwzAI_JBdn_oei2DkeINNZLC22devlaZS2wtiBhhmcKNUTPo97jxyaXEH3GJpiZrFhQW38A4cMqgeYQGlV19JFTKpQ-kUmvQKXP7I0cO4tC2kPnbg2wVdFslM0SCHPMs3vsEPPD7J6hgOGdPCKJyoRxxqUuePHjLLAuzVjimenRJGSLW08NoBK9LUn6SHlrytVOlcpJShB63QLSpBx_WkOzHNePol4fRQo_qMPvQ36ZXsAmd99lMNr2t_GUR9n60EyX9a_wePd5ns","theme":"uswds_sec","theme_token":null},"ajaxTrustedUrl":[],"gtm":{"tagId":null,"settings":{"data_layer":"dataLayer","include_classes":false,"allowlist_classes":"","blocklist_classes":"","include_environment":false,"environment_id":"","environment_token":""},"tagIds":["GTM-TD3BKV"]},"data":{"extlink":{"extTarget":false,"extTargetAppendNewWindowDisplay":true,"extTargetAppendNewWindowLabel":"(opens in a new window)","extTargetNoOverride":false,"extNofollow":false,"extTitleNoOverride":false,"extNoreferrer":false,"extFollowNoOverride":false,"extClass":"0","extLabel":"(link is external)","extImgClass":false,"extSubdomains":true,"extExclude":".*\\.gov|http:\/\/www.xbrl.org\/utr\/2013-05-17\/utr.xml|http:\/\/www.xbrl.org\/dtr\/type\/numeric-2009-12-16.xsd|http:\/\/www.xbrl.org\/dtr\/type\/nonNumeric-2009-12-16.xsd|https:\/\/secir.secure.force.com\/ombudsman\/OMMSForm","extInclude":"","extCssExclude":".data-exempt","extCssInclude":"","extCssExplicit":"","extAlert":true,"extAlertText":"You are now leaving the SEC Website. 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Bakal, et al. + + + + + + + + + + + + Dennis A. Bakal, et al. + + + + + + + + + + + + + + + + + + + U.S. SECURITIES AND EXCHANGE COMMISSION + Litigation Release No. 18684 / April 27, 2004 + + Accounting and Auditing Enforcement +Release No. 1993 / April 27, 2004 + + Securities and Exchange Commission v. Dennis A. Bakal, et al., United States District Court for the Northern District of Georgia, Civil Action No. 1:03-CV-2909-CC + + On April 22, 2004, the Honorable Clarence Cooper, U. S. District Judge for the Northern District of Georgia, entered a Final Judgment as to defendant William S. Cole (Cole), controller of Professional Transportation Group, Ltd., Inc. (Professional Transportation), a trucking business headquartered in Marietta, Georgia. The judgment enjoined Cole from further violations of Sections 10(b), 13(a), 13(b)(2)(A) and 13(b)(5) of the Securities Exchange Act of 1934 and Rules 10b-5, 12b-20, 13a-13 and 13b2-1 thereunder. Cole consented to the entry of the judgment without admitting or denying any of the allegations of the Commission's Complaint. Cole was also ordered to pay a civil penalty in the amount of $25,000. + The Complaint alleges that Cole and others engaged in a scheme to inflate the company's net income by recording sales and receivables actually earned by another trucking entity controlled by Professional Transportation's majority shareholder. This scheme caused the company to fraudulently report a cumulative net profit of $1.4 million for the six months ended June 30, 2000, instead of a net loss of $1.7 million. + + + + SEC Complaint in this matter --> + + + + + + + + + + + + + + + + + + + + + + + + + + Return to top + + + + + SEC homepage + + + + + + + + + + + + + + About the SEC + + + + + + Budget & Performance + + + Careers + + + Commission Votes + + + Contact + + + Contracts + + + + + + + + Transparency + + + + + + Accessibility & Disability + + + Super Intelligence + + + FOIA + + + Inspector General + + + No FEAR Act Data + + + Ombuds + + + SEC Excess Personal Property Guidance + + + + + + + + Websites + + + + + + Investor.gov + + + Related Sites + + + USA.gov + + + + + + + + Site Information + + + + + + Plain Writing + + + Privacy & Security + + + Site Map + + + + + + + + + + + + + + + + + + Stay connected. 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Sullivan, United States District Court Judge for the District of Columbia, entered a final judgment by default against Edward David Gable, the chairman and former chief operating officer of Carnegie International Corporation, in a civil action instituted by the Securities and Exchange Commission in July 2003. The final judgment permanently enjoins Gable from future violations of the federal securities laws, permanently bars him from serving as an officer or director of a public company, and orders him to pay disgorgement of $843,028, prejudgment interest of $257,833 and civil penalties of $110,000. + + The permanent injunction against Gable prohibits him from violating Section 17(a) of the Securities Act of 1933 and Sections 10(b), 13(b)(5) and 16(a) of the Securities Exchange Act of 1934 ("Exchange Act") and Exchange Act Rules 10b-5, 13b2-1, 13b2-2 and 16a-2 and 16a-3. The permanent injunction further prohibits Gable from aiding and abetting violations of Exchange Act Sections 12(g), 13(a), 13(b)(2)(A), and 13(b)(2)(B), and Exchange Act Rules 12b-20 and 13a-1. These provisions prohibit the commission of fraud, and impose requirements relating to an issuer's books and records, internal controls and reporting obligations, and a corporate insider's obligation to disclose transactions in a corporation's securities. + + The Commission alleged in its Complaint that Gable and others carried out a financial fraud that resulted in Carnegie fraudulently reporting millions of dollars in revenue and income for several transactions in filings with the Commission from 1998 through 2000. The Complaint also alleged that Gable personally benefited from the fraud by selling Carnegie shares at inflated prices through an offshore trust, and failed to disclose these sales in filings with the Commission, as required by federal securities law. + + Gable was one of seven defendants, including Carnegie and certain of its other current and former officers, sued by the Commission in July 2003. The other six defendants, two of whom were also named as relief defendants, settled this action by consenting, at the time the action was instituted, to the entry of final judgments against them, without admitting or denying the allegations of the Commission's Complaint. The Court's entry of the final judgment by default against Gable brings this civil action to a conclusion. + + For further information, see Litigation Release No. 18229 (July 14, 2003). + + + + +  + + + + + + + + + + + + + + + + + + + + + + + + + Return to top + + + + + SEC homepage + + + + + + + + + + + + + + About the SEC + + + + + + Budget & Performance + + + Careers + + + Commission Votes + + + Contact + + + Contracts + + + + + + + + Transparency + + + + + + Accessibility & Disability + + + Super Intelligence + + + FOIA + + + Inspector General + + + No FEAR Act Data + + + Ombuds + + + SEC Excess Personal Property Guidance + + + + + + + + Websites + + + + + + Investor.gov + + + Related Sites + + + USA.gov + + + + + + + + Site Information + + + + + + Plain Writing + + + Privacy & Security + + + Site Map + + + + + + + + + + + + + + + + + + Stay connected. 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Individuals (SALI) + + + + + Enforcement Data Delivery Standards + + + + + Small Businesses + + + + + Appellate Briefs + + + + + Amicus / Friend of the Court Briefs + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + Home + + + Enforcement and Litigation + + + Administrative Proceedings + + + California Amplifier, Inc. + + + + + + + + + + + + California Amplifier, Inc. + + + + + + + + + + + + + + + + + + + + + SECURITIES EXCHANGE ACT OF 1934 +Release No. 49630 / April 29, 2004 + + ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 1995 / April 29, 2004 + + ADMINISTRATIVE PROCEEDING +File No. 3-11469 + + + In the Matter of + CALIFORNIA AMPLIFIER, INC., + Respondent. + + : : : : : : : : : : + + ORDER INSTITUTING CEASE-AND- +DESIST PROCEEDINGS, MAKING +FINDINGS, AND IMPOSING A CEASE +-AND-DESIST ORDER PURSUANT TO +SECTION 21C OF THE SECURITIES +EXCHANGE ACT OF 1934 I. + + The Securities and Exchange Commission ("Commission") deems it appropriate and in the public interest that cease-and-desist proceedings be, and hereby are, instituted pursuant to Section 21C of the Securities Exchange Act of 1934 ("Exchange Act"), against California Amplifier, Inc. ("California Amplifier" or "Respondent"). + + II. + + In anticipation of the institution of these proceedings, Respondent has submitted an Offer of Settlement (the "Offer") which the Commission has determined to accept. Solely for the purpose of these proceedings and any other proceedings brought by or on behalf of the Commission, or to which the Commission is a party, and without admitting or denying the findings herein, except as to the Commission's jurisdiction over it and the subject matter of these proceedings, Respondent consents to the entry of this Order Instituting Cease-and-Desist Proceedings, Making Findings, and Imposing a Cease-and-Desist Order Pursuant to Section 21C of the Securities Exchange Act of 1934 ("Order"), as set forth below. + + III. + + FACTS + + On the basis of this Order and Respondent's Offer, the Commission finds 1 that: + + A. RESPONDENT + + California Amplifier is a Delaware corporation now located in Oxnard, California that manufactures microwave telecommunications products. During the relevant period, California Amplifier's common stock was registered with the Commission under Section 12(g) of the Exchange Act and traded on NASDAQ's National Market System. + + B. OTHER RELEVANT PERSON + + Barry Richard Kusatzky, ("Kusatzky") age 52, is currently an Illinois resident. Kusatzky was California Amplifier's corporate controller from January 1997 to March 2001. + + C. SUMMARY + + For fiscal 2000 and much of fiscal 2001, California Amplifier failed to establish or maintain internal accounting controls sufficient to provide reasonable assurance that its financial statements were prepared in accordance with generally accepted accounting principles ("GAAP"). This lack of adequate internal controls allowed Kusatzky to commit fraud, caused the failure of the company to discover that Kusatzky was not a CPA as he had represented, resulted in books and records that failed to accurately reflect the company's transactions, caused numerous other accounting errors, and caused California Amplifier to file materially false and misleading periodic reports with the Commission. + + From November 1999 through January 2001, Kusatzky hid at least $7.8 million in expenses by fabricating financial statements, falsifying the company's books and records, and thereafter, concealing his fraud by presenting false records to auditors. In fiscal 2000, Kustazky hid expenses of $5.9 million, thereby causing the company to report a profit when it actually incurred a loss. For the subsequent three quarters of fiscal 2001, Kusatzky hid at least $1.9 million in expenses. Kusatzky's fraud went undetected because of the company's lack of adequate internal controls. In fiscal 2000 and the first three quarters of fiscal 2001, California Amplifier's financial statements were generated from a spreadsheet maintained by Kusatzky on his own desktop computer. This spreadsheet was wholly separate from the company's accounting system. California Amplifier had no internal control to verify the accuracy of the information in his spreadsheet, such as by tying the information to the company's general ledger. As a result, once Kusatzky improperly created lower expenses on this spreadsheet, he was able to falsify California Amplifier's financial statements because Kusatzky's fraudulent spreadsheet was incorporated directly into the company's quarterly filings with the Commission. In addition, Kusatzky later made fraudulent journal entries to the company's general ledger without any supervision or requirement that such entries be reviewed or adequately substantiated. These journal entries matched the false entries previously made on his spreadsheet and led the company to file a materially false Form 10-K for the year 2000. In addition and unconnected to Kusatzky's fraud, the company's inadequate internal controls also caused numerous accounting errors to go undetected. These errors led to the restatement by California Amplifier of additional financial statements to those restated due solely to Kusatzky's actions. California Amplifier addressed the internal controls deficiencies exposed by Kusatzky's actions in a prompt manner upon their discovery. + + D. BACKGROUND + + On March 29, 2001, California Amplifier issued a press release stating that its corporate controller had admitted -- in writing -- that he was responsible for concealing expenses that were originally recorded, thereby causing the company to overstate net income for fiscal year 2000. + + After an internal investigation and review of its financial statements, California Amplifier confirmed that net income was misstated in each of the quarters of fiscal year 2000, and further revealed that net income for the first three quarters of fiscal year 2001 was also misstated. In addition, a reaudit of California Amplifier's books and records identified other inaccuracies on its financial statements for fiscal years 2000 and 2001. Thereafter, California Amplifier filed amendments to its Form 10-K for fiscal year 2000, and Forms 10-Q for the fiscal quarters during 2000 and 2001. + + E. CALIFORNIA AMPLIFIER'S IMPROPER ACCOUNTING + + The net adjustments to California Amplifier's income statement for the period beginning in the first quarter of fiscal year 2000, through the third quarter of fiscal year 2001, were as follows: + +   Overstatement (Under-statement) Pretax Income (In thousands) Overstatement (Understatement) 1st Q FY 2000 (2/28/99-5/29/99) $187 50% 2nd Q FY 2000 5/30/99-8/28/99 $(51) (3%) 3rd Q FY 2000 8/29/99-11/27/99 $3,373 376% Turned loss Into profit 4th Q FY 2000 11/28/99-2/26/00 $2,222 25% Fiscal Year Totals $5,731 72% Turned Gross Loss to Gross Profit 1st Q FY 2001 02/27/00-5/27/00 $906 37% 2nd Q FY 2001 5/28/00-8/26/00 $1,286 58% 3rd Q FY 2001 8/27/00-11/25/00 $688 23% Total $8,611 As described below, Kusatzky was responsible for at least $7.83 million, or 91%, of the total $8.61 million overstatement of pretax income. By hiding expenses, Kusatzky not only inflated earnings by approximately $7.83 million, he also caused California Amplifier to overstate equity by the same amount. Concealing expenses also caused California Amplifier to improperly compute and recognize a deferred tax asset of approximately $5.0 million during fiscal 2000. 2 Recognition of the deferred tax asset caused California Amplifier to further overstate equity. + + Kusatzky was responsible for hiding manufacturing expenses totaling over $5 million for the purpose of inflating California Amplifier's reported profit during fiscal years 2000 and 2001. During this time, Kusatzky used his personal computer to create false quarterly financial statements that he knew would be the basis of California Amplifier's quarterly press releases and quarterly filings with the Commission. Kusatzky also made false entries in California Amplifier's accounting records to conceal his malfeasance from auditors. + + The following is a description of each of the restatements made by California Amplifier for the period beginning February 28, 1999 through November 25, 2000. + + 1. Restatement for the First Quarter of Fiscal 2000: +February 28, 1999 through May 29, 1999 + + During the first quarter of fiscal 2000, California Amplifier overstated pretax income by a net total of $187,000. The overstatement was the result of errors in sales (net overstatement: $165,000), cost of sales (net understatement: $105,000), operating expenses (net overstatement: $66,000) and other income (net understatement: $17,000). None of these misstatements were due to intentional wrongdoing. These errors caused the company to materially overstate earnings per share by 50% (from $0.02 per share to $0.03 per share). + + In addition to the overstatement of pretax income, numerous items on the company's balance sheet were misstated which required adjustments as follows: + + Balance Sheet Data (in thousands) As Originally Reported Restatement Adjustments As Restated % Change Cash and cash equivalents $6,280 $(73) $6,207 1 % Accounts receivable, net 8,376 404 8,780 - 5 % Inventories 4,091 (111) 3,980 3 % Deferred tax asset 1,505 67 1,572 - 4 % Prepaid expenses & other current assets 544 4 548 - 1 % Property and equipment, net 5,649 (626) 5,023 12 % Goodwill, net of amortization 3,826 + 17 3,843 - 0.4 % Other assets $ 481 $ 219 700 - 31.0 % Accounts payable 4,172 (66) 4,106 2 % Accrued liabilities 2,006 88 2,094 - 4 % Stockholders' equity 20,398 (121) 20,277 0.59 % 2. Restatement for the Second Quarter of Fiscal 2000 +May 30, 1999 to August 29, 1999 + + During the second fiscal quarter of 2000, California Amplifier understated pretax income by $51,000. The understatement was due to errors in sales (net understatement: $82,000), cost of goods sold (net understatement: $74,000), operating expenses (net overstatement: $51,000) and other expenses (net understatement: $8,000). In addition, due to the company's inadequate internal controls, the company's balance sheet contained numerous misstatements that required adjustment as follows: + + Balance Sheet Data (in thousands) + As Originally Reported + Restatement Adjustments + As Restated + % Change + Cash and cash equivalents + $ 7,186 + $ (4) + $ 7,182 + 1 % + Accounts receivable, net + 10,810 + 1,912 + 12,722 + - 15 % + Inventories + 4,887 + 535 + 5,422 + - 2 % + Deferred tax asset + 988 + 132 + 1,120 + - 12 % + Prepaid expenses & other current assets + 552 + (22) + 530 + 4 % + Goodwill, net of amortization + 3,748 + 219 + 3,967 + - 6 % + Other assets + 859 + 190 + 1,049 + - 18 % + Accounts payable + 6,002 + 3,315 + 9,317 + - 36 % + Accrued liabilities + 3,347 + (266) + 3,081 + 9 % + Stockholders' equity + 21,604 + (87) + 21,517 + 0.4 % + 3. Restatement for the Third Quarter of Fiscal 2000: +August 29, 1999 to November 27, 1999 + + During the third quarter of fiscal year 2000, California Amplifier overstated pretax income by $3.37 million (376%) and similarly overstated shareholder's equity by $3.045 million (12%). The overstatement of income caused California Amplifier to report an after-tax profit of approximately $1.58 million, concealing the fact that the company had actually incurred a loss for the quarter. As described below, Kusatzky was responsible for the entire overstatement of income and equity during this fiscal quarter. + + Beginning in November 1999, Kusatzky prepared false financial statements that he knew would be incorporated into California Amplifier's Form 10-Q for the three-month period ending November 27, 1999. During the preparation of California Amplifier's financial statements, Kusatzky used his personal computer to create a spreadsheet containing California Amplifier's consolidated financial statements. He then knowingly and purposely lowered the general ledger figures for expenses and liabilities by $3.4 million to increase California Amplifier's reported profit. In preparing the financial statements, Kusatzky input figures from the general ledger into an electronic spreadsheet. Kusatzky formulated the spreadsheet so that during the consolidation, it would automatically lower the general ledger figures for expenses and accounts payable. Kusatzky then provided the false financial statements to California Amplifier's CFO, with full knowledge that they would be reported to investors and filed with the Commission. At this point in time, Kusatzky did not alter the company's general ledger to match the changes he made to the spreadsheet because the company based its filings on Kusatzky's financial statements and did not have any internal control to verify whether the information matched the general ledger. California Amplifier has since addressed these internal control deficiencies. + + 4. The False Financials are Publicly Disclosed and Filed + + After the market closed on December 8, 1999, California Amplifier publicly reported the false financial results for the quarterly period ended November 27, 1999. The market responded favorably to the news that the company had a quarterly profit of $1.58 million, and on December 9, 1999, California Amplifier's stock price opened at $31.44 per share, $4.44 (approximately 16%) above its closing price of $27.00 per share on December 8, 1999. Thereafter, on January 11, 2000, the company filed its Form 10-Q with the Commission. Kusatzky knew that instead of turning an after-tax profit of $1.58 million for the third quarter of fiscal year 2000, California Amplifier had actually incurred an after-tax loss of $570,000. + + 5. Restatement for the 2000 Fiscal Year + + For fiscal year 2000, California Amplifier overstated pre-tax income by approximately $5.7 million (72%) and shareholders' equity by $9.47 million (51%). Kusatzky was directly responsible for all of the overstatement of income and shareholders' equity for the year-end totals. + + In order to conceal the fraud from auditors, Kusatzky falsified California Amplifier's books and records by making improper adjustments to the company's general ledger. Specifically, during the latter half of February 2000, a short time before the annual audit was to start, Kusatzky made two improper journal entries. The first entry improperly reduced various cost of sales accounts (expense accounts) and reduced accounts payable by approximately $3.6 million. By making this adjustment, the false financial statements for the third quarter now agreed with the general ledger. + + In addition to the false entries of $3.6 million (described above), during the fourth quarter of fiscal year 2000, Kusatzky made an additional improper adjustment to the company's general ledger. Kusatzky improperly increased assets and lowered liabilities by approximately $2.2 million. Kusatzky carefully concealed these improper adjustments from Arthur Andersen, the company's auditors. California Amplifier had no internal control requiring that Kusatzky's journal entries be substantiated or verified by anyone else at the company to determine their authenticity or accuracy. In effect, Kusatzky was able to make unsupervised journal entries to the company's general ledger and such entries went unchecked by any internal control. California Amplifier has since addressed this internal control deficiency. + + 6. Kusatzky Continues Fabricating California +Amplifier's Financial Statements + + As described below, Kusatzky continued to use his spreadsheet to falsify the company's financial statements throughout the first three quarters of fiscal 2001. For the first quarter of fiscal 2001, due to Kusatzky's actions, California Amplifier overstated pretax income by $906,000 (37%). During the second quarter of fiscal 2001, due to Kusatzky's actions, California Amplifier overstated pretax income by $1.29 million (58%). During the second quarter of fiscal 2000, Kusatzky also made several improper adjustments that together overstated earnings and equity by approximately $1.35 million. During the third quarter of fiscal 2001, California Amplifier overstated net income by $688,000 (23%). Kusatzky's fraudulent adjustments totaled at least $118,000. + + IV. + + LEGAL ANALYSIS + + A. Exchange Act Reporting Provisions + + Section 13(a) of the Exchange Act requires issuers of securities registered pursuant to Section 12 of the Exchange Act to file periodic reports containing information prescribed by Commission rules and regulations. Pursuant to Section 13(a), the Commission has promulgated Rules 13a-1 and 13a-13, which require issuers to file annual and quarterly reports, respectively. Exchange Act Rule 12b-20 requires that these periodic reports contain all additional information necessary to ensure that other statements in the reports are not, under the circumstances, materially misleading. The obligation to file reports under Rules 13a-1 and 13a-13 embodies the requirement that such reports be true and correct. See SEC v. Kalvex, Inc., 425 F. Supp. 310, 316 (S.D.N.Y. 1975); SEC v. IMC International, Inc., 384 F. Supp. 899, 893 (N.D. Texas) aff'd, 505 F.2d 733 (5th Cir. 1974). + + By filing financial statements in quarterly and annual filings with the Commission for fiscal years 2000 and 2001 that were not prepared in conformity with GAAP, California Amplifier violated Section 13(a) of the Exchange Act and Rules 12b-20, 13a-1, and 13a-13 thereunder. See In the Matter of Oxford Health Plans, Inc., 2002 WL 1688400, SEC Release 34-46254 at 4. (Filing financial statements not in conformity with GAAP violates Section 13(a) of the Exchange Act and Rules 12b-20, 13a-1, 13a-13 thereunder.) + + B. Exchange Act Record Keeping and Internal Controls Provisions + + Section 13(b)(2)(A) of the Exchange Act requires issuers to keep books, records and accounts that, in reasonable detail, accurately and fairly reflect company transactions and disposition of assets. Section 13(b)(2)(B) of the Exchange Act requires, among other things, that issuers "devise and maintain a system of internal accounting controls" that is sufficient to provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in conformity with generally accepted accounting principles. Under Section 13(b)(7) of the Exchange Act, the phrases "reasonable detail" and "reasonable assurance" mean such level of detail and degree of assurance as would satisfy prudent officials in the conduct of their own business. Violations of Sections 13(b)(2)(A) and 13(b)(2)(B) do not require a showing of materiality or scienter. SEC v. World-Wide Coin Invs., Ltd., 567 F. Supp. 724, 749-51 (N.D. Ga. 1983). + + During each of the quarters of fiscal 2000, and the first three quarters of fiscal 2001, California Amplifier materially overstated income and equity. It also caused numerous errors in its balance sheet and therefore violated Section 13(b)(2)(A) of the Exchange Act in that the company's books and records failed accurately and fairly to reflect company transactions and disposition of assets. The company similarly violated Section 13(b)(2)(B) of the Exchange Act because it failed to devise and maintain a system of internal accounting controls that was sufficient to provide reasonable assurance that transactions were recorded as necessary to permit preparation of financial statements in conformity with generally accepted accounting principles. The deficiency of California Amplifier's internal controls is demonstrated by the fact that the company failed to conduct an adequate background check that would have revealed that Kusatzky was not a CPA as he represented, and further, that Kusatzky had not earned a college degree in accounting. The company's internal control deficiency is also demonstrated by the fact that, during the third quarter of fiscal 2000, and during the first three quarters of fiscal 2001, California Amplifier published, and thereafter filed with the Commission, quarterly financial statements that were created by Kusatzky essentially on a computer system maintained independent of the company's general ledger. In addition, Kusatzky later made fraudulent journal entries to the company's general ledger without any supervision or requirement that such entries be reviewed or adequately substantiated. These journal entries matched the false entries previously made on his spreadsheet and led to the company's filing of a materially false 2000 Form 10-K. In such circumstances, California Amplifier failed to devise and maintain internal accounting controls sufficient to reasonably assure that reported financial statements agreed with the general ledger. + + In determining to accept the Offer, the Commission considered remedial acts promptly undertaken by Respondent and cooperation afforded the Commission staff. + + V. + + In view of the foregoing, the Commission deems it appropriate to accept California Amplifier's Offer and to impose the sanctions specified therein. + + Accordingly, it is hereby ORDERED: + + Pursuant to Section 21C of the Exchange Act, that Respondent California Amplifier cease and desist from committing or causing any violations and any future violations of Sections 13(a), 13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act and Rules 12b-20, 13a-1 and 13a-13 promulgated thereunder. + + By the Commission. + + +Jonathan G. Katz +Secretary + + + Endnotes + 1 The findings herein are made pursuant to Respondent's Offer of Settlement and are not binding on any other person or entity in this or any other proceeding. + + 2 The value of the deferred tax asset was tied to the company's earnings. By inflating earnings, Kusatzky caused the value of the deferred tax asset to be overvalued, thereby further inflating shareholders' equity. + + + + +  + + + + + + + + + + + + + + + + + + + + + + + + + Return to top + + + + + SEC homepage + + + + + + + + + + + + + + About the SEC + + + + + + Budget & Performance + + + Careers + + + Commission Votes + + + Contact + + + Contracts + + + + + + + + Transparency + + + + + + Accessibility & Disability + + + Super Intelligence + + + FOIA + + + Inspector General + + + No FEAR Act Data + + + Ombuds + + + SEC Excess Personal Property Guidance + + + + + + + + Websites + + + + + + Investor.gov + + + Related Sites + + + USA.gov + + + + + + + + Site Information + + + + + + Plain Writing + + + Privacy & Security + + + Site Map + + + + + + + + + + + + + + + + + + Stay connected. 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("California Amplifier"), engaged in accounting fraud and insider trading. Specifically, the Complaint alleges that Kusatzky caused California Amplifier to materially overstate income and equity in its quarterly and annual financial statements for the period November 27, 1999 through November 25, 2000, by hiding $7.8 million in Company expenses. Kusatzky accomplished this fraud by fabricating financial statements and falsifying the Company's books and records. Kusatzky also concealed his fraud by presenting false records to California Amplifier's auditors. + + According to the Complaint, in January 2000, before his fraud was discovered, Kusatzky illegally profited from his misdeeds. At that time, with full knowledge of his wrongdoing, Kusatzky exercised all his vested options and sold all his 15,000 shares of California Amplifier stock while in possession of material, non-public information that the Company's earnings were materially overstated. The Complaint alleges that at the time of his insider sales, Kusatzky knew that California Amplifier's earnings for the quarter ended November 27, 1999 were materially overstated because he was solely responsible for overstating them. Kusatzky's illegal sales enabled him to avoid losses of over $350,000. The Complaint also alleges that in March 2001, on the day before the Company's annual audit was to begin, Kusatzky confessed to his fraud. In a handwritten note provided to Company officials, Kusatzky admitted to hiding expenses and to making California Amplifier's "P+L look better." The Complaint alleges that Kusatzky's "confession" neither revealed the extent of his misstatement of California Amplifier's financial statements, nor acknowledged his insider trading. + + The Complaint alleges that Kusatzky violated Section 17(a) of the Securities Act of 1933 (the "Securities Act"), Sections 10(b) and 13(b)(5) of the Securities Exchange Act of 1934 (the "Exchange Act") and Rules 10b-5, 13b2-1 and 13b2-2 thereunder, and aided and abetted California Amplifier's violations of Sections 13(a), 13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act and Rules 12b-20, 13a-1 and 13a-13 thereunder. The Complaint seeks a permanent injunction prohibiting future violations of these provisions, disgorgement, including prejudgment interest, and civil penalties pursuant to Sections 21(d)(3) and 21A of the Exchange Act, and Section 20(d)(1) of the Securities Act. The Commission also seeks an order barring Kusatzky from serving as an officer or director of a public company. + + In a related proceeding, on April 29, 2004, the Commission issued a settled Order against California Amplifier. The Order finds that during fiscal 2000 and much of fiscal 2001, California Amplifier failed to establish or maintain internal accounting controls sufficient to provide reasonable assurance that its financial statements were prepared in accordance with generally accepted accounting principles ("GAAP"). This lack of adequate internal controls allowed Kusatzky to commit fraud, caused the failure of the company to discover that Kusatzky was not a CPA. as he had represented, resulted in books and records that failed to accurately reflect the company's transactions, caused numerous other accounting errors, and caused California Amplifier to file materially false and misleading periodic reports with the Commission. The Order requires that California Amplifier cease and desist from committing or causing any violations and any future violations of Sections 13(a), 13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act and Rules 12b-20, 13a-1 and 13a-13 thereunder. California Amplifier consented to the entry of the Order without admitting or denying the findings therein. + + See In the Matter of California Amplifier, Inc., Admin. Proc. No. 3-11469 - (April 29, 2004). + + + SEC Complaint in this matter + + + + +  + + + + + + + + + + + + + + + + + + + + + + + + + Return to top + + + + + SEC homepage + + + + + + + + + + + + + + About the SEC + + + + + + Budget & Performance + + + Careers + + + Commission Votes + + + Contact + + + Contracts + + + + + + + + Transparency + + + + + + Accessibility & Disability + + + Super Intelligence + + + FOIA + + + Inspector General + + + No FEAR Act Data + + + Ombuds + + + SEC Excess Personal Property Guidance + + + + + + + + Websites + + + + + + Investor.gov + + + Related Sites + + + USA.gov + + + + + + + + Site Information + + + + + + Plain Writing + + + Privacy & Security + + + Site Map + + + + + + + + + + + + + + + + + + Stay connected. 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Roberts + + + + + + + + !function(){var e=navigator.userAgent,a=document.documentElement,n=a.className;n=n.replace("no-js","js"),/iPad|iPhone|iPod/.test(e)&&!window.MSStream&&(n+=" ua-ios"),a.className=n}(); + {"path":{"baseUrl":"\/","pathPrefix":"","currentPath":"node\/368086","currentPathIsAdmin":false,"isFront":false,"currentLanguage":"en"},"pluralDelimiter":"\u0003","suppressDeprecationErrors":true,"gtag":{"tagId":"","consentMode":false,"otherIds":[],"events":[],"additionalConfigInfo":[]},"ajaxPageState":{"libraries":"eJxdT0GOwzAI_JBdn_oei2DkeINNZLC22devlaZS2wtiBhhmcKNUTPo97jxyaXEH3GJpiZrFhQW38A4cMqgeYQGlV19JFTKpQ-kUmvQKXP7I0cO4tC2kPnbg2wVdFslM0SCHPMs3vsEPPD7J6hgOGdPCKJyoRxxqUuePHjLLAuzVjimenRJGSLW08NoBK9LUn6SHlrytVOlcpJShB63QLSpBx_WkOzHNePol4fRQo_qMPvQ36ZXsAmd99lMNr2t_GUR9n60EyX9a_wePd5ns","theme":"uswds_sec","theme_token":null},"ajaxTrustedUrl":[],"gtm":{"tagId":null,"settings":{"data_layer":"dataLayer","include_classes":false,"allowlist_classes":"","blocklist_classes":"","include_environment":false,"environment_id":"","environment_token":""},"tagIds":["GTM-TD3BKV"]},"data":{"extlink":{"extTarget":false,"extTargetAppendNewWindowDisplay":true,"extTargetAppendNewWindowLabel":"(opens in a new window)","extTargetNoOverride":false,"extNofollow":false,"extTitleNoOverride":false,"extNoreferrer":false,"extFollowNoOverride":false,"extClass":"0","extLabel":"(link is external)","extImgClass":false,"extSubdomains":true,"extExclude":".*\\.gov|http:\/\/www.xbrl.org\/utr\/2013-05-17\/utr.xml|http:\/\/www.xbrl.org\/dtr\/type\/numeric-2009-12-16.xsd|http:\/\/www.xbrl.org\/dtr\/type\/nonNumeric-2009-12-16.xsd|https:\/\/secir.secure.force.com\/ombudsman\/OMMSForm","extInclude":"","extCssExclude":".data-exempt","extCssInclude":"","extCssExplicit":"","extAlert":true,"extAlertText":"You are now leaving the SEC Website. 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Individuals (SALI) + + + + + Enforcement Data Delivery Standards + + + + + Small Businesses + + + + + Appellate Briefs + + + + + Amicus / Friend of the Court Briefs + + + + + + + + + + + + + + + + + + + + + + + + + + Enforcement & Litigation + + + + + + + Litigation Releases + + + + + Administrative Proceedings + + + + + + + Information for Respondents in Administrative Proceedings  + + + + + Open Litigated Administrative Proceedings + + + + + Closed Litigated Administrative Proceedings + + + + + Commission Opinions and Adjudicatory Orders + + + + + Delinquent Filings + + + + + Stop Orders + + + + + + + + Administrative Law Judge Orders and Initial Decisions + + + + + Trading Suspensions + + + + + Distributions to Harmed Investors + + + + + Receiverships + + + + + Electronic Filings in Administrative Proceedings (eFAP) + + + + + Rules of Practice + + + + + Applications for Reentry + + + + + Reports of Investigations + + + + + Whistleblower Program + + + + + Public Alert: Unregistered Soliciting Entities (PAUSE) + + + + + SEC Action Lookup - Individuals (SALI) + + + + + Enforcement Data Delivery Standards + + + + + Small Businesses + + + + + Appellate Briefs + + + + + Amicus / Friend of the Court Briefs + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + Home + + + Enforcement and Litigation + + + Administrative Proceedings + + + Keith M. Roberts + + + + + + + + + + + + Keith M. Roberts + + + + + + + + + + + + + + + + + + + + + +The Securities and Exchange Commission today announced that it has instituted public administrative cease-and-desist proceedings against Keith Roberts, the former Chief Financial Officer and General Counsel of QuadraMed Corporation, a Virginia health care software company (formerly based in San Rafael, California). The Commission's order alleges that Roberts, 39, of San Francisco, California, caused QuadraMed to inflate its 1998 and 1999 financial results by negotiating two $5 million "roundtrip" transactions with a startup company, in which QuadraMed essentially paid for its own products by funding the customer's purchases. As a result of these sales, the Division of Enforcement charges, QuadraMed improperly boosted its revenue for the third quarter of 1998 by 10%, and inflated its revenue for the first quarter of 1999 by 9%. QuadraMed also understated its net loss from operations by 218% and 12%, respectively, for the same quarters. + +According to the order, in the September 1998 transaction, Roberts caused QuadraMed to fund the startup's entire $5 million purchase by executing a guarantee for a line of credit which the startup used to pay for the software license; the customer had no independent ability to pay for the license. The order further alleges that, in March 1999, Roberts arranged for QuadraMed to wire funds that the startup used to cover a second $5 million purchase from QuadraMed. + +The order charges Roberts with causing QuadraMed's violations of the corporate reporting and record keeping provisions of the federal securities laws, circumventing internal controls and causing records to be falsified, and lying to QuadraMed's outside auditors (Sections 13(a), 13(b)(2)(A) and 13(b)(5) of the Securities and Exchange Act of 1934 and Rules 12b-20, 13a-1, 13a-13, 13b2-1 and 13b2-2 thereunder). Roberts is currently the Executive Vice President, General Counsel and CFO of a privately held California company. + +A hearing will be scheduled before an administrative law judge to determine whether the allegations contained in the Order Instituting Proceedings are true, to provide Roberts an opportunity to dispute these allegations, and to determine whether Roberts should be ordered to cease and desist from future violations. + +Pursuant to the Commission's Rules of Practice, an initial decision shall be issued by the administrative law judge within 300 days from service of the Order Instituting Proceedings upon Roberts. + +  + + SEC Order in this matter + + +  + + + + + + + + + + + Resources + + + + + the Order in this matter + + + + + + + + + + + + + + + + + + + + + + + + Return to top + + + + + SEC homepage + + + + + + + + + + + + + + About the SEC + + + + + + Budget & Performance + + + Careers + + + Commission Votes + + + Contact + + + Contracts + + + + + + + + Transparency + + + + + + Accessibility & Disability + + + Super Intelligence + + + FOIA + + + Inspector General + + + No FEAR Act Data + + + Ombuds + + + SEC Excess Personal Property Guidance + + + + + + + + Websites + + + + + + Investor.gov + + + Related Sites + + + USA.gov + + + + + + + + Site Information + + + + + + Plain Writing + + + Privacy & Security + + + Site Map + + + + + + + + + + + + + + + + + + Stay connected. 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Individuals (SALI) + + + + + Enforcement Data Delivery Standards + + + + + Small Businesses + + + + + Appellate Briefs + + + + + Amicus / Friend of the Court Briefs + + + + + + + + + + + + + + + + + + + + + + + + + + Enforcement & Litigation + + + + + + + Litigation Releases + + + + + Administrative Proceedings + + + + + + + Information for Respondents in Administrative Proceedings  + + + + + Open Litigated Administrative Proceedings + + + + + Closed Litigated Administrative Proceedings + + + + + Commission Opinions and Adjudicatory Orders + + + + + Delinquent Filings + + + + + Stop Orders + + + + + + + + Administrative Law Judge Orders and Initial Decisions + + + + + Trading Suspensions + + + + + Distributions to Harmed Investors + + + + + Receiverships + + + + + Electronic Filings in Administrative Proceedings (eFAP) + + + + + Rules of Practice + + + + + Applications for Reentry + + + + + Reports of Investigations + + + + + Whistleblower Program + + + + + Public Alert: Unregistered Soliciting Entities (PAUSE) + + + + + SEC Action Lookup - Individuals (SALI) + + + + + Enforcement Data Delivery Standards + + + + + Small Businesses + + + + + Appellate Briefs + + + + + Amicus / Friend of the Court Briefs + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + Home + + + Enforcement and Litigation + + + Administrative Proceedings + + + QuadraMed Corporation + + + + + + + + + + + + QuadraMed Corporation + + + + + + + + + + + + + + + + + + + + + SECURITIES EXCHANGE ACT OF 1934 +Release No. 49642 / April 30, 2004 + + ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 1998 / April 30, 2004 + + ADMINISTRATIVE PROCEEDING +File No. 3-11472 + + + In the Matter of + QUADRAMED CORPORATION, + Respondent. + + : : : : : : : : : : + + ORDER INSTITUTING PUBLIC +CEASE-AND-DESIST PROCEEDINGS, +MAKING FINDINGS AND ISSUING A +CEASE-AND-DESIST ORDER PURSUANT +TO SECTION 21C OF THE SECURITIES +EXCHANGE ACT OF 1934 I. + + The Securities and Exchange Commission ("Commission") deems it appropriate and in the public interest that public cease-and-desist proceedings be and hereby are instituted pursuant to Section 21C of the Securities Exchange Act of 1934 ("Exchange Act") against QuadraMed Corporation ("QuadraMed" or "Respondent"). + + II. + + In anticipation of the institution of this proceeding, QuadraMed has submitted an Offer of Settlement ("Offer") which the Commission has determined to accept. Solely for the purpose of this proceeding and any other proceedings brought by or on behalf of the Commission or in which the Commission is a party, and without admitting or denying the findings contained herein except that Respondent admits the jurisdiction of the Commission over it and over the subject matter of this proceeding, Respondent consents to the entry of this Order Instituting Public Cease-and-Desist Proceedings, Making Findings and Issuing a Cease-and-Desist Order Pursuant to Section 21C of the Securities Exchange Act of 1934 ("Order"), as set forth below. + + III. + + On the basis of this Order and the Respondent's Offer, the Commission finds that: + + A. Summary + + 1. This matter involves false financial reporting during 1998 and 1999 by QuadraMed, a health care technology company that fraudulently inflated its revenue by essentially paying for the purchase of its own products. In September 1998 and March 1999, QuadraMed improperly recognized revenue from two reciprocal (or "roundtrip") transactions with another software development firm that had no independent means of paying for QuadraMed's products. In the September 1998 transaction, QuadraMed executed a guarantee for a $12.5 million line of credit, which the customer used to purchase a $5 million software license from QuadraMed. In the March 1999 transaction, QuadraMed wired $5 million to the customer to finance an additional purchase from QuadraMed. In reality, QuadraMed was financing the purchase of its own products. + + 2. As a result of these sales, QuadraMed recorded revenue from which QuadraMed never obtained any economic benefit. QuadraMed's financial statements violated Generally Accepted Accounting Principles ("GAAP"). QuadraMed's recognition of revenue from the transactions was also contrary to GAAP because collectibility for the transactions was not probable absent financial assistance from QuadraMed. QuadraMed improperly reported revenue from these transactions in its financial results contained in press releases and its filings with the Commission. + + B. Respondent + + 3. QuadraMed is a Delaware corporation. During the relevant period, the company was headquartered in San Rafael, California, but has subsequently relocated to Reston, Virginia. QuadraMed sells information technology and consulting services to hospitals and healthcare professionals, and licenses software products. QuadraMed's common stock is registered with the Commission pursuant to Section 12(g) of the Exchange Act. QuadraMed was delisted from the Nasdaq stock market in March 2003, and is currently quoted on the OTC bulletin board. + + C. The September 1998 Transaction + + 4. In July 1998, QuadraMed's then-CFO met with a small, privately-owned health care company (the "customer"). Initially, the customer sought financing from QuadraMed in the form of a $2 million equity investment and a guarantee for a $4 million line of credit. In return, QuadraMed sought technical assistance in developing and integrating products acquired in various acquisitions. However, in September 1998, the customer agreed to purchase a nonexclusive license of source code from QuadraMed for $5 million. In exchange, QuadraMed guaranteed a $12.5 million line of credit to the customer. + + 5. QuadraMed's guarantee was supposedly secured by a lien on all of the customer's assets. However, the customer's financial records for the period ended July 31, 1998, indicate that the company had less than $2 million in total assets, no revenue, and an operating loss of $2 million. Hence, it had no financial ability to pay for QuadraMed's software absent QuadraMed's guarantee of the line of credit. The customer drew down from the line of credit in order to pay QuadraMed for the software license. + + 6. QuadraMed typically offered customers 30-day payment terms. In this instance, however, QuadraMed's then-CFO structured the transaction so that the customer was required to make payment before September 30 (the last day of QuadraMed's third fiscal quarter). Because payment was not outstanding at the end of the quarter, QuadraMed's outside auditors did not analyze the creditworthiness of the customer in order to determine whether collectibility was probable. Had the auditors reviewed the transaction, they could have seen that the customer had no means to pay for the purchase outside of the line of credit guaranteed by QuadraMed, and thus that revenue recognition was improper. + + 7. QuadraMed improperly recognized $4 million in revenue on the sale to the customer in QuadraMed's financial statements for the quarter ended September 30, 1998. On November 16, 1998, QuadraMed filed its Form 10-Q for the third quarter, after previously issuing a press release detailing its financial results. The 10-Q reported total revenue of $43.8 million and net loss of $2.2 million for the quarter. Hence, the improper reciprocal transaction caused QuadraMed's reported revenue to be overstated by about 10% and its reported net loss to be understated by about 218%. + + 8. QuadraMed's Form 10-Q was also deficient because it noted that QuadraMed had extended a loan guarantee to an entity, and that it had entered into a reseller agreement with the same entity, but failed to disclose that the loan guarantee was made to a customer who was using the funds to purchase software from QuadraMed. + + 9. On March 31, 1999, QuadraMed filed its Form 10-K for the fiscal year ended December 31, 1998. The 10-K reported total annual revenue of $159.4 million and a net loss from operations of $14 million. As a result of the improper reciprocal transaction, revenue for the fiscal year was overstated by 2.6% and the company's net loss was understated by 14.6%. As in the Form 10-Q, the Form 10-K mentioned the $12.5 million line of credit guarantee with a "reseller," but omitted any reference to the use of the credit line to pay QuadraMed for the $5 million license. + + D. The March 1999 Transaction + + 10. In February 1999, the same customer contacted QuadraMed's then-CFO to ask for more money to promote the sale of QuadraMed's software products. After further negotiation, QuadraMed and the customer entered into another reciprocal transaction in March 1999. The customer bought a $5 million source code license for a suite of software products from QuadraMed. In return, QuadraMed agreed to prepay non-refundable licensing royalties of $5 million, and to pay the customer $6 million for a software license and source code for another software program. The deal was again structured to allow QuadraMed to improperly report sales revenue, and did not accurately reflect the true character of the transaction. + + 11. As with the September 1998 transaction, QuadraMed structured the transaction so that QuadraMed would receive the customer's payment by the end of the fiscal quarter. As a result, there were no outstanding payments due at the end of the quarter, and the transaction escaped scrutiny by QuadraMed's outside auditors. + + 12. By the time of the second transaction, the customer had exhausted the line of credit guaranteed by QuadraMed. The customer thus lacked sufficient funds to make the $5 million payment to QuadraMed. QuadraMed's then-CFO arranged for QuadraMed to wire funds to the customer that would be used to cover the $5 million payment. In late March 1999, the customer sent QuadraMed a $5 million check. The customer also sent a letter to QuadraMed's then-CFO, which stated: + + In anticipation of funding the transaction contemplated by the Memorandum of Understanding, we are forwarding to you our company check in the amount of $5,000,000. We are providing this with the understanding that you will not present the check for collection at any bank or financial institution until such time as your company wires to us the total sum of $11,000,000 in completion of the various cash transactions agreed upon. + + 13. QuadraMed's outside auditors were never shown the letter, and thus were not informed that the customer was unable to pay for the purchase absent the receipt of funds from QuadraMed. + + 14. QuadraMed recognized $5 million in revenue on the licensing contract with the customer in its financial statements. This revenue was recognized improperly because the customer did not have any money to pay for the transaction until it received funds from QuadraMed. QuadraMed also recorded the pre-paid royalties as an asset in its books and records, in violation of GAAP. + + 15. On May 17, 1999, QuadraMed filed its Form 10-Q for the quarter ended March 31, 1999, after issuing a press release detailing the quarterly results. The Form 10-Q reported revenue of $59.6 million and a net loss of $25.6 million. As a result of the improper reciprocal transaction, QuadraMed's reported revenue was overstated by about 9% and its reported net loss from operations was understated by about 12%. + + 16. On March 29, 2000, QuadraMed filed its Form 10-K for the fiscal year ended December 31, 1999. The 10-K reported revenue of $240 million and a net loss from operations of $9.3 million. Because revenue from the $5 million March 1999 transaction should not have been recognized, QuadraMed's reported revenue for the fiscal year was overstated by about 2% and its reported net loss was understated by about 23%. + + E. Subsequent Events + + 17. During 2000, for reasons unrelated to the matters addressed in this Order, QuadraMed experienced a transition in all of its executive and financial management. The individual who had been CFO during the transactions described above left QuadraMed in April 2000. By the beginning of 2001, QuadraMed had replaced its Chairman, CEO, CFO and Controller. + + 18. In August 2002, QuadraMed issued a series of press releases announcing that the Company would not meet the deadline for filing its Form 10-Q for the quarter ended June 30, 2002; that it was undertaking a restatement of its financial statements for the fiscal years ended December 31, 2000 and 2001, and for the first quarter of 2002; and that it was suspending revenue and earnings guidance. At that time, QuadraMed's audit committee retained forensic accountants to review historical transactions from the 2000-2002 time period, and to establish a framework for resolving issues including revenue recognition on software term licenses and other accounting issues. On October 12, 2002, QuadraMed issued a press release announcing that it had identified issues that would also make it necessary to restate its financial statements for the fiscal year ended December 31, 1999. + + 19. On December 10, 2002, QuadraMed issued a press release announcing that it expected the completion of its SEC filings to be delayed for several weeks, and that as a result it would not meet Nasdaq's deadline for the company's securities to remain listed on Nasdaq. The release also stated that the forensic accounting firm appointed by the audit committee had reported that "its previously announced forensic procedures have not revealed any indications of fraud or intentional wrongdoing." A Reuters story published that day based on the release was entitled, "QuadraMed auditor says no signs of fraud." Later that day, after its forensic accountants apprised management that the first press release was misleading, QuadraMed issued another press release noting that the report of QuadraMed's forensic accountants related to 2000 and 2001, and that the forensic accountants were still reviewing "issues concerning the rationale" for several items reported in QuadraMed's 1999 financial statements. In addition, the December 10 press release represented that QuadraMed expected to meet the Nasdaq listing requirements for shareholder equity, a conclusion that was not supported by draft financial statements in the possession of QuadraMed's then-CFO. The second press release did not address the shareholder equity requirements. + + 20. On June 6, 2003, QuadraMed filed restated financial statements for the fiscal years ended December 31, 1999, December 31, 2000 and December 31, 2001. In its restated financial statements, QuadraMed reversed the revenue from the March 1999 transaction. The financial statements for the year ended December 31, 1998 were not restated. + + F. Legal Conclusions + + 21. As a result of the reciprocal transactions described above, QuadraMed engaged in fraudulent conduct in connection with the purchase or sale of securities by reporting false and misleading financial results in various Commission filings and public statements. QuadraMed also failed to file with the Commission accurate and complete reports, and filed reports that failed to include material information necessary to make its statements not misleading for the periods ended September 30, 1998, December 31, 1998, March 31, 1999 and December 31, 1999. In addition, QuadraMed failed to maintain books, records and accounts that, in reasonable detail, accurately and fairly reflected its transactions and dispositions of assets, and failed to maintain a system of internal accounting controls sufficient to provide reasonable assurances that transactions were recorded as necessary to permit the preparation of financial statements in conformity with GAAP. + 22. Based on the foregoing, the Commission finds that QuadraMed violated Sections 10(b), 13(a), 13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act and Rules 10b-5, 12b-20, 13a-1 and 13a-13 thereunder. + + IV. + + In view of the foregoing, the Commission deems it appropriate to accept the Offer submitted by QuadraMed. Accordingly, IT IS HEREBY ORDERED pursuant to Section 21C of the Exchange Act that QuadraMed cease and desist from committing or causing any violations or any future violations of Sections 10(b), 13(a), 13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act and Rules 10b-5, 12b-20, 13a-1 and 13a-13 thereunder. + + + By the Commission. + + + +Jonathan G. 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Individuals (SALI) + + + + + Enforcement Data Delivery Standards + + + + + Small Businesses + + + + + Appellate Briefs + + + + + Amicus / Friend of the Court Briefs + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + Home + + + Enforcement and Litigation + + + Administrative Proceedings + + + Gold Banc Corporation, Inc. + + + + + + + + + + + + Gold Banc Corporation, Inc. + + + + + + + + + + + + + + + + + + + + + SECURITIES EXCHANGE ACT OF 1934 +Release No. 49652 / May 4, 2004 + + ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 1999 / May 4, 2004 + + ADMINISTRATIVE PROCEEDING +File No. 3-11477 + + + In the Matter of + Gold Banc Corporation, Inc., + Respondent. + + : : : : : : : : : : + + ORDER INSTITUTING CEASE-AND- +DESIST PROCEEDINGS, MAKING +FINDINGS, AND IMPOSING A CEASE- +AND-DESIST ORDER PURSUANT TO +SECTION 21C OF THE SECURITIES +EXCHANGE ACT OF 1934 I. + + The Securities and Exchange Commission deems it appropriate that cease-and-desist proceedings be, and hereby are, instituted pursuant to Section 21C of the Securities Exchange Act of 1934 ("Exchange Act") against Gold Banc Corporation, Inc., ("Gold Banc" or "Respondent"). + + II. + + In anticipation of the institution of these proceedings, Respondent has submitted an Offer of Settlement (the "Offer"), which the Commission has determined to accept. Solely for the purpose of these proceedings and any other proceedings brought by or on behalf of the Commission, or to which the Commission is a party, and without admitting or denying the findings herein, except as to the Commission's jurisdiction over it and over the subject matter of these proceedings, which are admitted, Respondent consents to the entry of this Order Instituting Cease-and-Desist Proceedings, Making Findings, and Imposing a Cease-and-Desist Order Pursuant to Section 21C of the Securities Exchange Act of 1934 ("Order"), as set forth below. + + III. + + On the basis of this Order and Respondent's Offer, the Commission finds 1 that: + + RESPONDENT + + 1. Gold Banc is a Kansas corporation with its corporate headquarters in Leawood, Kansas. 2 Gold Banc registered its common stock with the Commission under Section 12(g) of the Exchange Act in 1996, and is listed on NASDAQ. Gold Banc has assets of more than $3.5 billion, and owns commercial banks operating in Kansas, Missouri, Oklahoma and Florida, as well as other financial services subsidiaries. 3 + + SUMMARY + + 2. From 1998 through 2002, Michael W. Gullion ("Gullion"), then Gold Banc's CEO, siphoned off corporate funds in connection with real estate transactions. 4 As a result, Gold Banc's pre-tax income and earnings per share, in its Forms 10-K for fiscal 2000 and fiscal 2001, and in its Forms 10-Q for the second and third quarters of 2002, were overstated. Those misstatements resulted in part from internal control deficiencies which caused Gold Banc to fail to prevent, detect or correctly account for Gullion's misapplication of corporate funds. Gullion also caused Gold Banc to extend credit to him without proper authorization. Immediately after discovering his misconduct, Gold Banc initiated an internal inquiry, dismissed Gullion and alerted its shareholders, then subsequently obtained restitution from Gullion, implemented or strengthened various internal controls and issued the restatements discussed below. + + 3. By virtue of its reporting, books and records, and internal controls failures, Gold Banc violated Sections 13(a) and 13(b)(2) of the Exchange Act and Rules 13a-1 and 13a-13 thereunder. + + FACTS + + Misappropriation of $1 Million in "Earnest Money" + + 4. In November 2000, Gullion verbally directed Gold Banc employees to issue a $1 million cashier's check - purportedly earnest money for the purchase of a new branch location - payable to an "entity" that was supposedly representing Gold Banc in connection with the land purchase. The employees complied with Gullion's instructions and the transaction was recorded as a $1 million debit to an "Other Assets" account. + + 5. In reality, no such "entity" existed. Rather, the "entity" was simply a fictitious business name that Gullion fabricated. Gullion deposited the $1 million check into his personal securities brokerage account, which he had opened in the entity's name, and subsequently applied the proceeds of the check to his personal use. + + Misappropriation of $900,000 Refund + + 6. In April 2001, a real estate broker, acting at Gullion's direction, purchased approximately 27 acres of land in the name of a limited liability company that was acting on behalf of Gold Banc as its nominee. The purchase price was $2.4 million, but Gullion represented to Gold Banc employees that the purchase price was $4.4 million. As a result, Gold Banc wired $4.4 million to the real estate broker for settlement of the transaction, and Gold Banc recorded a $4.4 million debit to an "Other Assets" general ledger account. + + 7. At Gullion's direction, the real estate broker refunded $1 million of the $2 million overpayment via a wire transfer to Gold Banc, and refunded another $900,000 by check payable to Gold Banc. Gullion intercepted the $900,000 check, deposited it into a personal bank account, and applied the proceeds to his personal use. 5 + + Use of False Documents and Circumvention of Controls +to Conceal the Misappropriation of Funds + + 8. In December 2002, in an apparent effort to conceal his prior misappropriation of funds, Gullion arranged for Gold Banc to finance the limited liability company's acquisition of the 27 acres from Gold Banc (for ownership and development by the limited liability company on its own behalf, rather than as a nominee) with a $6 million loan by Gold Banc. Gold Banc recorded the transaction by increasing its loan assets by $6 million, and reducing the "Other Assets" general ledger account by $6 million. + + 9. In arranging for the financing, Gullion presented a purported broker's letter, which Gullion actually wrote, as evidence that Gold Banc's $1 million payment in November 2000 was for earnest money (even though Gullion had actually misappropriated those funds). Gullion also presented a purported settlement statement, which Gullion actually prepared, showing that Gold Banc paid $4.4 million for the real estate, whereas the actual purchase price was $2.4 million. + + 10. The transaction was made in disregard of Gold Banc's loan origination policies. Gold Banc did not obtain any down payment, appraisal or personal guaranty. The limited liability company had no other assets or income to repay the loan, and no development plans for the property. Furthermore, Gold Banc recorded purported interest payments on the $6 million loan by crediting an interest income account and increasing the principal of the loan. 6 + + Unauthorized Extensions of Credit + + 11. From January 1998 through December 2002, Gullion caused Gold Banc, through its banking subsidiaries, to extend credit to Gullion without proper authorization, which Gullion applied to his personal benefit, including to cover overdrafts in his personal accounts. Although Gullion repaid most of the unauthorized extensions of credit before his March 2003 dismissal, Gullion benefited improperly from these unauthorized interest free loans, which came from various Gold Banc accounts, including the Federal Reserve clearing account, accrued other expenses account, furniture and fixtures accounts, and various other expense accounts. 7 + + Internal Control Deficiencies + + 12. At the time of Gullion's misappropriations, Gold Banc's internal controls were not adequate to prevent the activities which enabled the misappropriations to occur, including by not having written policies requiring (i) documentation, such as appraisals, purchase contracts and closing statements, authenticating the purchase price and disposition of proceeds with respect to significant real estate transactions, (ii) segregation of responsibilities for ordering, auditing and reconciling transactions and monthly reconciliations of various accounts, and (iii) limitations on Gullion's spending authority. + + Market Impact of Disclosure + + 13. Initial disclosures regarding Gullion's misconduct and dismissal had an adverse impact on Gold Banc's stock price. On March 13, 2003, the day before the company filed a Form 8-K disclosing Gullion's misconduct and dismissal, the stock closed at $10 on NASDAQ. The day of the announcement, the stock closed at $8.99, a 10% decline from the preceding day. The stock thereafter traded at approximately $8.50 through April 16, 2003, when Gold Banc issued its restated financial statements. + + Financial Misstatements + + 14. Gullion's misappropriation of $1 million in "earnest money" in November 2000 was not booked as an expense during the fiscal year ended December 31, 2000. Gullion's + misappropriation of the $900,000 refund in April 2001 was not booked as an expense during the quarter ended June 30, 2001, or during the fiscal year ended December 31, 2001. + + 15. Consequently, Gold Banc understated its expenses and overstated its income and earnings in the Forms 10-K that it filed with the Commission for 2000 and 2001, as well as the company's Form 10-Q filings for the quarters ended June 30, 2001 and September 30, 2001. Gullion signed those public filings. + + Restatements + + 16. In its restatement for the year ended December 31, 2000, Gold Banc recorded an additional pre-tax expense of $1 million, based on Gullion's misappropriation of the purported "earnest money" payment. Had this been Gold Banc's only adjustment for that period, its pre-tax earnings of $821,000 would have decreased 122% to a pre-tax loss of $179,000. 8 In its restatement for the year ended December 31, 2001, Gold Banc recorded an additional pre-tax expense of $900,000, based on Gullion's conversion of the refunded $900,000 overpayment. Had that been Gold Banc's only adjustment for the period, its pre-tax earnings would have dropped 3.1%, from $29,173,000 to $28,273,00. 9 + + VIOLATIONS + + 17. As a result of the conduct described above, Gold Banc violated Sections 13(a) and 13(b)(2) of the Exchange Act and Rules 13a-1 and 13a-13 thereunder. + + 18. Section 13(a) of the Exchange Act requires issuers to file periodic reports with the Commission containing such information as the Commission prescribes by rule. Exchange Act Rule 13a-1 requires issuers to file annual reports, while Rule 13a-13 requires issuers to file quarterly reports. + + 19. Section 13(b)(2) of the Exchange Act requires issuers to maintain an adequate system of internal controls and to make and keep books, records and accounts which, in reasonable detail, accurately and fairly reflect the transactions and disposition of the assets of the issuer. + + GOLD BANC'S REMEDIAL EFFORTS + + 20. In determining to accept Gold Banc's Offer, the Commission considered remedial acts promptly undertaken by Gold Banc, and cooperation afforded the Commission staff. + + IV. + + In view of the foregoing, the Commission deems it appropriate to impose the sanctions agreed to in Gold Banc's Offer. + + Accordingly, it is hereby ORDERED that Respondent Gold Banc cease and desist from committing or causing any violations and any future violations of Sections 13(a) and 13(b)(2) of the Exchange Act and Rules 13a-1 and 13a-13 thereunder. + + By the Commission. + + +Jonathan G. Katz +Secretary + + + + Endnotes + 1 The findings herein are made pursuant to Respondent's Offer and are not binding on any other person or entity in these or any other proceedings. + + 2 Gold Banc is registered with the Federal Reserve Board as a bank holding company under the Bank Holding Company Act of 1956, 12 U.S.C. § 1841 et seq., and also as a financial holding company under the Graham-Leach-Bliley Act of 1999, 12 U.S.C. §§ 1841(p) and 1843(l). + + 3 References in this order to "Gold Banc" shall mean and include all subsidiaries of Gold Banc. + + 4 On May 4, 2004, the Commission filed a civil injunctive action against Gullion in United States district court. See Litigation Rel. No. 18691 (May 4, 2004). + + 5 The remaining $100,000 was applied to the broker's commission and to various professional fees associated with the purchase and development of the tract, upon which Gullion intended to establish a branch bank. + + 6 Pursuant to its policies, the lending bank ordinarily allowed such "payments" only on loans to parties with definitive plans for developing the property and repaying the loans. Ultimately, however, the bank-financed sale of the real estate resulted in no additional harm to Gold Banc's shareholders, since Gold Banc did not make any cash disbursements in connection with the now-rescinded loan, and it has recovered the 27-acre parcel. + + 7 These extensions of credit were not authorized under Gold Banc's loan policies. Gold Banc entered into a public written agreement in August 2003 with the Kansas Office of the State Bank Commissioner and the Federal Reserve Bank of Kansas City (Docket Nos. 03-014-WA/RB-HK; 03-014-WA/RB-SM), requiring Gold Banc to improve its internal controls and regulatory compliance. + + 8 Other offsetting adjustments in the 2000 restatement, however, which did not relate to any misconduct by Gullion, limited the restated decrease in Gold Banc's pre-tax earnings to 66.7%, from the previously reported $821,000 to $274,000. + + 9 Other adjustments in the 2001 restatement, however, which did not relate to any misconduct by Gullion, brought the total restated decrease in Gold Banc's pre-tax earnings down by 5.5%, from the previously reported $29,173,000 to $27,574,000. The unauthorized extensions of credit to Gullion that were not associated with the land purchase did not result in any restatements, since Gold Banc's original financial statements included their effect. + + + + + + +  + + + + + + + + + + + + + + + + + + + + + + + + + Return to top + + + + + SEC homepage + + + + + + + + + + + + + + About the SEC + + + + + + Budget & Performance + + + Careers + + + Commission Votes + + + Contact + + + Contracts + + + + + + + + Transparency + + + + + + Accessibility & Disability + + + Super Intelligence + + + FOIA + + + Inspector General + + + No FEAR Act Data + + + Ombuds + + + SEC Excess Personal Property Guidance + + + + + + + + Websites + + + + + + Investor.gov + + + Related Sites + + + USA.gov + + + + + + + + Site Information + + + + + + Plain Writing + + + Privacy & Security + + + Site Map + + + + + + + + + + + + + + + + + + Stay connected. 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Gullion in the Matter of Gold Banc Corporation, Inc. + + + + + + + + + + + + Michael W. Gullion in the Matter of Gold Banc Corporation, Inc. + + + + + + + + + + + + + + + + + + + + + On May 4, 2004, the Securities and Exchange Commission filed a complaint in the United States District Court for the District of Kansas, against Michael W. Gullion, the former board chairman and chief executive officer of Gold Banc Corporation, Inc. Gold Banc is a Kansas-based bank holding company listed on the NASDAQ. The complaint alleges Gullion, 49, of Leawood, Kansas, misapplied $4.4 million in Gold Banc funds to his personal benefit by circumventing Gold Banc's internal controls and falsifying its books and records, with the result that Gold Banc materially misstated its operating results. Gullion, who has since reimbursed Gold Banc, has offered to settle the SEC's claims against him by consenting to pay a $100,000 civil penalty, and also to the entry of district court orders permanently enjoining him from future violations of the securities laws and barring him from serving as an officer or director of a publicly-held company. + + According to the SEC's complaint, Gullion's misappropriations involved two separate schemes. Most egregiously, in connection with the purchase of land for a suburban bank location, Gullion diverted two checks, in November 2000 and April 2001, respectively representing $1 million and $900,000 in Gold Banc funds, into his personal brokerage and banking accounts. Second, from January 1998 to December 2002, Gullion received an approximate $2.5 million in unauthorized extensions of credit by Gold Banc. + + The $1.9 million Gullion misappropriated in connection with the real estate purchase was not booked as an expense during the fiscal years ended December 31, 2000 and 2001, or during the quarter ended June 30, 2001. Consequently, Gold Banc overstated its income and earnings in the Forms 10-K that it filed with the SEC for 2000 and 2001, and also overstated its income in the Forms 10-Q that it filed for the second and third quarters of 2001. Gullion signed those periodic filings. Gullion also signed the October 2002 registration statement for a $49.3 million offering of Gold Banc's common stock, and a December 2001 registration statement for an offering of common stock to company employees in connection with Gold Banc's 401(k) plan, both of which incorporated the misstated financials. + + The SEC's complaint alleges that Gullion violated Section 17(a) of the Securities Act of 1933 ("Securities Act") and Sections 10(b) and 13(b)(5) of the Securities Exchange Act of 1934 ("Exchange Act") and Rules 10b-5, 13b2-1 and 13b2-2 thereunder, and that he aided and abetted violations of Sections 13(a) and 13(b)(2) of the Exchange Act and Rules 13a-1 and 13a-13 thereunder. Without admitting or denying the allegations in the complaint, Gullion made an offer of settlement in which he consented to the entry of an order of permanent injunction against violations of the above-specified provisions of the federal securities laws, the payment of a $100,000 civil money penalty, and a bar against serving as an officer or director of a publicly held company. + + Additionally, the SEC instituted settled cease-and-desist proceedings against Gold Banc, based on its violations of the recordkeeping, reporting and internal control provisions of the federal securities laws, which Gullion caused. The SEC found that Gullion's misappropriations in connection with the land purchase caused Gold Banc to make material financial misstatements, and that internal control deficiencies caused Gold Banc to fail to prevent, detect or correctly account for Gullion's misapplication of corporate funds. + + Without admitting or denying the findings made by the SEC, Gold Banc consented to the entry of an order which requires the company to cease and desist from violating Sections 13(a) and 13(b)(2) of the Exchange Act and Rules 13a-1 and 13a-13 thereunder. The SEC agreed to settle with Gold Banc on the above terms based on the remedial acts promptly undertaken by Gold Banc, and the cooperation afforded the SEC's staff. Immediately after discovering Gullion's misconduct, Gold Banc initiated an internal inquiry, alerted shareholders to its inquiry, terminated Gullion, obtained re-payment from Gullion for his misappropriations, implemented or strengthened various internal controls, and issued financial restatements. + + + SEC Complaint in this matter + + + + + +  + + + + + + + + + + + + + + + + + + + + + + + + + Return to top + + + + + SEC homepage + + + + + + + + + + + + + + About the SEC + + + + + + Budget & Performance + + + Careers + + + Commission Votes + + + Contact + + + Contracts + + + + + + + + Transparency + + + + + + Accessibility & Disability + + + Super Intelligence + + + FOIA + + + Inspector General + + + No FEAR Act Data + + + Ombuds + + + SEC Excess Personal Property Guidance + + + + + + + + Websites + + + + + + Investor.gov + + + Related Sites + + + USA.gov + + + + + + + + Site Information + + + + + + Plain Writing + + + Privacy & Security + + + Site Map + + + + + + + + + + + + + + + + + + Stay connected. 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White + + + + + + + + + + + + Phillip E. White + + + + + + + + + + + + + + + + + + + + + The Securities and Exchange Commission ("Commission") announced today that Phillip E. White ("White"), formerly President, Chief Executive Officer, and Chairman of the Board of Directors of Informix Corporation, consented to a final judgment permanently enjoining White from violating, or aiding and abetting violations of, Sections 10(b), 13(a), 13(b)(2)(A), and 13(b)(5) of the Securities Exchange Act of 1934 ("Exchange Act"); Exchange Act Rules 10b-5, 12b-20, 13a-1, 13b2-1, and 13b2-2; and Section 17(a) of the Securities Act of 1933 ("Securities Act"). Separately, White pleaded guilty on December 18, 2003 to one count of criminal securities fraud in an action brought by the Office of the United States Attorney for the Northern District of California based on some of the same facts underlying the Commission's civil action. White is scheduled to be sentenced in the criminal matter on May 12, 2004. + + The Commission instituted this action against White in November 2002 and filed its Amended Complaint today. In its Amended Complaint, the Commission alleges that White concealed secret side agreements to software licensing contracts on which Informix had improperly recognized revenue in its financial statements for its fiscal year ended December 31, 1996. To further his scheme, White made false statements and representations concerning the existence of these secret side agreements to members of Informix's financial staff and to Informix's independent auditors. White did this to avoid triggering a restatement of Informix's 1996 financial statements. When the side agreements were discovered, Informix's Board of Directors forced White to resign. Informix ultimately restated its 1996 financial statements to reflect substantial decreases in its earnings and income caused by, among other things, discovery of the side agreements White concealed and various other side agreements. Informix's amended 1996 Form 10-K revealed that, instead of earning net income of $97.8 million as Informix originally reported, Informix suffered a net loss of $73.6 million in 1996. According to the Amended Complaint, White violated, or aided and abetted violations of, antifraud, reporting, and record-keeping provisions of the Securities Act and Exchange Act. White consented to the final judgment without admitting or denying the allegations in the Commission's Amended Complaint. + + The civil and criminal actions against White are the result of investigations by the Commission, the Office of the United States Attorney for the Northern District of California, and the San Francisco office of the Federal Bureau of Investigation. + + Previously, the Commission instituted and simultaneously settled an administrative proceeding against Informix. See Informix Corp. , Admin. Proc. No. 3-10130 ; SA Rel. No. 33-7788; SEA Rel. No. 34-42326; AAE Rel. No. 1215 (Jan. 11, 2000). The Commission also previously filed a civil complaint, and obtained a default judgment, against Walter K¶nigseder, an Informix Vice President. See SEC v. Walter Konigseder , Civil Action No. 00-3668 (MJJ) (N.D. CAL. MAY 17, 2001) (Order), Lit. Rel. No. 17016 , AAE Rel. No. 1398 (May 23, 2001). For the original litigation release concerning the Commission's action against White, see Lit. Rel. No. 17855 , AAE Rel. No. 1671 (Nov. 21, 2003). + + + +  + + + + + + + + + + + + + + + + + + + + + + + + + Return to top + + + + + SEC homepage + + + + + + + + + + + + + + About the SEC + + + + + + Budget & Performance + + + Careers + + + Commission Votes + + + Contact + + + Contracts + + + + + + + + Transparency + + + + + + Accessibility & Disability + + + Super Intelligence + + + FOIA + + + Inspector General + + + No FEAR Act Data + + + Ombuds + + + SEC Excess Personal Property Guidance + + + + + + + + Websites + + + + + + Investor.gov + + + Related Sites + + + USA.gov + + + + + + + + Site Information + + + + + + Plain Writing + + + Privacy & Security + + + Site Map + + + + + + + + + + + + + + + + + + Stay connected. 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Stewart, A Partner, Sanctioned by Institute of Chartered Accountants in England and Wales for Failures in Connection with Audits of Financial Statements Filed with the SEC + + + + + + + + + + + + Moore Stephens Chartered Accountants (United Kingdom) and Peter D. Stewart, A Partner, Sanctioned by Institute of Chartered Accountants in England and Wales for Failures in Connection with Audits of Financial Statements Filed with the SEC + + + + + + + + + + + + + + + + + + + + + On May 5, 2004, the Investigation Committee of the Institute of Chartered Accountants in England and Wales ("Institute") announced that Consent Orders had been issued against the firm of Moore Stephens Chartered Accountants (United Kingdom), and a partner at the firm, Peter D. Stewart, FCA, for misconduct in connection with audits of the financial statements of the Cronos Group that were filed with the Securities and Exchange Commission. This is the first known disciplinary action brought by the Institute based on a complaint by the Commission and is the result of cross-border cooperation between the Commission and the Institute on this auditor oversight matter. Moore Stephens consented to an order of a severe reprimand, a fine of £35,750 ($67,450) and the payment of costs of £5,330 ($10,056). Stewart consented to an order that includes a reprimand, a fine of £3,000 ($5,660) and the payment of costs of £ 600 ($1,132). The disciplinary actions resulted from Stewart's and the firm's conduct with respect to the issuance of an unqualified audit report, dated July 28, 1997, on the consolidated financial statements of the Cronos Group for the year ended December 31, 1996, to the effect that the firm had conducted its audit in accordance with generally accepted auditing standards ("GAAS") in the United States, when this was not the case. + On July 2, 2002, based on the conduct described above and other conduct, the Commission in an administrative proceeding found that Stewart and two other auditors at the firm of Moore Stephens engaged in improper professional conduct within the meaning of Rule 102(e)(1)(ii) of the Commission's Rules of Practice and denied Stewart the privilege of practicing before the Commission as an accountant, but provided that he may request that the Commission consider his reinstatement after one year, and censured the two other auditors. The three consented to the Commission's Order without admitting or denying the allegations. In the Matter of Peter D. Stewart, FCA, John L. Harbor, FCA, and David Chopping, ACA, Admin. Proc. File No. 3-10820; SEA Rel. No. 34-46157; AAE Rel. No. 1587 (July 2, 2002). + Previously, the Commission instituted administrative proceedings against Cronos, Axel E. Friedberg and Rudolf J. Weissenberger. In the Matter of the Cronos Group, Admin. Proc. No. 3-10096; SA Rel. No 33-7771; SEA Rel. No. 34-42139; AAE Rel. No. 1208 (November 15, 1999); In the Matter of Axel E. Friedberg and Rudolf J. Weissenberger, Admin. Proc. File No. 3-10263; Rel. 34-43129; AAE Rel. No. 1291 (August 8, 2000). A civil action against the former CEO of the Cronos Group, Stefan M. Palatin, resulted in a final judgment of a permanent injunction against him for violations of the federal securities laws and a permanent bar against him acting as an officer and director of a public company. SEC v. Stefan M. Palatin , Civil Action No. 1:00CV01909 (USDC DC); LR-18284; AAE Rel. No. 1841 (August 13, 2003); see also LR-16645; AAE Rel. No. 1292 (August 8, 2000). All of these releases are available at the Commission's website at http://www.sec.gov. The Commission acknowledges the assistance provided in these matters by the governmental authorities of Austria, Switzerland and the United Kingdom. + + + + SEC Complaint in this matter --> + + + + + + + + + + + + + + + + + + + + + + + + + + Return to top + + + + + SEC homepage + + + + + + + + + + + + + + About the SEC + + + + + + Budget & Performance + + + Careers + + + Commission Votes + + + Contact + + + Contracts + + + + + + + + Transparency + + + + + + Accessibility & Disability + + + Super Intelligence + + + FOIA + + + Inspector General + + + No FEAR Act Data + + + Ombuds + + + SEC Excess Personal Property Guidance + + + + + + + + Websites + + + + + + Investor.gov + + + Related Sites + + + USA.gov + + + + + + + + Site Information + + + + + + Plain Writing + + + Privacy & Security + + + Site Map + + + + + + + + + + + + + + + + + + Stay connected. 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Individuals (SALI) + + + + + Enforcement Data Delivery Standards + + + + + Small Businesses + + + + + Appellate Briefs + + + + + Amicus / Friend of the Court Briefs + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + Home + + + Enforcement and Litigation + + + Administrative Proceedings + + + The Warnaco Group, Inc. + + + + + + + + + + + + The Warnaco Group, Inc. + + + + + + + + + + + + + + + + + + + + + + SECURITIES EXCHANGE ACT OF 1934 + Release No. 49675 / May 11, 2004 + ACCOUNTING AND AUDITING ENFORCEMENT + Release No. 2005 / May 11, 2004 + ADMINISTRATIVE PROCEEDING + File No. 3-11480 + + In the Matter of + THE WARNACO GROUP, INC., + Respondent. + + : : : : : : : + + ORDER INSTITUTING CEASE-AND-DESIST PROCEEDINGS, MAKING FINDINGS, AND IMPOSING CEASE-AND-DESIST ORDER PURSUANT TO SECTION 21C OF THE SECURITIES EXCHANGE ACT OF 1934 + I. + + The Securities and Exchange Commission ("Commission") deems it appropriate that cease-and-desist proceedings be, and hereby are, instituted pursuant to Section 21C of the Securities Exchange Act of 1934 ("Exchange Act") against The Warnaco Group, Inc. ("Warnaco" or "Respondent"). + + II. + + In anticipation of the institution of these proceedings, Respondent has submitted an Offer of Settlement (the "Offer") which the Commission has determined to accept. 1 Solely for the purpose of these proceedings and any other proceedings brought by or on behalf of the Commission, or to which the Commission is a party, prior to a hearing pursuant to the Commission's Rules of Practice, 17 C.F.R. § 201.1 et seq ., and without admitting or denying the findings herein, except as to the Commission's jurisdiction over it and the subject matter of these proceedings, Respondent consents to the entry of this Order Instituting Cease-and-Desist Proceedings, Making Findings, and Imposing a Cease-and-Desist Order Pursuant to Section 21C of the Securities Exchange Act of 1934 ("Order"), as set forth below. + + III. + + On the basis of this Order and Respondent's Offer, the Commission finds 2 that: + + FACTUAL FINDINGS + + A. Respondent and Other Related Parties + + Warnaco is a Delaware corporation with its headquarters in New York, New York. During the relevant period, Warnaco was one of the largest apparel manufacturers in the United States, reporting net revenues of $2 billion. Warnaco's common stock is registered with the Commission pursuant to Section 12(b) of the Exchange Act. During the relevant period, Warnaco was a Fortune 500 company that traded on the New York Stock Exchange, Inc. under the symbol "WAC." Warnaco filed for bankruptcy on June 11, 2001. On February 4, 2003, Warnaco emerged from bankruptcy under new management and began trading on the NASDAQ National Market under the symbol "WRNC." + + William S. Finkelstein , age 55, was the senior vice president and chief financial officer ("CFO") of Warnaco from May 1995 until February 2002. Warnaco terminated Finkelstein's employment on September 5, 2002. + + Linda J. Wachner, age 57, was the chief executive officer ("CEO") of Warnaco from 1986 until November 2001. She also held the position of chairman of the board of directors during her tenure at the company. Warnaco terminated Wachner's employment on November 16, 2001. She is a resident of New York, New York. + + Stanley P. Silverstein , age 51, was Vice President, General Counsel, and Secretary of Warnaco during all relevant periods. He is currently Chief Administrative Officer and Senior Vice President, Corporate Development for Warnaco. Silverstein is a resident of Englewood, New Jersey. Silverstein is licensed to practice law in the State of New York. + + PricewaterhouseCoopers LLP ("PwC") is a national public accounting firm with its headquarters in New York, New York. PwC audited Warnaco's financial statements and provided various consulting services for the company during the period 1995 through 1998. PwC also performed quarterly reviews of Warnaco's financial results for the period 1996 through the third quarter of 1999. + + B. Summary + + On March 2, 1999, Warnaco issued a false and materially misleading press release reporting its earnings for the fourth quarter and fiscal year 1998. The press release, which reported "record" earnings results, failed to disclose that Warnaco would be restating its financial results for the prior three years to correct a $145 million inventory overstatement. Instead, Warnaco hid the true reason for the write-down of inventory. In the press release, Warnaco characterized the inventory write-down as part of the company's write-off of deferred start-up costs under a new accounting pronouncement, AICPA Statement of Position ("SOP") 98-5. 3 At the time that it issued the press release, Warnaco knew that it could not account for the inventory overstatement as part of its adoption of SOP 98-5, because the error did not involve deferred start-up costs. In fact, the overstatement had been caused by material defects in Warnaco's inventory accounting and internal control systems that had allowed inventory to become overstated by more than twenty percent over a period of years. + + On April 2, 1999, Warnaco filed a misleading fiscal 1998 annual report with the Commission. The report disclosed that Warnaco had restated its financial results. The restatement decreased 1998 net income by $49 million; turned a $23 million net profit in 1997 into a $12 million net loss; and increased Warnaco's net loss for 1996 from $8.2 million to $31 million. However, the annual report did not disclose the true cause of the $145 million restatement. As it had done in the press release, Warnaco claimed in the annual report that the restatement resulted from the write-off of previously-deferred "start-up related" costs identified in connection with Warnaco's adoption of SOP 98-5. + + In the Fall of 2000, Warnaco issued a misleading and inaccurate quarterly report for the third quarter of 2000. That report improperly offset Warnaco's reported debt and cash balances in order to create the appearance that the company was in compliance with certain financial covenants in its largest licensing agreement. This offsetting of cash against debt was improper under generally accepted accounting principles ("GAAP") and necessitated a restatement in April 2001. + + In addition, since April 2001, Warnaco has issued restatements of its financial results on two subsequent occasions to correct significant accounting errors unrelated to the restatements discussed above. Indeed, during the past four years, Warnaco has restated its financial results for every year from 1996 through 2001 at least once, and has restated its fiscal 1998 through 2000 financial results twice. + + As set forth below, Warnaco's materially misleading press release in March 1999, its misleading disclosures in its 1998 annual report and quarterly report for the third quarter of 2000, and its failure to report accurate financial results and maintain adequate internal controls during the relevant time period violated the federal securities laws. + + C. Facts + + 1. Inventory Restatement + + a. Background + + Warnaco is one of the largest manufacturers and distributors of apparel in the United States. It designs and manufactures a broad line of intimate apparel, sportswear, swimwear and other clothing under a variety of well-known brand names. Warnaco's Intimate Apparel Division ("IAD") is a leading supplier of intimate apparel to department and specialty stores in the United States. + + During the period from at least 1997 through early 1999, the cost accounting and internal control systems at IAD were severely outdated and inadequate, given the size of the division's operations. IAD did not have a reliable perpetual inventory system or other means for accurately determining the value of its inventory on a regular basis. The division's physical inventory count was taken once a year at mid-year, and reconciled to the general ledger. + + Like many manufacturing companies, Warnaco used a "standard cost system" to value its inventory internally. The standard costs were based on the estimated cost to produce Warnaco's inventory. GAAP permits a company to use a standard cost system for internal accounting. However, the company must adjust the value of the inventory to actual cost before filing its financial statements. The company makes this adjustment by apportioning the difference (or "variance") between inventory (i.e . , goods produced by the company, but not yet sold), and the cost of goods sold. Inventory is carried as an asset on the balance sheet; cost of goods sold is recorded as an expense item on the income statement. Capitalizing costs into inventory instead of recording them as an expense to cost of goods sold increases the inventory balance (thus increasing the company's assets) and decreases the company's expenses (thus increasing its net income). + + However, IAD's standard cost system was old and prone to error. Many of the standard costs had not been updated in years. In some instances, the standard costs were missing entirely, meaning that Warnaco treated some items as if it had cost nothing to produce them. Because much of the data in IAD's standard cost system was outdated or missing during the period 1996-1998, the division experienced large variances between standard and actual costs each year. A larger variance increased the risk that Warnaco was not accurately reporting its inventory. Indeed, as a result of the shortcomings in the standard cost system, capitalized variances accounted for $42 million of IAD's inventory by 1997, more than forty percent of the total value of the division's inventory. + + Members of Warnaco's senior management, including its then-CFO, William Finkelstein, and then-CEO, Linda Wachner, knew that IAD's accounting and internal control systems were antiquated and prone to error. However, Warnaco did not take sufficient measures to correct the errors in a timely manner. Warnaco's independent auditors, PwC, had warned Warnaco as part of its 1996 and 1997 audits that the standard cost system needed to be updated to eliminate the large variances. + + b. Discovery of the Inventory Overstatement + + In mid-1997, on PwC's recommendation, Warnaco hired consultants from PwC to update and correct IAD's standard cost system ("the Standard Cost Project"). As part of the Standard Cost Project, PwC consultants examined IAD's inventory accounts and preliminarily concluded by the Spring of 1998 that the inventory accounts were overstated by at least $60 million. The consultants conveyed their findings to Warnaco's senior management during a meeting on March 31, 1998. By June 1998, IAD personnel working with the PwC consultants confirmed these findings and identified another $23 million in improperly recorded inventory. At that time, senior management at Warnaco was informed that the potential overstatement could be as high as $83 million. However, no adjustment was made to the inventory accounts at that time. + + In June 1998, after Warnaco informed PwC that the company internally estimated that its inventory was overvalued by at least $80 million, PwC recommended that Warnaco begin amortizing the adjustment over a period of years. Warnaco declined to record the adjustment until the Standard Cost Project was completed and the total amount of the overstatement was determined. PwC acceded to this request. + + In July 1998, the PwC engagement partner for the Warnaco account retired and was replaced by another PwC partner. The new engagement partner believed that Warnaco's audit committee should be informed about the potential inventory overstatement. After the engagement partner informed the audit committee and certain members of the board of directors of the potential overstatement at the August 1998 meeting, Wachner expressed dissatisfaction with the partner's failure to raise the issue with management prior to the meeting and requested that PwC address the issue. As a result, PwC replaced the engagement partner and assigned a new audit team. + + c. PwC's Audit Work Confirms the Overstatement + + In the Fall of 1998, IAD completed its annual physical inventory count and attempted to reconcile the physical inventory to the value of the inventory recorded on IAD's books. The reconciliation process confirmed the findings of the Standard Cost Project: the value of the actual physical inventory was $60 million to $80 million less than the inventory value recorded on IAD's internal records and publicly reported in Warnaco's periodic reports. + + After being informed of the results of the physical inventory reconciliation, Finkelstein directed IAD's controller to examine the division's cost accounting system for defects that could have caused the inventory overstatement. In early October 1998, IAD's controller delivered to Finkelstein a memorandum detailing significant and pervasive defects in IAD's cost accounting system, including the improper capitalization of variances and missing or incomplete cost data in the system. The controller advised that these defects caused the overstatement. Finkelstein dismissed the controller's findings as "preliminary," and took no action to correct or further investigate the flaws identified by the controller. Finkelstein did not inform PwC of the controller's conclusions. + + In late October or early November 1998, Finkelstein informed PwC of a significant unresolved discrepancy identified in the IAD reconciliation process. Finkelstein then asked PwC whether Warnaco could write off the inventory overstatement as part of the restructuring costs Warnaco planned to recognize in the fourth quarter of 1998. After consulting with the concurring partner, the audit team advised Finkelstein that GAAP did not permit such accounting treatment. + + Finkelstein and Wachner then asserted to PwC that the overstatement must be due to "start-up costs" that had been erroneously capitalized and recorded into inventory. 4 Finkelstein proposed writing off the inventory discrepancy as part of Warnaco's early adoption of a new accounting principle, AICPA Statement of Position ("SOP") 98-5, which required companies to record start-up costs as they were incurred, rather than amortizing them over time. However, Finkelstein did not provide any evidence to support this assertion at that time. 5 Given the magnitude of the inventory discrepancy, PwC informed Finkelstein and Wachner that PwC could not rely upon Warnaco's books and records or internal control systems in determining the correct value of IAD's inventory. Warnaco had neither the personnel nor the expertise to complete the reconciliation or correctly value inventory; therefore, the audit team engaged some of the same consultants who had worked on the Standard Cost Project to create a new system for valuing IAD's inventory. PwC also required Warnaco to complete another physical inventory count, observed by the PwC auditors, to ensure that the inventory discrepancy was a valuation problem and not a physical inventory problem. The physical inventory confirmed that the problem was not one of missing inventory, but rather was due to an overvaluation of existing inventory. + + In the course of its work, although PwC could not conclusively determine how the unresolved differences had accumulated, PwC identified certain flaws in IAD's cost accounting system. These flaws -- including missing or incomplete standard costs and the division's failure to update or maintain the standard cost files over the prior five years-- had prevented the system from properly reducing the value of inventory recorded on Warnaco's books as inventory was sold. During a meeting in December 1998 and in subsequent discussions, PwC notified Warnaco's senior management, including Finkelstein and Wachner, of its findings. These findings were consistent with the problems the PwC consultants had identified and brought to Warnaco's attention in March 1998. + + In February 1999, PwC completed its work and determined that Warnaco's inventory was overvalued by $159 million. PwC determined that this overstatement could not be written off under SOP 98-5 and informed Warnaco that it would have to restate its financial results for the preceding three years. Finkelstein and Wachner rejected PwC's conclusion, insisting that the overstatement was attributable to start-up costs. Over the course of a two-day meeting held in late February 1999, senior Warnaco management tried to persuade PwC that the overstatement should be written off in the current year as start-up costs under SOP 98-5. At the start of the two-day meeting, Finkelstein for the first time gave PwC a two-page schedule attributing nearly the entire overstatement to start-up costs. After reviewing the schedule, PwC concluded that it could not rely upon it to support the company's proposed accounting treatment, because costs on the schedule could not be traced back to Warnaco's books and records or came from factories that had been open for many years and thus did not qualify as start-up costs under Warnaco's start-up policy. PwC determined that, at most, only $14 million of the overstatement could be reclassified and accounted for as a current year write-off of start-up costs. The remaining inventory overstatement - $145 million - could not be written off pursuant to SOP 98-5. + + Accordingly, at the conclusion of the two-day meeting, PwC told Finkelstein and the rest of Warnaco's senior management that: (i) the overstatement must be accounted for as the correction of an error, thus necessitating a restatement of previously-reported financial statements; and (ii) PwC would not certify financial statements that accounted for the overstatement as part of the change in accounting to adopt SOP 98-5. + + The following day, PwC informed Warnaco's board of directors that the inventory error could not be written off under SOP 98-5 and would require Warnaco to restate its financial results for a three-year period. As CFO, Finkelstein attended the board meeting and participated in the discussion of the problem. At the end of the meeting, the board agreed that Warnaco would restate its financial results. + + As shown below, the restatement had a material impact upon Warnaco's previously reported results for 1996, 1997, and the first three quarters of 1998: + +   + + Inventory + ($ in thousands) + + Net Income + ($ in thousands) + + EPS + (diluted) +   + + Prev. Reported + + Restated + + % + + Prev. + Reported + + Restated + + % + + Prev. + Reported + + Restated + + % + 1998 _ + 625,545 + + 492,827 + + -21% + + 94,352 + + 69,948 * + - 26% + + 1.48 + + 0.72 + + - 51% + 1997 + + 526,185 + + 431,185 + + -18% + + 23,032 + + (12,319) + + -154% + + 0.42 + + (0.23) + + -155% + 1996 + + 387,318 + + 349,335 + + - 10% + + (8,239) + + (31,409) + + -281% + + (0.16) + + (0.61) + + -281% + + + + _ Cumulative results from the first three quarters of 1998 + * Adjusted to exclude $23,976 related to adoption of SOP 98-5 effective beginning of fiscal 1998 + + d. Warnaco Issues a False and Misleading Press Release + + On March 1, 1999, shortly after the board meeting concluded, Finkelstein gave PwC a draft press release announcing Warnaco's fiscal 1998 results. In the draft release, Warnaco touted "record" earnings and falsely characterized the inventory error as a part of Warnaco's write-off of start-up costs pursuant to SOP 98-5, stating that: + + Included in this fiscal year is the early adoption of the change in accounting for start-up costs that writes-off non-cash accumulated costs previously deferred, relating to the start-up of new and expanded manufacturing operations . The amount of this charge in fiscal year 1998 is $104.8 million, net of tax. In connection with the inventory costs related to start-up activities and write-offs, $35.5 million, net of tax, and $23.2 million, net of tax, have been reflected in the statement of operations for fiscal years 1997 and 1996, respectively. (Emphasis added.) + + The pro forma statement of operations attached to the press release also misleadingly combined both the 1998 portion of the inventory overstatement and Warnaco's actual write-off under SOP 98-5 into a single entry called "Write-off of Deferred Start-Up." Thus, Warnaco reported that it would be writing off, on a net of tax basis, start-up costs of $104.8 million. In fact, Warnaco wrote off only $72.6 million in start-up costs. The remaining amount written off by Warnaco, $90.7 million, ($32.1 million for 1998, plus the $35.5 million and $23.1 million identified in the press release as "inventory costs related to start-up activities and write-offs" for 1996 and 1997) was actually the correction of the inventory overstatement. + + The draft press release gave no indication that Warnaco would be writing down its inventory by $145 million pre-tax (or $90.7 million after tax) to correct an inventory overstatement. Nor was there any indication that Warnaco had calculated its "record" earnings by ignoring the effect of the restatement. The press release failed to tell investors that the earnings reported in the press release were not presented in conformity with GAAP, and that Warnaco's annual report, which would be filed the following month, would report significantly lower net income and earnings, as indicated below: + +   + + 3/1/99 Press Release + (in thousands) + + 4/1/99 10-K + (in thousands) + Operating Income + + $ 282,758 + + $ 85,575 + Pre-tax Income from Continuing Operations + + $ 218,968 + + $ 21,785 + Income before Charges and Accounting Change + + $ 141,672 + + $ 14,097 + + + The PwC engagement partner advised Finkelstein that the press release was inappropriate and inconsistent with the way the financial statements would be presented in Warnaco's upcoming 1998 annual report. Despite these warnings, Finkelstein replied that Warnaco would nevertheless issue the press release. Warnaco issued the misleading press release, substantially unchanged, the following day. Warnaco's stock traded slightly higher on the news of Warnaco's reported "record" results. + + e. Warnaco's 1998 Annual Report + + On April 1, 1999, Warnaco filed its annual report on Form 10-K for fiscal 1998. In this report, Warnaco restated its financial results for fiscal 1996-1998 to reduce inventory and increase cost of goods sold by $145 million, as required by GAAP. Warnaco misleadingly continued to claim, however, that the restatement related to the adoption of SOP 98-5. In the notes to the audited financial statements, Warnaco explained the restatement to its investors as an inventory "revision" resulting from deferred "start-up related and production inefficiency costs" identified as part of Warnaco's adoption of new accounting standard SOP 98-5. Specifically, the notes to the audited financial statements stated: + + Adjustments, Reclassifications and Revisions: As noted above, the Company early adopted SOP 98-5 in fiscal 1998. In connection with the adoption of the new accounting standard, an extensive effort was undertaken to identify all start-up related production and inefficiency costs that had previously been deferred. Over the last six years, the Company has opened or expanded 10 manufacturing facilities. In addition, to support anticipated future growth, the Company opened 2 new manufacturing facilities during 1998 for a total of 12 new facilities. This resulted in the Company's incurring plant inefficiencies and other start-up related costs resulting from high turnover and related training and other costs. Such start-up related production and inefficiency costs have been classified in other assets and inventories. Because certain such costs identified in this process related to fiscal 1997 and 1996 activities, such prior year consolidated financial statements have been revised to reflect additional cost of goods sold[.] (Emphasis added.) + + The Form 10-K was misleading. The restatement was not the result of "previously deferred" start-up costs and was not related to Warnaco's adoption of SOP 98-5. Rather, the restatement was precipitated by a material failure of Warnaco's inventory accounting and internal control systems. The annual report did not clearly explain to investors that Warnaco had restated its financial results for a three-year period to correct a $145 million inventory overvaluation, and did not disclose that this restatement was caused by the failure of Warnaco's accounting system to properly deduct costs from inventory as goods were sold. + + At the time the Form 10-K was filed, there was no reasonable basis for Warnaco to describe the inventory restatement as the write-off of deferred "start-up related" costs identified in connection with Warnaco's adoption of SOP 98-5. Warnaco's senior management knew as a result of the Standard Cost Project and IAD's own internal projections that IAD's inventory was overvalued on Warnaco's books by at least $60-$80 million. Senior management knew that the PwC consultants had identified defects in IAD's inventory systems that potentially could have caused IAD's inventory to be overvalued by the amounts in question. Furthermore, Finkelstein, Warnaco's then-CFO, knew that the IAD controller had confirmed certain of these errors in October and that the controller had concluded that the inventory overstatement was due to the failure of the system to properly deduct costs from inventory as that inventory was sold. Warnaco's disclosure concealed a material weakness in its cost accounting and internal control systems. + + Warnaco did not correct the misleading disclosure until May 16, 2000, over a year later, when it filed an amended 1998 Form 10-K. The notes to the financial statements in the amended report removed all references to start-up related production and inefficiency costs and, for the first time, informed investors that: + + Reclassifications and Restatement: . . . In connection with the fiscal 1998 year-end closing, the Company determined that in fiscal 1996, 1997 and the first three quarters of 1998, as merchandise was sold, inventories were relieved at less than actual cost per unit, leaving an accumulation of inventory costs. As a result, costs related to [those periods] have been restated to reflect additional costs of goods sold[.] . . . This restatement resulted from flaws in the Company's Intimate Apparel Division inventory costing control system that have since been addressed. + + 2. Improper Offset of Debt Against Cash in the Third Quarter of 2000 + + In the Summer of 2000, due to its deteriorating financial situation, Warnaco faced the possibility of being unable to meet the financial covenants of its long-term debt, which totaled nearly $2 billion. Warnaco sought and subsequently obtained waivers of the financial covenants from its banks. It then entered into a series of negotiations with its bank consortium to restructure its long-term debt. The negotiations culminated in an agreement between the banks and Warnaco that was signed on October 6, 2000. + + On November 2, 2000, Warnaco publicly announced its earnings for the third quarter of 2000. In the consolidated balance sheet attached to the press release issued that day, Warnaco reported that it had shareholders' equity of $348 million, cash of $227 million, and debt of $1.79 billion as of the end of the third quarter on September 30, 2000. In the conference call with investors held that day, Finkelstein reported that "[d]ebt net of cash was $1.644 billion." + + Shortly after the press release was issued, Warnaco's lenders contacted Warnaco to inquire whether, based upon the numbers reflected in the press release, the company was in compliance with the financial covenants in Warnaco's license agreement with Calvin Klein, Inc. The financial covenants in that license required Warnaco to maintain a debt-to-equity ratio of less than 5-to-1. The debt and equity amounts reported in the earnings release, however, revealed that Warnaco's debt-to-equity ratio had risen above 5-to-1. Under the terms of the licensing agreement, a violation of the covenant could result in termination of the license, which accounted for more than twenty-five percent of Warnaco's gross revenues. + + After Finkelstein confirmed that the lenders' calculations were correct, he decided to retroactively offset Warnaco's cash on hand as of September 30 against its debt, which would reduce Warnaco's debt on paper and create the appearance that Warnaco had remained in compliance with the debt-to-equity covenant as of the end of the quarter. In order to convince Warnaco's auditors that the cash against debt set-off was proper under Generally Accepted Accounting Principles, Finkelstein asked Warnaco's general counsel to send a letter to the auditors stating that Warnaco and its lenders had entered into a legally enforceable agreement as of September 29, 2000 that Warnaco's cash on hand would be offset against its debt. The general counsel sent the letter without ascertaining whether a legally enforceable agreement had been reached by that date. + + On November 12, 2000, Warnaco filed its quarterly report on Form 10-Q for the third quarter of fiscal 2000. At Finkelstein's direction, Warnaco offset its cash on hand as of September 30 against its long-term debt to prepare the consolidated balance sheet for the report. The balance sheet reported cash of $36.5 million and long-term debt of $1.6 billion. By using these revised amounts, Warnaco's debt-to-equity ratio appeared to be slightly less than 5-to-1, indicating that Warnaco remained in compliance with the Calvin Klein licensing agreement. The quarterly report did not disclose that the reported cash and long-term debt amounts differed from the amounts Warnaco had previously announced in its earnings release on November 2, 2000. Nor did the report disclose that Warnaco had offset $190.5 million in cash against long-term debt in order to reach the reported cash and debt amounts. + + The revised cash and debt amounts that Warnaco reported in its Form 10-Q were not calculated in conformity with GAAP. Under Financial Accounting Standards Board ("FASB") Interpretation No. 39 ("FIN 39"), accounts can be offset only in certain limited instances: + + [T]he offset of assets and liabilities in the balance sheet is improper except where a right of setoff exists. . . . A right of setoff exists when all of the following conditions are met: (a) Each of two parties owes the other determinable amounts; (b) The reporting party has the right to set off the amount owed with the amount owed by the other party; (c) The reporting party intends to set off; and (d) The right of setoff is enforceable at law. + + FIN 39 also states that cash cannot be treated as an amount owed to the depositor by the financial institution and cannot be subject to set-off. + + None of the FIN 39 requirements were met. FIN 39 specifically prohibits the set off of cash held on deposit at a financial institution, and therefore Warnaco could not treat its cash deposits as a "debt" owed to it by the banks. Moreover, there was no legally enforceable agreement between Warnaco and its banks to repay the $190.5 million that was setoff. Finally, Warnaco never repaid the full $190.5 million, indicating that there was no agreement to offset that amount. Therefore, under GAAP, Warnaco was not permitted to offset the $190.5 million against debt. As a result, the quarterly report was misleading. + + 3. Warnaco's $26 Million Restatement of Shareholders' Equity in April 2001 + + On April 18, 2001, Warnaco filed its annual report on Form 10-K for fiscal 2000. In this filing, Warnaco again restated its financial statements dating back to January 3, 1998 to correct a new set of accounting errors, including a $52 million understatement of Warnaco's accounts receivable reserves, a $6 million understatement of accrued liabilities, inventory and other assets that were overstated by $17 million, and a deferred tax asset that was understated by $49 million. The net effect of the adjustments was to reduce shareholders' equity by $26 million as of January 3, 1998. + + The majority of the adjustment - the $52 million understatement of accounts receivable reserves at Warnaco's IAD - was due to Warnaco's failure over a period of years to accrue a sufficient reserve for customer returns and discounts, as required by GAAP. At the request of Warnaco's new auditors, Deloitte & Touche, Warnaco prepared an analysis of the customer return reserve and concluded that it should have established a total of $41 million or more in reserves beginning in 1997. + + As a result of these errors, Warnaco filed inaccurate financial statements from 1998 through 2000. Warnaco also failed to maintain books and records that accurately reflected the transactions of the company and failed to establish an adequate system of internal controls. + + 4. Warnaco's $51 Million Restatement In July 2002 + + On August 23, 2001, Warnaco announced that it expected to take an estimated $43 million charge to earnings and restate its financial results for the prior three fiscal years (1999, 2000, and 2001). Ultimately, the errors turned out to be larger than Warnaco had anticipated. On July 31, 2002, Warnaco filed its overdue annual report on Form 10-K for fiscal year 2001, restating its financial results for the years 1999 through 2001 to reduce net income or increase net loss by a total of $51 million over the period. The restatement reduced net income for 1999 by $4.1 million; increased net loss for 2000 by $45.8 million; and increased net loss for the first quarter of 2001 by $1.1 million. + + This restatement resulted from significant accounting problems at Warnaco's Designer Holdings Limited ("DHL") subsidiary, which manufactures designer jeans and sportswear under the Calvin Klein logo. From at least 1999, DHL had improperly accounted for "inter-company transactions," that is, transactions between DHL and other divisions or subsidiaries of Warnaco. DHL recorded the transactions at a lower cost than the other divisions. Moreover, because DHL failed to reconcile its accounts payable for a period of years, DHL failed to timely discover the error. Further, when Warnaco and its auditors scrutinized the DHL accounts after the inter-company error was discovered, they found additional accounting errors relating to the recording of accounts payable and inventory at European subsidiaries, including the booking of some entries to the general ledger without proper support. Ultimately, these errors led to the $51 million restatement. + + As with the inventory error at IAD described above, the errors at DHL resulted from material weaknesses in DHL's internal controls. DHL failed to maintain basic internal controls. Moreover, Warnaco had no corporate policy during this period to ensure that each division performed basic accounting control measures, such as reconciling all major accounts at the end of each month or each quarter. If DHL had reconciled its accounts on a regular basis, it would have identified the errors that resulted in the $51 million restatement and corrected them in a timely manner. + + As a result of this conduct, Warnaco's Forms 10-K for 1999-2001 misstated cost of goods sold, net income, accounts payable, and earnings per share. Warnaco also failed to maintain books and records that accurately reflected the transactions of Warnaco and failed to establish an adequate system of internal controls. + + D. Violations + + 1. Warnaco Issued a False and Misleading Press Release + + Section 10(b) of the Exchange Act and Rule 10b-5 thereunder prohibit materially false or misleading statements or omissions made in connection with the purchase or sale of securities. SEC v. McNulty , 137 F.3d 732, 741 (2d Cir. 1998). "Moreover, half-truths are as violative . . . as outright falsehoods." SEC v. Schiffer , S.D.N.Y. 1998 Fed. Sec. L. Rep. ¶ 90,247, 1998 WL 307375, at *2 (S.D.N.Y.). + + A fact is material if there is a substantial likelihood that a reasonable investor would consider the information to be important. Basic v. Levinson , 485 U.S. 224, 231-32 (1988). Information concerning a company's financial condition and profitability is material information. See, e.g. , SEC v. Murphy , 626 F.2d 633, 653 (9th Cir. 1980). Misstatements of income are material because "earnings reports are among the pieces of data that investors find most relevant to their investment decisions." Ganino v. Citizens Util. Co., , 228 F.3d 154, 164 (2d Cir. 2000) (citation omitted). + + Section 10(b) and Rule 10b-5 require that a defendant act with scienter, which has been defined as "a mental state embracing intent to deceive, manipulate, or defraud." Aaron v. SEC , 446 U.S. 680, 701-02 (1980); Ernst & Ernst v. Hochfelder , 425 U.S. 185, 193 n.12 (1976). Scienter can be satisfied by showing that a defendant acted recklessly. See, e.g. , ITT v. Cornfeld , 619 F.2d 909, 923 (2d Cir. 1980); Schiffer , 1998 WL 307375, at *3. For the purposes of establishing scienter on the part of a company, the mental state of the company's officers is imputed to the company. SEC v. Manor Nursing Centers, Inc. , 458 F.2d 1082, 1089 n.3 (2d Cir. 1972). + + Warnaco issued a false and misleading press release on March 2, 1999 that materially misrepresented Warnaco's financial results. The press release reported "record" earnings results without informing investors that these results were substantially greater than the audited results Warnaco would report the following month in its annual report. It obscured the material information that Warnaco's inventory was overstated by $145 million (more than twenty percent), and failed to disclose this overstatement had been caused by materially deficient accounting and internal control systems at Warnaco's largest division. Instead, Warnaco falsely claimed that the inventory write-down was part of the write-off of start-up costs under new accounting pronouncement SOP 98-5, making it appear that these were costs incurred in growing the business when in fact Warnaco would be restating its financial results to correct the $145 million overstatement of its inventory. + + As a result of these acts and omissions, Warnaco violated Section 10(b) of the Exchange Act and Rule 10b-5 promulgated thereunder. + + 2. Warnaco Violated the Reporting Provisions of the Exchange Act + + Section 13(a) of the Exchange Act and Rule 13a-1 thereunder require issuers whose securities are registered with the Commission pursuant to Section 12 of the Exchange Act to file annual reports with the Commission. These reports must be complete and accurate in all material respects. United States v. Bilzerian , 926 F.2d 1285, 1298 (2d Cir. 1991); SEC v. Savoy Indus., Inc. , 587 F.2d 1149, 1165 (D.C. Cir. 1978), cert. denied , 440 U.S. 913 (1979). Rule 12b-20 of the Exchange Act requires that an issuer's periodic reports include any additional information "necessary to make the required statements, in the light of the circumstances under which they are made, not misleading." The issuer's legal obligation "extends not only to accurate quantitative reporting of the required items in its financial statements, but also to other information, qualitative as well as quantitative, needed to enable investors to make informed decisions." In re Sony Corp. and Sumio Sano , 67 SEC Docket 1609, 1998 WL 439898 at *4 (Aug. 5, 1998). + + Warnaco filed a misleading fiscal 1998 Form 10-K annual report on April 2, 1999 that falsely attributed Warnaco's $145 million restatement to "previously deferred" start-up related costs identified in connection with Warnaco's adoption of SOP 98-5. Warnaco failed to disclose that the restatement was precipitated by a material failure of Warnaco's inventory accounting and internal control systems and did not clearly explain to investors that Warnaco had restated its financial results for a three-year period to correct a $145 million inventory overvaluation. + + Warnaco also filed a misleading and inaccurate third quarter 2000 Form 10-Q quarterly report on November 12, 2000 that improperly offset $190.5 million in cash against debt in order to avoid a claim of non-compliance with the Calvin Klein licensing agreement. This offset was not in conformity with GAAP. + + In addition, Warnaco filed annual reports for the years 1998 through 2001 that contained inaccurate financial statements that were not presented in conformity with GAAP, due to a series of errors that required Warnaco to restate its financial results for this period on three separate occasions. + + By its conduct, Warnaco violated Section 13(a) of the Exchange Act and Rules 12b-20, 13a-1 and 13a-13 thereunder. + + 3. Warnaco Violated the Books and Records and Internal Control Provisions of the Exchange Act + + Section 13(b)(2)(A) of the Exchange Act requires that issuers make and keep books, records, and accounts which, in reasonable detail, accurately and fairly represent the transactions and dispositions of the company. Section 13(b)(2)(B) of the Exchange Act requires reporting companies to devise and maintain a system of internal accounting controls sufficient to provide reasonable assurances that, among other things, transactions are recorded as necessary to permit preparation of financial statements in conformity with generally accepted accounting principles and to maintain accountability of assets. + + During the period 1996 through 2001, Warnaco's books and records failed to accurately reflect the company's transactions as set forth below: + During the period from at least 1996 through the end of 1998, as a result of the weaknesses in the IAD inventory accounting and internal control systems, Warnaco's books and records overstated the actual value of the company's inventory by $145 million. + + In November 1999, as a result of Warnaco's decision to improperly offset cash against long term debt, the company's books and records understated long-term debt and cash on hand by $190.5 million. + + During the period from at least 1997 through 2000, due to the company's failure to account properly for customer returns and other errors, Warnaco's books and records understated shareholders' equity by $26 million and understated by material amounts the company's accounts receivable reserves, accrued liabilities, and inventory and other assets. + + During the period from at least 1998 through 2001, as a result of DHL's failure to properly account for inter-company transactions and other errors, Warnaco's books and records did not accurately reflect the company's financial position and results of operations, resulting in an overstatement of net income of $51 million. + + Warnaco also failed to maintain adequate internal controls sufficient to ensure that Warnaco's financial statements would be prepared in conformity with GAAP, as required by Section 13(b)(2)(B) of the Exchange Act. The inventory and internal control systems at Warnaco's largest division, IAD, were inadequate and error-prone. Senior management at Warnaco was aware of these defects, but did not take steps to rectify the situation promptly. Further, Warnaco's senior management failed to ensure that all of Warnaco's divisions had sufficient internal controls to identify and correct the accounting errors that led to Warnaco's 2001 and 2002 restatements. + + By its conduct, Warnaco violated Sections 13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act. + + E. Undertakings + + Respondent undertakes to: + Require its board of directors to appoint a special committee comprised entirely of outside directors ("Special Committee") that shall retain, within thirty days after entry of this Order, a qualified independent consultant not unacceptable to the staff of the Division of Enforcement to perform a complete review of Warnaco's internal controls and policies relating to: + All inventory systems at the Intimate Apparel Division, including but not limited to cost accounting systems and internal control systems relating to inventory valuation; + + Procedures relating to inter-company accounts, accounts payable transactions, and appropriate reconciliation of all accounts at the company (including both corporate and division or subsidiary); + + Internal audit functions at the company; and + + Financial reporting functions. + Warnaco shall cooperate fully with the Independent Consultant in this review. Within 120 days after appointment, the Independent Consultant shall complete its review and submit to the Special Committee and Division Staff a written report fully documenting its findings and proposed recommendations. Within sixty days after receipt of such report, Warnaco's board of directors shall adopt and implement such recommendations; provided, however, that as to any recommendation that Warnaco believes is unduly burdensome or impractical, Warnaco may suggest an alternative policy or procedure designed to achieve the same objective, submitted in writing to the Independent Consultant and the Division Staff. The Independent Consultant shall reasonably evaluate any alternative policy or procedure proposed by Warnaco. Warnaco agrees that it will abide by the decision of the Independent Consultant regarding such alternative proposals. + + Warnaco further agrees to require the Independent Consultant to enter into an agreement that provides that for the period of engagement and for a period of two years from completion of the engagement, the Independent Consultant shall not enter into any employment, consultant, attorney-client, auditing or other professional relationship with Respondent, or any of its present or former affiliates, directors, officers, employees, or agents acting in their capacity. The agreement will also provide that the Independent Consultant will require that any firm with which he/she is affiliated or of which he/she is a member, and any person engaged to assist the Independent Consultant in performance of his/her duties under this Order shall not, without prior written consent of the Division Staff, enter into any employment, consultant, attorney-client, auditing or other professional relationship with Respondent, or any of its present or former affiliates, directors, officers, employees, or agents acting in their capacity as such for the period of the engagement and for a period of two years after the engagement. + + Require for a period of two years that: + Warnaco's general counsel continue to report directly to the audit committee of the board of directors on any matter relating to Warnaco's financial reporting obligations; and + + Former general counsel Stanley P. Silverstein not sign any documents to be filed with the Commission by or on behalf of Warnaco and not participate in or be responsible for the preparation or review of such filings, except that Silverstein may provide information to others upon request for inclusion into such filings if he also provides a copy of any such information to Warnaco's audit committee. + In determining whether to accept the Offer, the Commission has considered the undertakings set forth in the preceding paragraphs. + + F. Findings + + Based on the foregoing, the Commission finds that Warnaco violated Sections 10(b), 13(a), 13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act and Rules 10b-5, 12b-20, 13a-1 and 13a-13 thereunder. + + IV. + + In view of the foregoing, the Commission deems it appropriate to impose the sanctions agreed to in Warnaco's Offer. + + ACCORDINGLY, IT IS HEREBY ORDERED: + + Pursuant to Section 21C of the Exchange Act, that Warnaco cease and desist from committing or causing any violations and any future violations of Sections 10(b), 13(a), 13(b)(2)(A), and 13(b)(2)(B) of the Exchange Act, and Rules 10b-5, 12b-20, 13a-1, and 13a-13 promulgated thereunder. + + By the Commission. + + Jonathan G. Katz + Secretary + + ____________________ + 1 Simultaneously with this proceeding, the Commission has instituted or filed the following settled actions: SEC v. William S. Finkelstein, 04 CV 3573 (May 11, 2004 S.D.N.Y.) (SS); In the Matter of Linda J. Wachner , Rel. No. 34-49677 (May 11, 2004); In the Matter of Stanley P. Silverstein , Rel. No. 34-49676 (May 11, 2004); and In the Matter of PricewaterhouseCoopers LLP , Rel. No. 34-49678 (May 11, 2004). + + 2 The findings herein are made pursuant to Respondent's Offer of Settlement and are not binding on any other person or entity in this or any other proceeding. + + 3 American Institute of Certified Public Accountants ("AICPA") Statement of Position ("SOP") 98-5, which was issued on April 3, 1998, required companies to expense start-up costs in the period in which they were incurred, rather than capitalizing them as had been previously permitted. Companies were required to write-off any previously deferred start-up costs on their books at the time of adoption. SOP 98-5 became effective in fiscal 1999, although companies were permitted to adopt the SOP early. Warnaco adopted SOP 98-5 at the end of its fiscal 1998 year. + + 4 "Start-up costs" are those costs associated with one-time activities related to opening a new facility or introducing a new product or service. Historically, GAAP allowed companies to capitalize their start-up costs, and then amortize those costs over a period of years. However, SOP 98-5 required companies to record start-up costs as expenses at the time they are incurred. All public companies were required to adopt SOP 98-5 and write off their start-up costs by no later than fiscal 1999. + + 5 Warnaco had a very expansive start-up policy that deemed all new or expanded plants to be in start-up phase for up to three years from the time they began operating. During this phase, Warnaco classified all of the plant's operating expenses above the standard cost as start-up, and recorded them each quarter into a separate "start-up account" on its books. Finkelstein oversaw this process, and the start-up accounts were audited by PwC each year. As of year-end 1998, Warnaco had over $71 million recorded in its start-up accounts that would be written off under SOP 98-5. + + + + + + + + + + + + + + + + + + + + + + + + Return to top + + + + + SEC homepage + + + + + + + + + + + + + + About the SEC + + + + + + Budget & Performance + + + Careers + + + Commission Votes + + + Contact + + + Contracts + + + + + + + + Transparency + + + + + + Accessibility & Disability + + + Super Intelligence + + + FOIA + + + Inspector General + + + No FEAR Act Data + + + Ombuds + + + SEC Excess Personal Property Guidance + + + + + + + + Websites + + + + + + Investor.gov + + + Related Sites + + + USA.gov + + + + + + + + Site Information + + + + + + Plain Writing + + + Privacy & Security + + + Site Map + + + + + + + + + + + + + + + + + + Stay connected. 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Wachner + + + + + + + + + + + + Linda J. Wachner + + + + + + + + + + + + + + + + + + + + SECURITIES EXCHANGE ACT OF 1934 + Release No. 49677 / May 11, 2004 + ACCOUNTING AND AUDITING ENFORCEMENT + Release No. 2006 / May 11, 2004 + ADMINISTRATIVE PROCEEDING + File No. 3-11482 + + + In the Matter of + LINDA J. WACHNER, + Respondent. + + : : : : : : : : + ORDER INSTITUTING CEASE-AND-DESIST PROCEEDINGS, MAKING FINDINGS, AND IMPOSING CEASE-AND-DESIST ORDER PURSUANT TO SECTION 21C OF THE SECURITIES EXCHANGE ACT OF 1934 + I. + + The Securities and Exchange Commission ("Commission") deems it appropriate that cease-and-desist proceedings be, and hereby are, instituted pursuant to Section 21C of the Securities Exchange Act of 1934 ("Exchange Act") against Linda J. Wachner ("Wachner" or "Respondent"). + + II. + + In anticipation of the institution of these proceedings, Respondent has submitted an Offer of Settlement (the "Offer") which the Commission has determined to accept. 1 Solely for the purpose of these proceedings and any other proceedings brought by or on behalf of the Commission, or to which the Commission is a party, and without admitting or denying the findings herein, except as to the Commission's jurisdiction over her and the subject matter of these proceedings, Respondent consents to the entry of this Order Instituting Cease-and-Desist Proceedings, Making Findings, and Imposing a Cease-and-Desist Order Pursuant to Section 21C of the Securities Exchange Act of 1934 ("Order"), as set forth below. + + III. + + On the basis of this Order and Respondent's Offer, the Commission finds 2 that: + + FACTUAL FINDINGS + + A. Respondent and Related Parties + + Linda J. Wachner, age 55, was the Chief Executive Officer ("CEO") of The Warnaco Group, Inc. from 1986 until November 2001. She also held the position of chairman of the board of directors. Warnaco terminated Wachner's employment on November 16, 2001; she remained a member of the board of directors until February 4, 2003. Wachner is a resident of New York, New York. + + The Warnaco Group, Inc. ("Warnaco" or "company") is a Delaware corporation with its headquarters in New York, New York. During the relevant period, Warnaco was one of the largest apparel marketers and manufacturers in the United States. Warnaco's common stock is registered with the Commission pursuant to Section 12(b) of the Exchange Act. During the relevant period, Warnaco was a Fortune 500 company that traded on the New York Stock Exchange, Inc. under the symbol "WAC." Warnaco filed for bankruptcy on June 11, 2001. In February 2003, the company emerged from bankruptcy under new management and began trading on the NASDAQ National Market under the symbol "WRNC." + + PricewaterhouseCoopers LLP ("PwC") is a national public accounting firm with its U.S. headquarters in New York, New York. PwC audited Warnaco's financial statements and provided various consulting services for the company for fiscal years 1995 through 1998. PwC also performed quarterly reviews of Warnaco's financial results for the period 1996 through the third quarter of 1999. + + B. Summary + + During the period from at least 1996 through early 1999, Warnaco's inventory accounts were materially overstated in its books and records and in reports filed with the Commission and disseminated to the public. The inventory overstatement was caused by serious and pervasive flaws in the company's cost accounting systems at its largest division, the Intimate Apparel Division. As a result, by early 1999, inventory at the division was overstated by more than 100 percent, and the company's entire inventory balance was overstated by more than twenty percent. Warnaco had to restate its financial results for a three-year period, 1996 through the first three quarters of 1998. + + On April 2, 1999, Warnaco filed with the Commission its Annual Report on Form 10-K for the year ended January 2, 1999 (fiscal 1998), which "revised" the company's previously-reported financial results for the years 1996 through the first three quarters of 1998. Warnaco did not disclose in its annual report that it had restated to correct an inventory overstatement caused by flaws in the company's cost accounting systems. Instead, Warnaco improperly attributed the "revision" to the write-off of "start-up related production and inefficiency costs" in connection with the adoption of a new accounting pronouncement. Accordingly, the annual report contained material misstatements. + + Wachner and other members of Warnaco's senior management knew or should have known that it was improper to attribute the inventory restatement to the write-off of start-up related costs in the company's annual report. Nevertheless, Wachner approved and signed the misleading annual report. As a result, Wachner caused Warnaco's reporting violation. Wachner and other members of Warnaco's senior management also knew or should have known that Warnaco's internal control systems were inadequate and that the company's books and records did not accurately reflect the value of inventory during the period. By failing to require the company to take adequate steps to address these problems, Wachner caused the company's books and records and internal control violations. + + C. Facts + + 1. Inventory Restatement + + a. Indications of an Inventory Overstatement + + Warnaco is one of the largest marketers and manufacturers of apparel in the United States. It designs and manufactures a broad line of intimate apparel, sportswear, swimwear and other clothing under a variety of well-known brand names. Warnaco's Intimate Apparel Division ("IAD") is a leading supplier of intimate apparel to department and specialty stores in the United States. + + During the period from at least 1997 through early 1999, IAD's inventory control systems did not accurately account for the value of manufactured inventory. The systems had not been updated in decades and were outdated and inadequate. + + As CEO of the company, Wachner knew or should have known that IAD's accounting systems were antiquated and prone to error. In mid-1997, in response to a recommendation from Warnaco's independent auditors, PwC, Wachner caused Warnaco to hire consultants from PwC to update and improve IAD's standard cost system ("the Standard Cost Project"). 3 As part of the Standard Cost Project, the PwC consultants examined IAD's inventory accounts and preliminarily concluded by the Spring of 1998 that the inventory accounts were overstated by at least $60 million. The PwC consultants conveyed their preliminary findings to Wachner and other senior managers during a meeting on March 31, 1998. By July 1998, Wachner and other senior management at the company were informed that IAD accounting personnel, who were working with the PwC consultants, estimated that the potential overstatement could be as high as $83 million. No adjustment was made to inventory at that time. + + In July 1998, the PwC engagement partner for the Warnaco account retired and was replaced by another PwC partner. The new engagement partner believed that the company's board of directors should be informed about the potential inventory overstatement. After the engagement partner informed the audit committee of the potential overstatement at the August 1998 board meeting, Wachner expressed dissatisfaction with the partner's failure to raise the issue with management prior to the meeting and requested that PwC address the issue. As a result, PwC replaced the engagement partner and assigned a new audit team. + + b. The Inventory Overstatement Is Confirmed + + In the Fall of 1998, IAD completed its annual physical inventory count and attempted to reconcile the physical inventory to the value of the inventory recorded on IAD's books. The reconciliation was consistent with the preliminary findings of the Standard Cost Project: the value of the actual physical inventory was $60 million to $80 million less than the inventory value recorded on IAD's internal books and publicly reported in Warnaco's periodic reports. + + In late October or early November 1998, Warnaco's CFO informed PwC of the significant discrepancy identified in the IAD reconciliation process. Wachner joined in the CFO's assertion that the discrepancy must be due to "start-up costs" that had been erroneously recorded into inventory. 4 The CFO proposed writing off the inventory discrepancy as part of Warnaco's early adoption of a new accounting principle, American Institute of Certified Public Accountants Statement of Position ("SOP") 98-5, which required companies to record start-up costs as they were incurred, rather than amortizing them over time. The CFO did not provide any evidence to support this claim. + + Given the magnitude of the inventory discrepancy, the audit team informed Wachner and other members of senior management that PwC could not rely upon Warnaco's books and records or internal control systems in determining the correct value of IAD's inventory. Instead, Warnaco and the PwC audit team engaged some of the same PwC consultants who had worked on the Standard Cost Project to create a new system for valuing IAD's inventory. Warnaco also completed a second physical inventory count to ensure that the inventory discrepancy was a valuation problem and not a physical inventory problem. In December 1998, the second physical inventory confirmed that the problem was not one of missing inventory, but rather was due to an overvaluation of existing inventory. + + In the course of this work, PwC identified certain flaws in IAD's cost accounting system. These flaws -- including missing or incomplete standard costs and the division's failure to update or maintain the standard cost files over the prior five years -- had prevented the system from properly reducing the value of inventory recorded on Warnaco's books as inventory was sold. During a meeting in December 1998 and in subsequent discussions, PwC notified Warnaco's senior management, including Wachner, of their findings. These findings were consistent with the problems the PwC consultants had identified and brought to Wachner's attention in March 1998. + + In February 1999, PwC completed its work and determined that Warnaco's inventory was overvalued by $159 million. To account for the necessary inventory write-down, PwC decided that Warnaco would have to restate its financial results for the preceding three years. However, Wachner and the CFO continued to insist that the inventory overstatement was attributable to start-up costs that had been misallocated to the inventory accounts and should be written off as part of the company's adoption of SOP 98-5 without causing a restatement. During a two-day meeting held in late February 1999, senior Warnaco management attempted to convince the auditors that the overstatement should be written off under SOP 98-5. After reviewing the information provided by Warnaco, PwC determined that, at most, only $14 million of the overstatement could be written-off as start-up costs. The remaining inventory overstatement -- $145 million -- had to be accounted for as the correction of an error, thus necessitating a restatement of previously-reported financial results for fiscal 1996 through the first three quarters of 1998. + + The following day, the auditors informed the company's board of directors that the inventory error could not be written off under SOP 98-5 and would require the company to restate its financial results for a three-year period. As chairman of the board of directors, Wachner attended the board meeting and participated in the board's discussion of the problem. At the end of the meeting, the board agreed that the company would restate its financial results. + + As shown below, the restatement had a material impact upon the company's previously reported results for 1996, 1997, and the first three quarters of 1998: + +   + + Inventory + ($ in thousands) + + Net Income + ($ in thousands) + + EPS + (diluted) +   + + Prev. Reported + + Restated + + % + + Prev. + Reported + + Restated + + % + + Prev. + Reported + + Restated + + % + 1998 _ + 625,545 + + 492,827 + + -21% + + 94,352 + + 69,948 * + - 26% + + 1.48 + + 0.72 + + - 51% + 1997 + + 526,185 + + 431,185 + + -18% + + 23,032 + + (12,319) + + -154% + + 0.42 + + (0.23) + + -155% + 1996 + + 387,318 + + 349,335 + + - 10% + + (8,239) + + (31,409) + + -281% + + (0.16) + + (0.61) + + -281% + + + _ Cumulative results from the first three quarters of 1998. + * Adjusted to exclude $23,976 related to adoption of SOP 98-5 effective beginning of fiscal 1998. + + c. Warnaco's Annual Report + + On April 2, 1999, Warnaco filed its annual report on Form 10-K for fiscal 1998. In this report, the company revised its financial results for fiscal 1996-1998 to reduce inventory and increase cost of goods sold by $145 million, as required by GAAP. However, the Form 10-K report misleadingly asserted that the restatement related to the company's adoption of SOP 98-5. In the notes to the audited financial statements, Warnaco explained the restatement to its investors by claiming that the inventory "revision" was the result of "start-up related and production inefficiency costs" identified by the company during its adoption of new accounting standard SOP 98-5. Specifically, the annual report stated: + + Adjustments, Reclassifications and Revisions: As noted above, the Company early adopted SOP 98-5 in fiscal 1998. In connection with the adoption of the new accounting standard, an extensive effort was undertaken to identify all start-up related production and inefficiency costs that had previously been deferred. Over the last six years, the Company has opened or expanded 10 manufacturing facilities. In addition, to support anticipated future growth, the Company opened 2 new manufacturing facilities during 1998 for a total of 12 new facilities. This resulted in the Company's incurring plant inefficiencies and other start-up related costs resulting from high turnover and related training and other costs. Such start-up related production and inefficiency costs have been classified in other assets and inventories. Because certain such costs identified in this process related to fiscal 1997 and 1996 activities, such prior year consolidated financial statements have been revised to reflect additional costs of goods sold[.] (Emphasis added.) + + PwC acceded to Warnaco's description of the restatement and described the restatement in similar terms in its "Report of Independent Accountants" attached to Warnaco's financial statements. + + The Form 10-K report was misleading and inaccurate. The restatement was not the result of "previously deferred" start-up costs and was not related to the company's adoption of SOP 98-5. Rather, the restatement resulted from material flaws in IAD's inventory accounting system. The annual report did not clearly explain to investors that Warnaco had restated its financial results for a three-year period to correct a $145 million inventory overvaluation, and did not disclose that this restatement was caused by the failure of IAD's inventory costing system to account properly for the value of inventory. + + Wachner reviewed the fiscal 1998 Form 10-K before it was filed and signed the document as CEO of the company. As a result of her meetings with PwC in late February and early March 1999, Wachner understood that Warnaco's auditors had determined that the inventory overstatement could not be attributed to misclassified start-up costs. Wachner also knew or should have known that the overstatement had not been discovered in connection with the adoption of SOP 98-5, as implied in the annual report. In light of the information Wachner received during meetings with PwC and Warnaco management between March 1998 and March 1999, Wachner knew or should have known at the time that she signed the filing that Warnaco's annual report mischaracterized the cause of the restatement. + + Warnaco did not correct the misleading disclosure until May 16, 2000, when it filed an amended 1998 Form 10-K. The amended report, signed by Wachner as CEO, removed all references to "start-up related production and inefficiency costs" and, for the first time, informed investors that: + + Reclassifications and Restatement: . . . In connection with the fiscal 1998 year-end closing, the Company determined that in fiscal 1996, 1997 and the first three quarters of 1998, as merchandise was sold, inventories were relieved at less than actual cost per unit, leaving an accumulation of inventory costs. As a result, costs related to [those periods] have been restated to reflect additional costs of goods sold[.] . . . This restatement resulted from flaws in the Company's Intimate Apparel Division inventory costing control system that have since been addressed. + + 2. Respondent's Bonus + + Under the terms of her employment contract with Warnaco, Wachner was eligible to receive a bonus if the company met a predetermined earnings threshold in a given fiscal year. In fiscal 1998, Warnaco did not meet its earnings threshold because of the impact of the restatement upon earnings. However, Warnaco calculated earnings for purposes of the bonus calculation without including the effect of the restatement. By doing so, Warnaco appeared to meet the earnings threshold, resulting in a significant bonus for Wachner and other executives at the company. Had the effect of the restatement been factored into the bonus calculation, Wachner would not have been eligible to receive a bonus under her contract. + + D. Violations + + 1. Respondent Was a Cause of Warnaco's Violation of the Reporting Provisions of the Exchange Act + + Section 13(a) of the Exchange Act and Rule 13a-1 thereunder require issuers whose securities are registered with the Commission pursuant to Section 12 of the Exchange Act to file annual reports with the Commission. These reports must be complete and accurate. United States v. Bilzerian , 926 F.2d 1285, 1298 (2d Cir. 1991); SEC v. Savoy Indus., Inc. , 587 F.2d 1149, 1165 (D.C. Cir. 1978), cert. denied , 440 U.S. 913 (1979). Rule 12b-20 of the Exchange Act requires that an issuer's periodic reports include any additional information "as necessary to make the required statements, in the light of the circumstances under which they are made, not misleading." Information is material where there is a substantial likelihood that a reasonable investor would consider the information important in making an investment decision. Basic, Inc. v. Levinson , 485 U.S. 224, 231-32 (1988). The issuer's legal obligation "extends not only to accurate quantitative reporting of the required items in its financial statements, but also to other information, qualitative as well as quantitative, needed to enable investors to make informed decisions." In re Sony Corp. and Sumio Sano , 67 SEC Docket 1609, 1998 WL 439898, at *4 (Aug. 5, 1998). + + By filing a Form 10-K annual report for fiscal 1998 that mischaracterized the reason for the restatement of the company's financial results, Warnaco violated Section 13(a) of the Exchange Act and Rules 12b-20 and 13a-1 thereunder. At the time Wachner approved and signed Warnaco's annual report, she knew or should have known that the restatement of the company's financial results was not related to the adoption of SOP 98-5 or the write-off of start-up related costs. Wachner knew or should have known that the restatement was due to material flaws in the company's cost accounting and internal control systems. By approving and signing the Form 10-K, Wachner was a cause of Warnaco's violation of Section 13(a) and Rules 12b-20 and 13a-1 of the Exchange Act. + + 2. Respondent Was a Cause of Warnaco's Violations of the Books and Records and Internal Control Provisions of the Exchange Act + + Section 13(b)(2)(A) of the Exchange Act requires that issuers make and keep books, records, and accounts which, in reasonable detail, accurately and fairly represent the transactions and dispositions of the company. Warnaco violated Section 13(b)(2)(A) of the Exchange Act because IAD's books, records, and accounts did not accurately and fairly reflect the inventory balance during the period 1996 through 1998. Wachner knew or should have known that the inventory accounts at the IAD were overstated, and her failure to ensure that Warnaco corrected IAD's inventory accounts in a timely manner was a cause of Warnaco's Section 13(b)(2)(A) violation. + + Section 13(b)(2)(B) of the Exchange Act requires reporting companies to devise and maintain a system of internal accounting controls sufficient to provide reasonable assurances that, among other things, transactions are recorded as necessary to permit preparation of financial statements in conformity with generally accepted accounting principles and to maintain accountability of assets. During the period from at least 1997 through early 1999, Warnaco's internal controls at the Intimate Apparel Division were inadequate to provide reasonable assurances that transactions in the inventory and cost of goods sold accounts were properly recorded. Wachner knew or should have known IAD's inventory costing control system was inadequate to assure the accuracy of Warnaco's books and records, and her failure to ensure that proper internal controls were in place was a cause of Warnaco's Section 13(b)(2)(B) violation. + + E. Findings + + Based on the foregoing, the Commission finds that Wachner was a cause of Warnaco's violations of Sections 13(a), 13(b)(2)(A), and 13(b)(2)(B) of the Exchange Act and Rules 12b-20 and 13a-1 thereunder. + + IV. + + In view of the foregoing, the Commission deems it appropriate to impose the remedies specified in Wachner's Offer. + + ACCORDINGLY, IT IS HEREBY ORDERED: + + A. Pursuant to Section 21C of the Exchange Act, that Respondent Wachner cease and desist from causing any violations and any future violations of Sections 13(a), 13(b)(2)(A), and 13(b)(2)(B) of the Exchange Act, and Rules 12b-20 and 13a-1 promulgated thereunder. + + B. IT IS FURTHER ORDERED THAT Respondent Wachner shall, within 10 days of the entry of this Order, pay $1,328,444 in disgorgement and prejudgment interest, to the United States Treasury. Such payment shall be: (A) made by United States postal money order, certified check, bank cashier's check or bank money order; (B) made payable to the Securities and Exchange Commission; (C) hand-delivered or mailed to the Office of Financial Management, Securities and Exchange Commission, Operations Center, 6432 General Green Way, Alexandria, Stop 0-3, VA 22312; and (D) submitted under cover letter that identifies Linda J. Wachner as a Respondent in these proceedings, the file number of these proceedings, a copy of which cover letter and money order or check shall be sent to Antonia Chion, Associate Director, Division of Enforcement, Securities and Exchange Commission, 450 5th Street N.W., Washington, D.C. 20549-0801. + + By the Commission. + + Jonathan G. Katz + Secretary + + + ________________________ + 1 Simultaneously with this proceeding, the Commission has instituted or filed the following settled actions: In the Matter of The Warnaco Group, Inc. , Rel. No. 34-49675 (May 11, 2004); SEC v. William S. Finkelstein, 04 CV 3574 (May 11, 2004 S.D.N.Y.) (SS); In the Matter of Stanley P. Silverstein, Rel. No. 34-49676 (May 11, 2004); In the Matter of PricewaterhouseCoopers LLP, Rel. No. 34-49678 (May 11, 2004) . + + 2 The findings herein are made pursuant to Respondent's Offer of Settlement and are not binding on any other person or entity in this or any other proceeding. + + 3 Wachner also caused Warnaco to hire consultants from PwC and SAP America, Inc. to implement a company-wide global information system that would include improvements in all company financial and inventory controls. However, the SAP project never was successfully implemented. + + 4 "Start-up costs" under SOP 98-5 are "defined broadly as those one-time activities related to opening a new facility, introducing a new product or service, conducting business in a new territory, conducting business with a new class of customer or beneficiary, initiating a new process in an existing facility, or commencing some new operation." Historically, GAAP allowed companies to capitalize their start-up costs, and amortize the expense over a period of years. However, SOP 98-5 required companies to record start-up costs at the time they were incurred. 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Silverstein + + + + + + + + + + + + Stanley P. Silverstein + + + + + + + + + + + + + + + + + + + + SECURITIES EXCHANGE ACT OF 1934 + Release No. 49676 / May 11, 2004 + ACCOUNTING AND AUDITING ENFORCEMENT + Release No. 2007 / May 11, 2007 + ADMINISTRATIVE PROCEEDING + File No. 3-11481 + + In the Matter of + STANLEY P. SILVERSTEIN, + Respondent. + + : : : : : : : : + ORDER INSTITUTING PUBLIC ADMINISTRATIVE AND CEASE-AND-DESIST PROCEEDINGS PURSUANT TO SECTION 21C OF THE SECURITIES EXCHANGE ACT OF 1934 AND RULE 102(e) OF THE COMMISSION'S RULES OF PRACTICE, MAKING FINDINGS, AND IMPOSING REMEDIAL SANCTIONS AND A CEASE-AND-DESIST ORDER + I. + + The Securities and Exchange Commission ("Commission") deems it appropriate that public administrative and cease-and-desist proceedings be, and hereby are, instituted against Stanley P. Silverstein ("Silverstein" or "Respondent") pursuant to Section 21C of the Securities Exchange Act of 1934 ("Exchange Act") and Rule 102(e)(1)(iii) of the Commission's Rules of Practice. + + II. + + In anticipation of the institution of these proceedings, Respondent has submitted an Offer of Settlement (the "Offer") that the Commission has determined to accept. 1 Solely for the purpose of these proceedings and any other proceedings brought by or on behalf of the Commission, or to which the Commission is a party, and without admitting or denying the findings herein, except as to the Commission's jurisdiction over him and the subject matter of these proceedings, Respondent consents to the entry of this Order Instituting Public Administrative and Cease-And-Desist Proceedings Pursuant to Section 21C of the Securities Exchange Act of 1934 and Rule 102(e) of the Commission's Rules of Practice, Making Findings, and Imposing Remedial Sanctions and a Cease-And-Desist Order ("Order"), as set forth below. 2 III. + + On the basis of this Order and Respondent's Offer, the Commission finds that: 3 A. Respondent and Related Parties + + Stanley P. Silverstein , age 51, was Vice President, General Counsel, and Secretary of The Warnaco Group, Inc. during all relevant periods. He is currently Chief Administrative Officer and Senior Vice President, Corporate Development for Warnaco. Silverstein is a resident of Englewood, New Jersey. He is licensed to practice law in the state of New York. + + The Warnaco Group, Inc . ("Warnaco") is a Delaware corporation with its headquarters in New York, New York. During the relevant period, Warnaco was one of the largest apparel manufacturers in the United States, reporting net revenues of $2 billion. Warnaco's common stock is registered with the Commission pursuant to Section 12(b) of the Exchange Act. During the relevant period, Warnaco was a Fortune 500 company that traded on the New York Stock Exchange, Inc. under the symbol "WAC." Warnaco filed for bankruptcy on June 11, 2001. In February 2003, the company emerged from bankruptcy under new management and began trading on the NASDAQ National Market under the symbol "WRNC." + + PricewaterhouseCoopers LLP ("PwC") is a national public accounting firm with its U.S. headquarters in New York, New York. PwC audited Warnaco's financial statements and provided various consulting services for the company during the period 1995 through 1998. PwC also performed quarterly reviews of Warnaco's financial results for the period 1996 through the third quarter of 1999. + + B. Summary + + During the period from at least 1996 through early 1999, Warnaco's inventory accounts were materially overstated in its books and records and, as a result, the value of its inventory was overstated in reports filed with the Commission and disseminated to the public. The inventory overstatement was caused by serious and pervasive flaws in the company's cost accounting systems at its largest division. As a result, by early 1999, inventory at the division was overstated by more than 100 percent, and the company's entire inventory balance was overstated by more than twenty percent. Warnaco had to restate its financial results for a three-year period, 1996 through the first three quarters of 1998. + + On April 2, 1999, Warnaco filed with the Commission its annual report on Form 10-K for the year ended January 2, 1999 (fiscal 1998), which "revised" the company's previously-reported financial results for the years 1996 through the first three quarters of 1998. Warnaco did not disclose in its annual report that it had restated to correct an inventory overstatement caused by flaws in the company's cost accounting systems. Instead, Warnaco improperly attributed the "revision" to the write-off of "start-up related production and inefficiency costs" identified in connection with the adoption of a new accounting pronouncement. Accordingly, the annual report contained material misstatements. + + Silverstein and other members of Warnaco's senior management knew or should have known that it was improper to attribute the inventory restatement to the write-off of start-up related costs in the company's annual report. Nevertheless, Silverstein approved the misleading annual report. As a result, Silverstein caused the company's reporting violation. + + In an unrelated matter, in the third quarter of 2000, Warnaco filed a quarterly report on Form 10-Q that improperly offset $190.5 million in cash against long-term debt. Such an offset was not permitted under generally accepted accounting principles ("GAAP"). Silverstein reviewed and signed Warnaco's Form 10-Q, when he knew or should have known that the company's offset of cash against long-term debt in its quarterly report was improper and not in conformity with GAAP. + + C. Facts + + 1. Inventory Restatement + + a. Discovery of Inventory Overstatement + + Warnaco is one of the largest manufacturers and distributors of apparel in the United States. It designs and manufactures a broad line of intimate apparel, sportswear, swimwear and other clothing under a variety of well-known brand names. Warnaco's Intimate Apparel Division ("IAD") is a leading supplier of intimate apparel to department and specialty stores in the United States. + + During the period at least 1997 through early 1999, the cost accounting and internal control systems at IAD were severely outdated and inadequate, given the size of the division's operations. IAD operated on a standard cost system that had not been updated in decades. 4 IAD did not have a perpetual inventory system or other means for accurately determining the value of its inventory on a regular basis. The division valued its inventory accounts only once a year, when the physical inventory count was taken mid-year and reconciled to the general ledger. Further, out-of-date and missing standard costs led to large and increasing variances between actual and standard cost. By the end of 1997, capitalized variances accounted for forty-two percent of the value of inventory at the division. + + As Warnaco's General Counsel, Silverstein became aware that IAD's accounting systems were antiquated. Silverstein also knew that, on the advice of its auditors, PwC, Warnaco hired PwC consultants to update and correct IAD's standard cost system ("the Standard Cost Project") in late 1997. In August 1998, PwC informed the board and management, including Silverstein, that the standard cost project had revealed that a material reduction in the value of IAD's inventory of $60 million or more might be required. + + In the Fall of 1998, IAD completed its annual physical inventory count and attempted to reconcile the value of the physical inventory to the value of the inventory on IAD's books. The reconciliation process confirmed the findings of the standard cost project: the value of IAD's actual physical inventory was $60 million to $80 million less than the value recorded on IAD's internal records and publicly reported in Warnaco's periodic reports. + + b. PwC's Audit Work Confirms the Overstatement + + Warnaco informed PwC in late October or early November 1998 of the inventory discrepancy identified by the IAD reconciliation. Given the magnitude of the inventory discrepancy, the audit team informed Warnaco's senior management that PwC could not rely upon the company's books and records or internal control systems in determining the correct value of IAD's inventory. Instead, PwC created a new "valuation model" to revalue IAD's inventory, bypassing IAD's own accounting systems. + + In the course of this work, PwC identified flaws in IAD's cost accounting system, including missing, incomplete and outdated standard costs, that had prevented the system from properly reducing the value of inventory recorded on Warnaco's books as inventory was sold. During a meeting in December 1998 and in subsequent discussions, PwC notified Warnaco's senior management, including Silverstein, of their findings. These findings were consistent with the errors the PwC consultants had identified in March 1998 during the Standard Cost Project. + + In February 1999, the auditors completed their work and determined that Warnaco's inventory was overvalued by $159 million. Warnaco sought to treat the overstatement as start-up costs that would be written off as part of the company's adoption of new accounting pronouncement Statement of Position ("SOP") 98-5, which required companies to record start-up costs as they were incurred instead of amortizing them over time. 5 However, PwC determined that the inventory overstatement could not be written off as start-up costs and informed the company that it would have to restate its financial results for the preceding three years to correct the error. + + Over the course of two days in late February 1999, Silverstein attended a series of meetings between PwC and Warnaco's senior management. During these meetings, senior management attempted to convince the auditors that Warnaco should be permitted to write off the overstatement as start-up costs under SOP 98-5. After reviewing the information provided by Warnaco in the light most favorable to the company, PwC determined that, at most, only $14 million of the overstatement arguably could be reclassified as start-up costs. The remaining $145 million could not be written off as start-up costs. + + The auditors informed Silverstein and other members of Warnaco's senior management of this decision at the end of the day on Sunday, February 29, 1999. Silverstein and other members of senior management were also present the next day, March 1, 1999, when PwC informed Warnaco's board of directors that the inventory error could not be written off under SOP 98-5 and would require Warnaco to restate its financial statements for a three-year period. + + As shown below, the restatement had a material impact upon the company's previously reported results for 1996, 1997, and the first three quarters of 1998: + +   + + Inventory + ($ in thousands) + + Net Income + ($ in thousands) + + EPS + (diluted) +   + + Prev. Reported + + Restated + + % + + Prev. + Reported + + Restated + + % + + Prev. + Reported + + Restated + + % + 1998_ + + 625,545 + + 492,827 + + -21% + + 94,352 + + 69,948 * + - 26% + + 1.48 + + 0.72 + + - 51% + 1997 + + 526,185 + + 431,185 + + -18% + + 23,032 + + (12,319) + + -154% + + 0.42 + + (0.23) + + -155% + 1996 + + 387,318 + + 349,335 + + - 10% + + (8,239) + + (31,409) + + -281% + + (0.16) + + (0.61) + + -281% + + + _ Cumulative results from the first three quarters of 1998 + * Adjusted to exclude $23,976 related to adoption of SOP 98-5 effective beginning of fiscal 1998 + + c. Warnaco's 1998 Annual Report on Form 10-K + + On April 2, 1999, Warnaco filed its annual report on Form 10-K for fiscal 1998. In this report, the company "revised" its financial results for fiscal 1996-1998 to reduce inventory and increase cost of goods sold by $145 million, as required by GAAP. Warnaco continued, however, to insist misleadingly that the restatement was related to the company's adoption of SOP 98-5. + + In the annual report, the notes to the audited financial statements explained the restatement by claiming that the inventory "revision" was the result of "start-up related and production inefficiency costs" identified by the company during its adoption of new accounting standard SOP 98-5. Specifically, notes to the financial statements stated: + + Adjustments, Reclassifications and Revisions: As noted above, the Company early adopted SOP 98-5 in fiscal 1998. In connection with the adoption of the new accounting standard, an extensive effort was undertaken to identify all start-up related production and inefficiency costs that had previously been deferred. Over the last six years, the Company has opened or expanded 10 manufacturing facilities. In addition, to support anticipated future growth, the Company opened 2 new manufacturing facilities during 1998 for a total of 12 new facilities. This resulted in the Company's incurring plant inefficiencies and other start-up related costs resulting from high turnover and related training and other costs. Such start-up related production and inefficiency costs have been classified in other assets and inventories. Because certain such costs identified in this process related to fiscal 1997 and 1996 activities, such prior year consolidated financial statements have been revised to reflect additional costs of goods sold[.] (emphasis added) + + The Form 10-K was misleading and inaccurate. The restatement was not the result of "previously deferred" start-up costs and was not related to the company's adoption of SOP 98-5. Rather, the restatement was precipitated by a material failure of Warnaco's inventory accounting system. The annual report did not clearly explain to investors that Warnaco had restated its financial results for a three-year period to correct a $145 million inventory overvaluation, and did not disclose that this restatement was caused by the failure of the company's accounting system to properly deduct costs from inventory as goods were sold. + + As general counsel of Warnaco, Silverstein reviewed the fiscal 1998 Form 10-K and approved its filing. Silverstein knew or should have known that the disclosures contained in the Form 10-K mischaracterized the cause of the restatement. Silverstein knew or should have known that there were significant flaws in IAD's cost accounting and internal control systems. From his attendance at the meetings with PwC in late February and early March 1999, Silverstein knew or should have known that Warnaco's auditors had determined the inventory overstatement could not be attributed to misclassified start-up costs. Silverstein also knew or should have known that it was incorrect to imply that the restatement was related to the adoption of SOP 98-5. + + Warnaco did not correct the misleading disclosure until May 16, 2000, when it filed an amended 1998 Form 10-K. The amended report removed all references to start-up related production and inefficiency costs and for the first time, informed investors that: + + Reclassifications and Restatement: . . . In connection with the fiscal 1998 year-end closing, the Company determined that in fiscal 1996, 1997 and the first three quarters of 1998, as merchandise was sold, inventories were relieved at less than actual cost per unit, leaving an accumulation of inventory costs. As a result, costs related to [those periods] have been restated to reflect additional costs of goods sold[.] . . . This restatement resulted from flaws in the Company's Intimate Apparel Division inventory costing control system that have since been addressed. + + d. Silverstein's Bonus + + As an executive of the company, Silverstein participated in Warnaco's Incentive Compensation Plan. The plan provided for bonuses of up to 100 percent of salary, based upon certain criteria. In 1998, executives at the company were eligible to receive a bonus if Warnaco met certain EBIT (earnings before interest and taxes), inventory turn, and cash flow targets. + + Warnaco met the 1998 cash flow target, but did not meet the inventory turn target. Warnaco did not meet the EBIT target, either, due to the effect of the $145 million restatement upon the company's income. However, Warnaco calculated the company's EBIT as if the restatement had never occurred. By doing so, Warnaco appeared to meet the EBIT target, resulting in larger bonuses for the executives, including Silverstein, than they should have received. As a result of the improper EBIT calculation, Silverstein received an additional $125,305 in Incentive Compensation for 1998. + + 2. Improper Offset of Debt Against Cash in the Third Quarter of 2000 + + In the Summer of 2000, due to its deteriorating financial situation, Warnaco was unable to meet the financial covenants of its long-term debt, which totaled nearly $2 billion. The company sought and subsequently obtained waivers of the financial covenants from its banks. It then entered into a series of negotiations with its bank consortium to restructure its long-term debt. As Warnaco's general counsel, Silverstein participated in these negotiations as one of Warnaco's representatives. The negotiations culminated in an agreement between the banks and Warnaco that was signed on October 6, 2000. + + On November 2, 2000, Warnaco publicly announced its earnings for the third quarter of 2000. In the consolidated balance sheet attached to the press release, Warnaco reported that it had shareholders' equity of $348 million, cash of $227 million, and debt of $1.79 billion as of the end of the third quarter on September 30, 2000. + + Shortly after the press release was issued, Warnaco's lenders contacted Warnaco to inquire whether the company was in compliance with the financial covenants in its license agreement with Calvin Klein, Inc. The financial covenants in that license required Warnaco to maintain a debt-to-equity ratio of less than 5-to-1. The debt and equity amounts reported in the earnings release, however, revealed that Warnaco's debt-to-equity ratio had risen above 5-to-1. Under the terms of the licensing agreement, a violation of the covenant could result in termination of the license, which accounted for more than twenty-five percent of Warnaco's gross revenues. + + After Warnaco's then-CFO confirmed that the lenders' calculations were correct, the CFO decided to retroactively offset the company's cash on hand as of September 30 against its debt, which would reduce Warnaco's debt on paper and create the appearance that Warnaco had remained in compliance with the debt-to-equity covenant as of the end of the quarter. The CFO asked Silverstein to send a letter to the auditors confirming that Warnaco and its lenders had entered into a legally enforceable agreement as of September 29, 2000 that Warnaco's cash on hand would be offset against its debt. Silverstein sent the letter without ascertaining whether a legally enforceable agreement had been reached by that date. No legally enforceable agreement existed as of September 30. + + On November 12, 2000, Warnaco filed its quarterly report on Form 10-Q for the third quarter of fiscal 2000. At the CFO's direction, the company used the revised debt and cash amounts to prepare the consolidated balance sheet for the report. Using the revised amounts, Warnaco's debt-to-equity ratio was slightly less than 5-to-1, thereby creating the appearance that the company remained in compliance with the Calvin Klein licensing agreement. The quarterly report did not disclose that the cash and long-term debt amounts it reported differed from the amounts Warnaco had previously announced in its earnings release on November 2, 2000. Nor did the report disclose that Warnaco had offset $190.5 million in cash against long-term debt in order to reach the reported cash and debt amounts. As General Counsel of the company, Silverstein reviewed and signed Warnaco's Form 10-Q. + + The revised cash and debt amounts that Warnaco reported in its Form 10-Q were not calculated in conformity with GAAP. Under Financial Accounting Standards Board ("FASB") Interpretation No. 39 ("FIN 39"), accounts can be offset only in certain limited instances: + + [T]he offset of assets and liabilities in the balance sheet is improper except where a right of setoff exists. . . . A right of setoff exists when all of the following conditions are met: (a) Each of two parties owes the other determinable amounts; (b) The reporting party has the right to set off the amount owed with the amount owed by the other party; (c) The reporting party intends to set off; and (d) The right of setoff is enforceable at law. + + FIN 39 also states that cash cannot be treated as an amount owed to the depositor by the financial institution and cannot be subject to set-off. + + None of the FIN 39 requirements were met. FIN 39 specifically prohibits the set off of cash held on deposit at a financial institution, and therefore Warnaco could not treat its cash deposits as a "debt" owed to it by the banks. Moreover, there was no legally enforceable agreement between the company and its banks to repay the $190.5 million that was setoff. Finally, Warnaco never repaid $190.5 million, indicating that there was no agreement to offset that amount. Therefore, under GAAP, Warnaco was not permitted to offset the $190.5 million against debt. As a result, the quarterly report was misleading. + + D. Violations + + Section 13(a) of the Exchange Act and Rules 13a-1 and 13a-13 thereunder require issuers whose securities are registered with the Commission pursuant to Section 12 of the Exchange Act to file annual reports with the Commission. These reports must be complete and accurate in all material respects. United States v. Bilzerian , 926 F.2d 1285, 1298 (2d Cir. 1991). Rule 12b-20 of the Exchange Act requires that an issuer's periodic reports include any additional information "as necessary to make the required statements, in the light of the circumstances under which they are made, not misleading." Information is material where there is a substantial likelihood that a reasonable investor would consider the information important in making an investment decision. Basic, Inc. v. Levinson , 485 U.S. 224, 231-32 (1988). The issuer's legal obligation "extends not only to accurate quantitative reporting of the required items in its financial statements, but also to other information, qualitative as well as quantitative, needed to enable investors to make informed decisions." In re Sony Corp. and Sumio Sano , 67 SEC Docket 1609, 1998 WL 439898, at *4 (Aug. 5, 1998). + + By filing an fiscal 1998 Form 10-K annual report on April 2, 1999 that misleadingly and inaccurately described the reason for the restatement of the company's financial statements, Warnaco violated Section 13(a) of the Exchange Act and Rules 12b-20 and 13a-1 thereunder. Silverstein willfully aided and abetted and caused Warnaco's violation of Section 13(a) and Rules 12b-20 and 13a-1 by approving the annual report that he knew or should have known contained a materially inaccurate and misleading description of the reasons for the company's restatement and the cause of the inventory overstatement. + + By filing a third quarter 2000 Form 10-Q quarterly report on November 12, 2000 that improperly offset $190.5 million in cash against long-term debt, Warnaco violated Section 13(a) of the Exchange Act and Rules 12b-20 and 13a-13 thereunder. Silverstein willfully aided and abetted and caused Warnaco's violation of Section 13(a) and Rules 12b-20 and 13a-13 thereunder by approving and signing a quarterly report that he knew or should have known did not accurately represent Warnaco's debt and cash. + + E. Findings + + Based on the foregoing, the Commission finds that Silverstein willfully aided and abetted and caused Warnaco's violations of Section 13(a) of the Exchange Act and Rules 12b-20, 13a-1 and 13a-13 promulgated thereunder. + + F. Undertakings + + Silverstein undertakes and agrees that, for a period of two years from the date of the issuance of the Order: + He will not sign any documents to be filed with the Commission, except for those filings made in his individual capacity that relate to his personal stock holdings; and + + He will not participate in or be responsible for the preparation or review of any documents to be filed with the Commission, except for those filings made in his individual capacity that relate to his personal stock holdings. Although he may provide information to others, upon request, for inclusion into documents to be filed with the Commission by or on behalf of Warnaco or another public company, he must provide a copy of any such information to the Audit Committee of the Board of Directors of such company. + In determining whether to accept the Offer, the Commission has considered the undertakings set forth in the preceding paragraph. + + IV. + + In view of the foregoing, the Commission deems it appropriate to impose the sanctions specified in Respondent Silverstein's Offer. + + ACCORDINGLY, IT IS HEREBY ORDERED, effective immediately, + + A. Pursuant to Section 21C of the Exchange Act, Silverstein cease and desist from causing any violations and any future violations of Section 13(a) of the Exchange Act, and Rules 12b-20, 13a-1, and 13a-13 promulgated thereunder. + + B. Pursuant to Rule 102(e)(1)(iii) of the Commission's Rules of Practice, Silverstein is hereby censured. + + C. IT IS FURTHERED ORDERED that Silverstein shall, within ten days of the entry of this Order, pay disgorgement and prejudgment interest in the total amount of $165,772 to the United States Treasury. Such payment shall be: (A) made by United States postal money order, certified check, bank cashier's check or bank money order; (B) made payable to the Securities and Exchange Commission; (C) hand-delivered or mailed to the Office of Financial Management, Securities and Exchange Commission, Operations Center, 6432 General Green Way, Alexandria, Stop 0-3, VA 22312; and (D) submitted under cover letter that identifies Stanley P. Silverstein as a Respondent in these proceedings, the file number of these proceedings, a copy of which cover letter and money order or check shall be sent to Antonia Chion, Division of Enforcement, Securities and Exchange Commission, 450 5th Street N.W., Washington, D.C. 20549-0801. + + By the Commission. + + Jonathan G. Katz + Secretary + + + ________________________ + 1 Simultaneously with this proceeding, the Commission has instituted or filed the following settled actions: In the Matter of The Warnaco Group, Inc. , Rel. No. 34-49675 (May 11, 2004); SEC v. William S. Finkelstein, 04 CV 3574 (May 11, 2004 S.D.N.Y.) (SS); In the Matter of Linda J. Wachner, Rel. No. 34-49677 (May 11, 2004); In the Matter of PricewaterhouseCoopers LLP, Rel. No. 34-49678 (May 11, 2004) . + + 2 Rule 102(e)(1)(iii) provides, in relevant part, that: + + The Commission may censure a person or deny, temporarily or permanently, the privilege of appearing or practicing before it in any way to any person who is found...[t]o have willfully violated, or willfully aided and abetted the violation of any provision of the Federal securities laws or the rules and regulations thereunder. + + + 3 The findings herein are made pursuant to Respondent's Offer of Settlement and are not binding on any other person or entity in this or any other proceeding. + + 4 IAD used a "standard cost system" to value its inventory internally. The standard costs were based on the estimated cost to produce the company's inventory. GAAP permits the use of a standard cost system for internal accounting. However, a company must adjust the value of the inventory to the actual cost of production before filing its financial statements. The company makes this adjustment by apportioning the difference (or "variance") between inventory (i.e . , goods produced by the company but not yet sold), and the cost of goods sold. Inventory is carried as an asset on the balance sheet; the cost of goods sold is recorded as an expense item on the income statement. Capitalizing costs into inventory instead of recording them as an expense to cost of goods sold increases the inventory balance (thus increasing the company's recorded assets) and decreases the company's expenses (thus increasing its recorded net income). + + 5 "Start-up costs" are those costs associated with one-time activities related to opening a new facility or introducing a new product or service. Historically, GAAP allowed companies to capitalize their start-up costs, and amortize those costs over a period of years. However, AICPA Statement of Position 98-5 ("SOP 98-5") required companies to record start-up costs as expenses at the time they were incurred. 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Finkelstein and PricewaterhouseCoopers LLP + + + + + + + + + + + + William S. Finkelstein and PricewaterhouseCoopers LLP + + + + + + + + + + + + + + + + + + + + + PricewaterhouseCoopers LLP Settles Related SEC Enforcement Action and Agrees to Pay $2.4 Million Penalty + + On May 11, 2004, the Securities and Exchange Commission filed a settled injunctive action against William S. Finkelstein, the former chief financial officer of The Warnaco Group, Inc., for aiding and abetting Warnaco's violations of the antifraud, issuer reporting, books and records, and internal control provisions of the federal securities laws. Also on May 11, the Commission filed a settled action for a civil money penalty against PricewaterhouseCoopers LLP ("PwC"), Warnaco's former auditors, for aiding and abetting Warnaco's violation of the issuer reporting provisions in connection with Warnaco's 1998 annual report. Finkelstein has agreed to pay $189,464 in disgorgement and prejudgment interest and a civil penalty of $75,000 and to be barred for four years from serving as an officer or director of a public company. PwC has agreed to pay a $2.4 million civil penalty. In related administrative proceedings, the Commission issued cease-and-desist orders against Warnaco, former chief executive officer Linda J. Wachner, and former general counsel Stanley P. Silverstein, and censured Silverstein and PwC under Rule 102(e) of the Commission's Rules of Practice. + + The Commission's Complaints + + The Commission's complaint against Finkelstein alleges that Warnaco issued a false and misleading press release on March 2, 1999, which announced "record results" for fourth quarter and fiscal 1998, but failed to disclose that Warnaco would be restating its financial results for the prior three years to correct a $145 million inventory overstatement. In the press release, Warnaco falsely portrayed the inventory write-down as a part of the company's write-off of deferred start-up costs under a new accounting pronouncement. + + The complaint alleges that Finkelstein authorized the issuance of the press release almost immediately after he had participated in two days of meetings during which PwC, Warnaco's outside auditors, had insisted over the objections of Warnaco's senior management that Warnaco could not write off the inventory overstatement under the new accounting pronouncement. After the meetings, Finkelstein showed PwC the draft press release and was told that its description of the reason for the restatement was inconsistent with how the restatement would be described in Warnaco's upcoming annual report and was urged to consult with counsel regarding the content of the release. Finkelstein nevertheless issued the press release containing the misleading characterization of the restatement. + + One month later, on April 2, 1999, Warnaco filed its fiscal 1998 annual report with the Commission. Although the annual report correctly accounted for the $145 million restatement, it failed to disclose that the true cause of the restatement was an inventory overstatement and incorrectly stated that the restatement resulted from the write-off of "start-up related" costs. Finkelstein approved and signed the annual report even though he knew there was no reasonable basis for describing the restatement as involving "start-up related" costs. The complaint also alleges that Finkelstein failed to ensure that Warnaco's books and records were accurate and that the company's internal controls were functioning properly. Finally, the complaint alleges that in November 2000, Warnaco improperly offset $190.5 million in cash against long-term debt in order to create the appearance that the company remained in compliance with a key financial covenant. The offset was not in compliance with generally accepted accounting principles. Finkelstein directed the offset and signed the misleading quarterly report that Warnaco filed with the Commission. + + The Commission's complaint against PwC alleges that, during PwC's audit of the financial statements contained in Warnaco's fiscal 1998 annual report, PwC had determined that the $145 million inventory overvaluation could not be written off pursuant to Warnaco's adoption of the new accounting pronouncement and most likely resulted from a series of internal control deficiencies and accounting errors. The complaint further alleges that, although Warnaco's financial results were accurately reflected in the annual report, PwC failed to object to Warnaco's mischaracterization of the inventory overstatement as involving "start-up related" costs and incorporated the misleading description of the restatement into its own audit report. + + The Commission's complaint against Finkelstein charges Finkelstein with aiding and abetting Warnaco's violations of Sections 10(b), 13(a), and 13(b)(2) of the Securities Exchange Act of 1934 ("Exchange Act") and Rules 10b-5, 12b-20, 13a-1, and 13a-13. Section 10(b) and Rule 10b-5 are general antifraud provisions of the federal securities laws. The Commission's complaint against PwC alleges that the firm aided and abetted Warnaco's violation of Section 13(a) and Rules 12b-20 and 13a-1 in connection with the incorrect disclosure in Warnaco's fiscal 1998 annual report. + + The Settlements + + Finkelstein and PwC have agreed to settle these matters without admitting or denying the allegations in their respective Complaints. The settlement terms are subject to court approval. + + Finkelstein has consented to the entry of an order that would enjoin him from future violations of the relevant federal securities law provisions and rules, order him to pay $189,464 in disgorgement and prejudgment interest and a civil penalty of $75,000, and bar him from acting as an officer or director of a public company for four years. + + PwC has consented to the entry of an order requiring the firm to pay a civil money penalty pursuant to Section 21(d)(3) of the Exchange Act in the amount of $2.4 million. The Commission also censured PwC for aiding and abetting Warnaco's reporting violations in a separate settled administrative proceeding brought under Rule 102(e)(1)(iii) of the Commission's Rules of Practice. + + Related Proceedings + + In related proceedings, on May 11, 2004, the Commission issued a settled cease-and-desist order against Warnaco for violating the antifraud provisions of the securities laws in connection with the March 1999 press release, and for violating the issuer reporting, books and records, and internal control provisions of the securities laws in connection with the company's annual report for fiscal 1998 and quarterly report for the third quarter of 2000. Warnaco also agreed to settle additional reporting, books and records, and internal control violations for two restatements the company made in April 2001 and July 2002. Warnaco agreed to hire an independent consultant to perform a complete review of the company's internal controls and policies relating to its inventory systems, internal audit, financial reporting, and other accounting functions and to adopt the recommendations of the independent consultant within 180 days. + + The Commission also issued a settled cease-and-desist order against Warnaco's former chief executive officer, Linda J. Wachner, for causing Warnaco's violations of the reporting, books and records, and internal control provisions in connection with the fiscal 1998 annual report, and ordered her to pay $1,328,444 in disgorgement of a 1998 bonus amount and prejudgment interest. The Commission found that at the time she approved and signed the 1998 annual report, Wachner knew or should have known that the restatement of the company's financial results was caused by material flaws in the cost accounting and internal control systems at one of the company's largest divisions and was not related to the write-up of deferred start-up or start-up related costs. The Commission also found that Wachner knew or should have known that the division's inventory costing control system was inadequate to ensure the accuracy of Warnaco's books and records and failed to ensure that proper internal controls were in place. + + The Commission also issued a settled cease-and-desist order against Warnaco's former general counsel (and current senior vice president and chief administrative officer), Stanley P. Silverstein, for aiding and abetting and causing Warnaco's violations of the reporting provisions of the Exchange Act by (i) approving an annual report for fiscal 1998 that he knew or should have known contained a materially inaccurate and misleading description of the reasons Warnaco had made a $145 million restatement of its financial results; and (ii) approving and signing a quarterly report for the third quarter of 2000 that he knew or should have known did not accurately represent Warnaco's debt and cash. The Commission ordered Silverstein to pay $165,772 in disgorgement and prejudgment interest and also censured Silverstein under Rule 102(e)(1)(iii) of the Commission's Rules of Practice. + + + SEC Complaint in this matter (PricewaterhouseCoopers LLP) + + SEC Complaint in this matter (William S. 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Ozer, CPA + + + + + + + + + + + + Jay S. Ozer, CPA + + + + + + + + + + + + + + + + + + + SECURITIES EXCHANGE ACT OF 1934 +Release No. 49683 / May 11, 2004 + + ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 2010 / May 11, 2004 + + ADMINISTRATIVE PROCEEDING +File No. 3-11485 + + + + + + + + In the Matter of + + JAY S. OZER, CPA + + Respondent. + + + : + : + : + : + : + : + : + : + : + : + + ORDER INSTITUTING PUBLIC + ADMINISTRATIVE PROCEEDINGS + PURSUANT TO RULE 102(e)(3) OF + THE COMMISSION'S RULES OF + PRACTICE, MAKING FINDINGS, AND + IMPOSING REMEDIAL SANCTIONS + + + + + I. + + The Securities and Exchange Commission ("Commission") deems it appropriate and in the public interest that public administrative proceedings be, and hereby are, instituted against Jay S. Ozer ("Ozer" or "Respondent"), pursuant to Rule 102(e)(3) of the Commission's Rules of Practice. 1 + + II. + + In anticipation of the institution of these proceedings, Respondent has submitted an Offer of Settlement ("Offer"), which the Commission has determined to accept. Solely for the purpose of these proceedings and any other proceedings brought by or on behalf of the Commission, or to which the Commission is a party, and without admitting or denying the findings contained herein, except as to the Commission's jurisdiction over him and the subject matter of these proceedings and the findings contained in Section III.3 below, which are admitted, Respondent consents to the entry of this Order Instituting Public Administrative Proceedings Pursuant to Rule 102(e)(3) of the Commission's Rules of Practice, Making Findings, and Imposing Remedial Sanctions ("Order"), as set forth below. + + III. + + On the basis of this Order and Respondent's Offer, the Commission finds that: + + 1. Jay S. Ozer, 60, was a partner at Arthur Andersen LLP from 1976 to August 2000 and was the engagement partner on Arthur Andersen's 1997 and 1998 audits of Styling Technology Corporation's ("Styling") year-end financial statements and on its reviews of Styling's quarterly financial statements from the first quarter of 1997 through the second quarter of 1999. At the time of the Styling audits and reviews, Ozer was a certified public accountant licensed in Arizona and New York. In September 2002, Ozer consented to the revocation of his license as a certified public accountant in Arizona, and, in March 2003, he relinquished his license in New York. + + 2. Styling Technology Corporation is a Delaware corporation headquartered in Scottsdale, Arizona, that at all relevant times was engaged in the development, production and marketing of beauty salon products. Styling's common stock is registered with the Commission under Section 12(g) of the Securities Exchange Act of 1934 ("Exchange Act") and, until November 1999, was listed for trading on the Nasdaq National Market System. In August 2000, Styling entered a proceeding under Chapter 11 of the U.S. Bankruptcy Code and, shortly thereafter, restated its financial statements for 1997, 1998 and the first two quarters of 1999. Pursuant to a plan of reorganization filed in the bankruptcy court, Styling sold off all of its business assets. + + 3. On May 7, 2004, the U.S. District Court for the District of Columbia entered a final judgment by consent against Ozer, permanently enjoining him from violating and aiding and abetting violations of Section 17(a) of the Securities Act of 1933 and Section 10(b) of the Exchange Act and Rule 10b-5 thereunder and from aiding and abetting violations of Section 13(a) of the Exchange Act and Rules 12b-20, 13a-1 and 13a-13 thereunder in a civil action entitled Securities and Exchange Commission v. Sam Leopold, et al., Civil Action Number 03-CV-2491 RMU. The Court also ordered Ozer to pay a civil penalty of $50,000. Ozer consented to the entry of the Court's order without admitting or denying the allegations of the Commission's complaint. + + 4. The Commission's complaint alleged, among other things, that Styling's principal executive officers and others engaged in a fraudulent scheme that resulted in Styling filing materially false and misleading financial statements in its annual reports on Form 10-K for the fiscal years ended December 31, 1997, and December 31, 1998, and in its quarterly reports on Form 10-Q for the first two quarters of fiscal year 1999. The complaint alleged that, in the course of the 1998 year-end audit of Styling, Ozer encountered numerous red flags that should have alerted him to significant financial problems at the company, yet recklessly failed to ensure that the audit team follow basic audit procedures in its examination of the company. The complaint alleged that Ozer then caused Arthur Andersen to render an unqualified audit report on Styling's 1998 financial statements, falsely representing that the Styling audit had been conducted in accordance with generally accepted auditing standards and that Styling had reported its financial condition in conformity with generally accepted accounting principles ("GAAP"). Finally, the complaint alleged that, during his review of Styling's 1999 first and second quarter financial statements, Ozer failed to object to the company's recognition of revenue from transactions that did not meet GAAP criteria and to the company's false and misleading representations concerning the purpose of its write-off of $5.1 million of uncollectible accounts receivable. + + IV. + + In view of the foregoing, the Commission deems it appropriate and in the public interest to impose the sanction agreed to in Respondent Ozer's Offer. + + Accordingly, IT IS HEREBY ORDERED, effective immediately, that Ozer is suspended from appearing or practicing before the Commission as an accountant. + + By the Commission. + + + Jonathan G. Katz +Secretary + + Endnotes + + + + + + + 1 Rule 102(e)(3)(i) of the Commission's Rules of Practice provides, in relevant part, that: + + The Commission, with due regard to the public interest and without preliminary hearing, may, by order, . . . suspend from appearing or practicing before it any . . . accountant . . . who has been by name . . . permanently enjoined by any court of competent jurisdiction, by reason of his or her misconduct in an action brought by the Commission, from violating or aiding and abetting the violation of any provision of the Federal securities laws or of the rules and regulations thereunder. + + + + + + + + + + + + + + + + + + + + + + + + + Return to top + + + + + SEC homepage + + + + + + + + + + + + + + About the SEC + + + + + + Budget & Performance + + + Careers + + + Commission Votes + + + Contact + + + Contracts + + + + + + + + Transparency + + + + + + Accessibility & Disability + + + Super Intelligence + + + FOIA + + + Inspector General + + + No FEAR Act Data + + + Ombuds + + + SEC Excess Personal Property Guidance + + + + + + + + Websites + + + + + + Investor.gov + + + Related Sites + + + USA.gov + + + + + + + + Site Information + + + + + + Plain Writing + + + Privacy & Security + + + Site Map + + + + + + + + + + + + + + + + + + Stay connected. 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Schmidt, CPA + + + + + + + + + + + + Bradley J. Schmidt, CPA + + + + + + + + + + + + + + + + + + + SECURITIES EXCHANGE ACT OF 1934 +Release No. 49684 / May 11, 2004 + + ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 2011 / May 11, 2004 + + ADMINISTRATIVE PROCEEDING +File No. 3-11486 + + + + + + + + In the Matter of + + BRADLEY J. SCHMIDT, CPA + + Respondent. + + + : + : + : + : + : + : + : + : + : + : + + ORDER INSTITUTING PUBLIC + ADMINISTRATIVE PROCEEDINGS + PURSUANT TO RULE 102(e)(3) OF + THE COMMISSION'S RULES OF + PRACTICE, MAKING FINDINGS, AND + IMPOSING REMEDIAL SANCTIONS + + + + + I. + + The Securities and Exchange Commission ("Commission") deems it appropriate and in the public interest that public administrative proceedings be, and hereby are, instituted against Bradley J. Schmidt ("Schmidt" or "Respondent"), pursuant to Rule 102(e)(3) of the Commission's Rules of Practice. 1 + + II. + + In anticipation of the institution of these proceedings, Respondent has submitted an Offer of Settlement ("Offer"), which the Commission has determined to accept. Solely for the purpose of these proceedings and any other proceedings brought by or on behalf of the Commission, or to which the Commission is a party, and without admitting or denying the findings contained herein, except as to the Commission's jurisdiction over him and the subject matter of these proceedings and the findings contained in Section III.3 below, which are admitted, Respondent consents to the entry of this Order Instituting Public Administrative Proceedings Pursuant to Rule 102(e)(3) of the Commission's Rules of Practice, Making Findings, and Imposing Remedial Sanctions ("Order"), as set forth below. + + III. + + On the basis of this Order and Respondent's Offer, the Commission finds that: + + 1. Bradley J. Schmidt, 34, is a certified public accountant licensed in California. Schmidt was the audit manager on Arthur Andersen LLP's 1997 and 1998 audits of the year-end financial statements of Styling Technology Corporation ("Styling") and on Arthur Andersen's reviews of Styling's quarterly financial statements from the first quarter of 1997 through the third quarter of 1998. Schmidt left Arthur Andersen to accept employment with Styling in April 1999 and served as its senior vice president of financial reporting from then until the summer of 2000. + + 2. Styling Technology Corporation is a Delaware corporation headquartered in Scottsdale, Arizona, that at all relevant times was engaged in the development, production and marketing of beauty salon products. Styling's common stock is registered with the Commission under Section 12(g) of the Securities Exchange Act of 1934 ("Exchange Act") and, until November 1999, was listed for trading on the Nasdaq National Market System. In August 2000, Styling entered a proceeding under Chapter 11 of the U.S. Bankruptcy Code and, shortly thereafter, restated its financial statements for 1997, 1998 and the first two quarters of 1999. Pursuant to a plan of reorganization filed in the bankruptcy court, Styling sold off all of its business assets. + + 3. On May 7, 2004, the U.S. District Court for the District of Columbia entered a final judgment by consent against Schmidt, permanently enjoining him from violating Section 17(a) of the Securities Act of 1933 and Sections 10(b) and 13(b)(5) of the Exchange Act and Rules 10b-5 and 13b2-1 thereunder and from aiding and abetting violations of Sections 13(a), 13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act and Rules 12b-20, 13a-1 and 13a-13 thereunder in a civil action entitled Securities and Exchange Commission v. Sam Leopold, et al., Civil Action Number 03-CV-2491 RMU. The Court also ordered Schmidt to pay a civil penalty of $30,000. Schmidt consented to the entry of the Court's order without admitting or denying the allegations of the Commission's complaint. + + 4. The Commission's complaint alleged, among other things, that Styling's principal executive officers and others engaged in a fraudulent scheme that resulted in Styling filing materially false and misleading financial statements in its annual reports on Form 10-K for the fiscal years ended December 31, 1997, and December 31, 1998, and in its quarterly reports on Form 10-Q for the first two quarters of fiscal year 1999. The complaint alleged that, in the course of the 1998 year-end audit of Styling, Schmidt encountered numerous red flags that should have alerted him to significant financial problems at the company, yet recklessly failed to ensure that the audit team follow basic audit procedures in its examination of the company. The complaint alleged that Schmidt and the audit partner then caused Arthur Andersen to render an unqualified audit report on Styling's 1998 financial statements, falsely representing that the Styling audit had been conducted in accordance with generally accepted auditing standards and that Styling had reported its financial condition and results of operations in conformity with generally accepted accounting principles. The complaint further alleged that Schmidt, while serving as Styling's vice president of financial reporting, participated in the preparation of the company's 1999 second quarter Form 10-Q, which he knew or was reckless in not knowing contained false and misleading statements concerning Styling's sales during the quarter and the purpose of its write-off of $5.1 million of uncollectible accounts receivable. + + IV. + + In view of the foregoing, the Commission deems it appropriate and in the public interest to impose the sanction agreed to in Respondent Schmidt's Offer. + + Accordingly, IT IS HEREBY ORDERED, effective immediately, that: + + A. Respondent is suspended from appearing or practicing before the Commission as an accountant. + + B. After 5 years from the date of this order, Respondent may request that the Commission consider his reinstatement by submitting an application (attention: Office of the Chief Accountant) to resume appearing and practicing before the Commission as: + + 1. a preparer or reviewer, or a person responsible for the preparation or review, of any public company's financial statements that are filed with the Commission. Such an application must satisfy the Commission that Respondent's work in his practice before the Commission will be reviewed either by the independent audit committee of the public company for which he works or in some other acceptable manner, as long as he practices before the Commission in this capacity; and/or + + 2. an independent accountant. Such an application must satisfy the Commission that: + + (d) Respondent acknowledges his responsibility, as long as Respondent appears or practices before the Commission as an independent accountant, to comply with all requirements of the Commission and the Board, including, but not limited to, all requirements relating to registration, inspections, concurring partner reviews and quality control standards. + + + + (a) Respondent, or the public accounting firm with which he is associated, is registered with the Public Company Accounting Oversight Board ("Board") in accordance with the Sarbanes-Oxley Act of 2002, and such registration continues to be effective; + + (b) Respondent, or the registered public accounting firm with which he is associated, has been inspected by the Board and that inspection did not identify any criticisms of or potential defects in the Respondent's or firm's quality control system that would indicate that the Respondent will not receive appropriate supervision or, if the Board has not conducted an inspection, has received an unqualified report relating to his, or the firm's, most recent peer review conducted in accordance with the guidelines adopted by the former SEC Practice Section of the American Institute of Certified Public Accountants Division for CPA Firms or an organization providing equivalent oversight and quality control functions; + + (c) Respondent has resolved all disciplinary issues with the Board, and has complied with all terms and conditions of any sanctions imposed by the Board (other than reinstatement by the Commission); and + + + + C. The Commission will consider an application by Respondent to resume appearing or practicing before the Commission provided that his state CPA license is current and he has resolved all other disciplinary issues with the applicable state boards of accountancy. However, if state licensure is dependant on reinstatement by the Commission, the Commission will consider an application on its other merits. The Commission's review may include consideration of, in addition to the matters referenced above, any other matters relating to Respondent's character, integrity, professional conduct, or qualifications to appear or practice before the Commission. + + By the Commission. + + + Jonathan G. Katz +Secretary + + Endnotes + + + + + + + 1 Rule 102(e)(3)(i) of the Commission's Rules of Practice provides, in relevant part, that: + + The Commission, with due regard to the public interest and without preliminary hearing, may, by order, . . . suspend from appearing or practicing before it any . . . accountant . . . who has been by name . . . permanently enjoined by any court of competent jurisdiction, by reason of his or her misconduct in an action brought by the Commission, from violating or aiding and abetting the violation of any provision of the Federal securities laws or of the rules and regulations thereunder. + + + + + + + + + + + + + + + + + + + + + + + + + + + + + Return to top + + + + + SEC homepage + + + + + + + + + + + + + + About the SEC + + + + + + Budget & Performance + + + Careers + + + Commission Votes + + + Contact + + + Contracts + + + + + + + + Transparency + + + + + + Accessibility & Disability + + + Super Intelligence + + + FOIA + + + Inspector General + + + No FEAR Act Data + + + Ombuds + + + SEC Excess Personal Property Guidance + + + + + + + + Websites + + + + + + Investor.gov + + + Related Sites + + + USA.gov + + + + + + + + Site Information + + + + + + Plain Writing + + + Privacy & Security + + + Site Map + + + + + + + + + + + + + + + + + + Stay connected. 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Individuals (SALI) + + + + + Enforcement Data Delivery Standards + + + + + Small Businesses + + + + + Appellate Briefs + + + + + Amicus / Friend of the Court Briefs + + + + + + + + + + + + + + + + + + + + + + + + + + Enforcement & Litigation + + + + + + + Litigation Releases + + + + + Administrative Proceedings + + + + + Administrative Law Judge Orders and Initial Decisions + + + + + Trading Suspensions + + + + + Distributions to Harmed Investors + + + + + Receiverships + + + + + Electronic Filings in Administrative Proceedings (eFAP) + + + + + Rules of Practice + + + + + Applications for Reentry + + + + + Reports of Investigations + + + + + Whistleblower Program + + + + + Public Alert: Unregistered Soliciting Entities (PAUSE) + + + + + SEC Action Lookup - Individuals (SALI) + + + + + Enforcement Data Delivery Standards + + + + + Small Businesses + + + + + Appellate Briefs + + + + + Amicus / Friend of the Court Briefs + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + Home + + + Enforcement and Litigation + + + Litigation Releases + + + James Murphy, Robert Lockwood, Gilboa Peretz + + + + + + + + + + + + James Murphy, Robert Lockwood, Gilboa Peretz + + + + + + + + + + + + + + + + + + + + + The Commission announced today that on April 28, 2004, following a four-day bench trial held in March 2004, the Honorable Patti B. Saris of the United States District Court for the District of Massachusetts entered judgment in favor of Gilboa Peretz on a finding that he did not have the requisite scienter to aid and abet Centennial Technologies, Inc.'s violations of Sections 10(b) and 13 (b)(2)(A) of the Exchange Act and Rules 10b-5 and 13b2-1 thereunder. + + The Commission presented evidence that between April 1994 and December 31, 1996, Emanuel Pinez, Centennial's former chief executive officer, and James Murphy, Centennial's former chief financial officer, with the assistance of Peretz, Robert Lockwood, and others, orchestrated a massive fraud which made Centennial appear significantly more successful than it was. Among other things, they caused Centennial to recognize revenue from invalid or nonexistent sales, include fake items in inventory, and make false additions to fixed assets. As a result of these improper activities, Centennial overstated its earnings for this period by approximately $40 million. Based on this evidence, the Commission previously obtained civil judgments against Pinez, Lockwood and others, by consent, and against Murphy, by summary judgment, and in prior parallel criminal proceedings, Pinez, Murphy, Lockwood and other defendants were criminally convicted for perpetrating the Centennial financial fraud. + + During trial, Peretz specifically admitted that, at Pinez's instruction, Peretz, the founder of PG Technologies, Inc., a Centennial customer, placed an order with Centennial to purchase 2,500 Flash PC cards at a cost of $500,000, on condition that Pinez provide the funds to pay for the purchase. Centennial shipped 1,000 blank PC cards to PG and thereafter billed PG $500,000, as if it had sent the company 2,500 real PC cards. Pinez subsequently provided Peretz $500,000, which Peretz used to pay Centennial for the fictitious sale to PG. The Commission sought judgment against Peretz for aiding and abetting Centennial's violations of §§ 10(b) and 13 (b)(2)(A) of the Exchange Act and Rules 12b-5 and 13b2-1 thereunder. + + The court found that, although Peretz was careless in his financial affairs and perhaps negligent regarding the $500,000 transaction, he did not have knowledge of the fraud at Centennial and did not knowingly provide assistance to Pinez in perpetrating the fraud. Previously, in a separate proceeding, Judge Saris held Peretz in contempt for lying to the court regarding the source of funds received from Pinez. 52 F.Supp.2d 205 (DMA 1999). + + For further information, please see Litigation Release Nos. + 17705 (8/30/02), + 16725 (4/26/00), + 16170 (6/2/99), + 15818 (7/21/98), + 15605 (12/23/97), + 15548 (10/31/97), + 15405 (7/7/97), + 15399 (6/26/97), + 15295 (3/14/97) and + 15258 (2/14/97). + + + +  + + + + + + + + + + + + + + + + + + + + + + + + + Return to top + + + + + SEC homepage + + + + + + + + + + + + + + About the SEC + + + + + + Budget & Performance + + + Careers + + + Commission Votes + + + Contact + + + Contracts + + + + + + + + Transparency + + + + + + Accessibility & Disability + + + Super Intelligence + + + FOIA + + + Inspector General + + + No FEAR Act Data + + + Ombuds + + + SEC Excess Personal Property Guidance + + + + + + + + Websites + + + + + + Investor.gov + + + Related Sites + + + USA.gov + + + + + + + + Site Information + + + + + + Plain Writing + + + Privacy & Security + + + Site Map + + + + + + + + + + + + + + + + + + Stay connected. 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Individuals (SALI) + + + + + Enforcement Data Delivery Standards + + + + + Small Businesses + + + + + Appellate Briefs + + + + + Amicus / Friend of the Court Briefs + + + + + + + + + + + + + + + + + + + + + + + + + + Enforcement & Litigation + + + + + + + Litigation Releases + + + + + Administrative Proceedings + + + + + + + Information for Respondents in Administrative Proceedings  + + + + + Open Litigated Administrative Proceedings + + + + + Closed Litigated Administrative Proceedings + + + + + Commission Opinions and Adjudicatory Orders + + + + + Delinquent Filings + + + + + Stop Orders + + + + + + + + Administrative Law Judge Orders and Initial Decisions + + + + + Trading Suspensions + + + + + Distributions to Harmed Investors + + + + + Receiverships + + + + + Electronic Filings in Administrative Proceedings (eFAP) + + + + + Rules of Practice + + + + + Applications for Reentry + + + + + Reports of Investigations + + + + + Whistleblower Program + + + + + Public Alert: Unregistered Soliciting Entities (PAUSE) + + + + + SEC Action Lookup - Individuals (SALI) + + + + + Enforcement Data Delivery Standards + + + + + Small Businesses + + + + + Appellate Briefs + + + + + Amicus / Friend of the Court Briefs + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + Home + + + Enforcement and Litigation + + + Administrative Proceedings + + + Cosmo Corigliano, CPA + + + + + + + + + + + + Cosmo Corigliano, CPA + + + + + + + + + + + + + + + + + + + + + SECURITIES EXCHANGE ACT OF 1934 +Release No. 49705 / May 14, 2004 + + ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 2015 / May 14, 2004 + + ADMINISTRATIVE PROCEEDING +File No. 3-11490 + + + + In the Matter of + COSMO CORIGLIANO, CPA, + Respondent. + + : : : : : : : : : : + + ORDER INSTITUTING ADMINISTRATIVE +PROCEEDINGS PURSUANT TO RULE +102(e) OF THE COMMISSION'S RULES OF +PRACTICE, MAKING FINDINGS, AND +IMPOSING REMEDIAL SANCTIONS I. + + The Securities and Exchange Commission ("Commission") deems it appropriate and in the public interest that public administrative proceedings be, and hereby are, instituted against Cosmo Corigliano ("Respondent" or "Corigliano") pursuant to Rule 102(e)(3)(i) of the Commission's Rules of Practice. 1 + + II. + + In anticipation of the institution of these proceedings, Respondent has submitted an Offer of Settlement (the "Offer") which the Commission has determined to accept. Solely for the purpose of these proceedings and any other proceedings brought by or on behalf of the Commission, or to which the Commission is a party, and without admitting or denying the findings herein, except as to the Commission's jurisdiction over him and the subject matter of these proceedings, and the findings contained in Section III.4. below, which are admitted, Respondent consents to the entry of this Order Instituting Administrative Proceedings Pursuant to Rule 102(e) of the Commission's Rules of Practice, Making Findings, and Imposing Remedial Sanctions ("Order"), as set forth below. + + III. + + On the basis of this Order and Respondent's Offer, the Commission finds that: + + 1. Corigliano, age 44, is and has been a certified public accountant licensed to practice in the State of Connecticut. He served as Controller of CUC International Inc. ("CUC") from 1983 to 1995 and as its Chief Financial Officer from 1995 until the December 1997 merger of CUC and HFS Incorporated ("HFS"), which formed Cendant Corporation ("Cendant"). After the merger, he was an officer of Cendant Membership Services, the post-merger name for the former CUC business units, until his resignation from Cendant in April 1998. + + 2. CUC was a Delaware corporation with its principal offices in Stamford, Connecticut. CUC was principally engaged in membership-based consumer services, such as auto, dining, shopping, and travel "clubs." Its securities were registered pursuant to Section 12(b) of the Securities Exchange Act of 1934 ("Exchange Act") and traded on the New York Stock Exchange ("NYSE"). + + 3. Cendant is a Delaware corporation with its principal offices in New York City. Cendant was created through the December 17, 1997, merger of HFS and CUC. Pursuant to the Agreement and Plan of Merger between CUC and HFS, HFS was merged with and into CUC, with CUC continuing as the surviving corporation and changing its name to Cendant Corporation. Cendant provides membership-based and Internet-related consumer services and owns the rights to franchise brand names in the hotel, residential real estate brokerage, car rental, and tax preparation businesses. Cendant's common stock and certain other securities issued by Cendant are registered pursuant to Section 12(b) of the Exchange Act and trade on the NYSE. Certain additional securities issued by Cendant are registered pursuant to Section 12(g) of the Exchange Act. + + 4. On May 7, 2004, a final judgment was entered against Corigliano, permanently enjoining him from future violations of Section 17(a) of the Securities Act of 1933, Sections 10(b) and 13(b)(5) of the Exchange Act, and Exchange Act Rules 10b 5, 13b2 1, and 13b2 2, and aiding and abetting violations of Sections 13(a), 13(b)(2)(A), 13(b)(2)(B), and 14(a) of the Exchange Act, and Exchange Act Rules 12b 20, 13a 1, 13a 13, and 14a 9, in the civil action entitled Securities and Exchange Commission v. Cosmo Corigliano, et al., Civil Action Number 00 Civ. No. 2873, in the United States District Court for the District of New Jersey. + + 5. The Commission's complaint alleged, among other things, that Corigliano, as Controller of CUC, assisted senior CUC officers who initiated a long-running financial reporting fraud and, later, as CUC's Chief Financial Officer, proceeded to orchestrate and refine the fraud. The complaint further alleges that, as Chief Financial Officer, Corigliano was the CUC officer responsible for creating and maintaining a schedule that CUC officers used to track their fraudulent scheme during the course of each fiscal year. He was responsible for keeping more senior CUC officers apprised about the progress of the scheme. While Chief Financial Officer, Corigliano directed CUC mid-level financial reporting managers to make unsupported quarterly top-side adjustments to CUC's earnings as reported in its quarterly Reports on Form 10 Q filed with the Commission. He also instructed less senior CUC managers to make unsupported journal entries effectuating year-end adjustments that improperly inflated CUC's operating income and earnings as reported in its annual Reports on Form 10 K as filed with the Commission. The complaint further alleges that, while engaged in these activities, Corigliano signed CUC's periodic reports filed with the Commission and made materially false statements to CUC's auditors. + + IV. + + In view of the foregoing, the Commission deems it appropriate and in the public interest to impose the sanction agreed to in Respondent Corigliano's Offer. + + Accordingly, it is hereby ORDERED, effective immediately, that: + + Corigliano is suspended from appearing or practicing before the Commission as an accountant. + + By the Commission. + + +Jonathan G. Katz +Secretary + + Endnotes + 1 Rule 102(e)(3)(i) provides, in relevant part, that: + + The Commission, with due regard to the public interest and without preliminary hearing, may, by order, . . . suspend from appearing or practicing before it any . . . accountant . . . who has been by name . . . 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Individuals (SALI) + + + + + Enforcement Data Delivery Standards + + + + + Small Businesses + + + + + Appellate Briefs + + + + + Amicus / Friend of the Court Briefs + + + + + + + + + + + + + + + + + + + + + + + + + + Enforcement & Litigation + + + + + + + Litigation Releases + + + + + Administrative Proceedings + + + + + Administrative Law Judge Orders and Initial Decisions + + + + + Trading Suspensions + + + + + Distributions to Harmed Investors + + + + + Receiverships + + + + + Electronic Filings in Administrative Proceedings (eFAP) + + + + + Rules of Practice + + + + + Applications for Reentry + + + + + Reports of Investigations + + + + + Whistleblower Program + + + + + Public Alert: Unregistered Soliciting Entities (PAUSE) + + + + + SEC Action Lookup - Individuals (SALI) + + + + + Enforcement Data Delivery Standards + + + + + Small Businesses + + + + + Appellate Briefs + + + + + Amicus / Friend of the Court Briefs + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + Home + + + Enforcement and Litigation + + + Litigation Releases + + + Ed Johnson and Merl Holdings, Inc.Com + + + + + + + + + + + + Ed Johnson and Merl Holdings, Inc.Com + + + + + + + + + + + + + + + + + + + + + On April 16, 2004, the Honorable Garrett E. Brown, Jr. of the U.S. District Court for the District of New Jersey entered a consent order ("Order") regarding the SEC's application to hold New Jersey-based MERL Holdings Inc.com ("MERL") in civil contempt ("Contempt Motion"). The Contempt Motion alleged that MERL violated the final judgment of permanent injunction ("Final Judgment"), entered by the Court against MERL on April 3, 2003, which permanently enjoined MERL from violating the anti-fraud provisions of the federal securities laws. The SEC alleged that MERL violated the Final Judgment by issuing three materially false and misleading press releases. + MERL, without admitting or denying the allegations against it, consented to the entry of the Order, which found that three of MERL's press releases contained materially false and misleading statements and omissions. The first press release, issued by MERL on August 1, 2003, announced that MERL had entered into a software licensing agreement with Heritage Capital Credit Corporation. According to the Contempt Motion, the August 1 press release omitted to state that Heritage was a wholly-owned subsidiary of MERL Financial Group, Inc. which, in turn, was controlled by the same individuals who held a controlling interest in MERL. The second press release, issued by MERL on September 5, 2003, announced that MERL had received a $50 million financing proposal from a private equity fund. In fact, according to the Contempt Motion, the private equity fund had withdrawn the financing proposal on August 28, 2003, prior to the issuance of the press release. Finally, the third press release, issued by MERL on November 10, 2003, announced that the company had signed a $50 million letter of interest. In fact, according to the Contempt Motion, the investment banking firm that issued the letter of interest had not yet begun its formal due diligence of MERL, and the letter of interest was subject to a number of significant conditions in addition to extensive due diligence. The November 10 press release described the investment banking firm as "an investor," but in fact, according to the Contempt Motion, the firm's role was going to be to attempt to raise $50 million among its investors. This was a "best efforts" proposal only, meaning that there was no assurance that the investment banking firm could raise all or any portion of the $50 million for MERL. + In addition, the Order directed MERL to issue a corrective press release within ten days of entry of the Order or it would be subject to a prospective fine of $10,000 for each day that it does not issue the corrective press release. Further information regarding the Final Judgment may be found at Litigation Release No. 18085 (April 14, 2003). + + + + SEC Complaint in this matter --> + + + + + + + + + + + + + + + + + + + + + + + + + + Return to top + + + + + SEC homepage + + + + + + + + + + + + + + About the SEC + + + + + + Budget & Performance + + + Careers + + + Commission Votes + + + Contact + + + Contracts + + + + + + + + Transparency + + + + + + Accessibility & Disability + + + Super Intelligence + + + FOIA + + + Inspector General + + + No FEAR Act Data + + + Ombuds + + + SEC Excess Personal Property Guidance + + + + + + + + Websites + + + + + + Investor.gov + + + Related Sites + + + USA.gov + + + + + + + + Site Information + + + + + + Plain Writing + + + Privacy & Security + + + Site Map + + + + + + + + + + + + + + + + + + Stay connected. 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Rieker + + + + + + + + !function(){var e=navigator.userAgent,a=document.documentElement,n=a.className;n=n.replace("no-js","js"),/iPad|iPhone|iPod/.test(e)&&!window.MSStream&&(n+=" ua-ios"),a.className=n}(); + {"path":{"baseUrl":"\/","pathPrefix":"","currentPath":"node\/494131","currentPathIsAdmin":false,"isFront":false,"currentLanguage":"en"},"pluralDelimiter":"\u0003","suppressDeprecationErrors":true,"gtag":{"tagId":"","consentMode":false,"otherIds":[],"events":[],"additionalConfigInfo":[]},"ajaxPageState":{"libraries":"eJxdT0GOwzAI_JBdn_oei2DkeINNZLC22devlaZS2wtiBhhmcKNUTPo97jxyaXEH3GJpiZrFhQW38A4cMqgeYQGlV19JFTKpQ-kUmvQKXP7I0cO4tC2kPnbg2wVdFslM0SCHPMs3vsEPPD7J6hgOGdPCKJyoRxxqUuePHjLLAuzVjimenRJGSLW08NoBK9LUn6SHlrytVOlcpJShB63QLSpBx_WkOzHNePol4fRQo_qMPvQ36ZXsAmd99lMNr2t_GUR9n60EyX9a_wePd5ns","theme":"uswds_sec","theme_token":null},"ajaxTrustedUrl":[],"gtm":{"tagId":null,"settings":{"data_layer":"dataLayer","include_classes":false,"allowlist_classes":"","blocklist_classes":"","include_environment":false,"environment_id":"","environment_token":""},"tagIds":["GTM-TD3BKV"]},"data":{"extlink":{"extTarget":false,"extTargetAppendNewWindowDisplay":true,"extTargetAppendNewWindowLabel":"(opens in a new window)","extTargetNoOverride":false,"extNofollow":false,"extTitleNoOverride":false,"extNoreferrer":false,"extFollowNoOverride":false,"extClass":"0","extLabel":"(link is external)","extImgClass":false,"extSubdomains":true,"extExclude":".*\\.gov|http:\/\/www.xbrl.org\/utr\/2013-05-17\/utr.xml|http:\/\/www.xbrl.org\/dtr\/type\/numeric-2009-12-16.xsd|http:\/\/www.xbrl.org\/dtr\/type\/nonNumeric-2009-12-16.xsd|https:\/\/secir.secure.force.com\/ombudsman\/OMMSForm","extInclude":"","extCssExclude":".data-exempt","extCssInclude":"","extCssExplicit":"","extAlert":true,"extAlertText":"You are now leaving the SEC Website. 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Rieker + + + + + + + + + + + + Paula H. Rieker + + + + + + + + + + + + + + + + + + + + + Defendant Barred From Serving As Officer Or Director Of Public Company and Agrees to Pay $499,333; Will Cooperate With Government Investigations + + The Securities and Exchange Commission today charged Paula H. Rieker, a former Managing Director for Investor Relations and Corporate Secretary for Enron Corp., with violating the antifraud provisions of the federal securities laws. Without admitting or denying the allegations of the Complaint, Rieker has agreed to be enjoined permanently from violating and aiding and abetting the violation of Sections 10(b) of the Securities Exchange Act of 1934 and Exchange Act Rule 10b-5, and to be barred from acting as an officer or director of a public company. As part of the settlement agreement, which is subject to the approval of the U.S. District Court, Rieker will pay disgorgement, prejudgment interest, and a civil penalty totaling $499,333. The Commission brought this action in coordination with the U.S. Department of Justice Enron Task Force, which filed a related criminal charge against Rieker. Rieker agreed to enter a guilty plea in connection with that charge and to cooperate with the government's continuing investigation. + As alleged in the Complaint, Rieker engaged in insider trading in violation of the federal securities laws in July 2001 when she traded on material inside information about significant losses in Enron Broadband Services (EBS). The Complaint also alleges that Rieker violated the federal securities laws by providing substantial assistance to Enron executives and senior managers in the dissemination of false and misleading information to the public about Enron business units in analyst calls and earnings releases. + Specifically, the Commission's Complaint alleges as follows: + Aiding and Abetting Material Misrepresentations and Omissions: In her role as Managing Director for Investor Relations, Rieker was actively involved in the compilation and drafting of Enron's First and Second Quarter 2001 earnings releases, and scripts for Enron's March 23, 2001 Analyst Call and the First and Second Quarter 2001 Analyst Calls. During her efforts, Rieker learned specific information about Enron's retail energy business unit, Enron Energy Service (EES), and about EBS revealing that EES and EBS were not the successful business units described in the earnings releases and scripts she compiled, and as described by Enron in the analyst calls. Nevertheless, Rieker did not correct the false and misleading information provided to analysts and investors by Enron executives and senior managers.   + Insider Trading: Rieker, in her role as an investor relations official at Enron, learned that Enron's EBS business unit was experiencing significant financial problems and was experiencing losses greater than had been previously disclosed to analysts and investors. While in possession of this material non-public information, Rieker sold Enron stock in advance of Enron's public disclosure of EBS' true financial picture and avoided losses. + The Commission's investigation is continuing. + + + + SEC Complaint in this matter + + + + + + + + + + + + + + + + + + + + + + + + + + Return to top + + + + + SEC homepage + + + + + + + + + + + + + + About the SEC + + + + + + Budget & Performance + + + Careers + + + Commission Votes + + + Contact + + + Contracts + + + + + + + + Transparency + + + + + + Accessibility & Disability + + + Super Intelligence + + + FOIA + + + Inspector General + + + No FEAR Act Data + + + Ombuds + + + SEC Excess Personal Property Guidance + + + + + + + + Websites + + + + + + Investor.gov + + + Related Sites + + + USA.gov + + + + + + + + Site Information + + + + + + Plain Writing + + + Privacy & Security + + + Site Map + + + + + + + + + + + + + + + + + + Stay connected. 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Individuals (SALI) + + + + + Enforcement Data Delivery Standards + + + + + Small Businesses + + + + + Appellate Briefs + + + + + Amicus / Friend of the Court Briefs + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + Home + + + Enforcement and Litigation + + + Administrative Proceedings + + + Lance Turner Fair + + + + + + + + + + + + Lance Turner Fair + + + + + + + + + + + + + + + + + + + + + + SECURITIES ACT OF 1933 +Release No. 8424 / May 19, 2004 + + SECURITIES EXCHANGE ACT OF 1934 +Release No. 49730 / May 19, 2004 + + ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 2019 / May 19, 2004 + + ADMINISTRATIVE PROCEEDING +File No. 3-11495 + + + + In the Matter of + Lance Turner Fair, + Respondent. + + : : : : : : : : : : + + +ORDER INSTITUTING CEASE-AND- +DESIST PROCEEDINGS, MAKING +FINDINGS, AND IMPOSING A CEASE +-AND-DESIST ORDER PURSUANT TO +SECTION 8A OF THE SECURITIES +ACT OF 1933 AND SECTION 21C OF +THE SECURITIES EXCHANGE ACT OF 1934 I. + + The Securities and Exchange Commission ("Commission") deems it appropriate that cease-and-desist proceedings be, and hereby are, instituted pursuant to Section 8A of the Securities Act of 1933 ("Securities Act") and Section 21C of the Securities Exchange Act of 1934 ("Exchange Act") against Lance Turner Fair ("Fair" or "Respondent"). + + II. + + In anticipation of the institution of these proceedings, Respondent has submitted an Offer of Settlement (the "Offer") which the Commission has determined to accept. Solely for the purpose of these proceedings and any other proceedings brought by or on behalf of the Commission, or to which the Commission is a party, and without admitting or denying the findings herein, except as to the Commission's jurisdiction over him and the subject matter of these proceedings, Respondent consents to the entry of this Order Instituting Cease-and-Desist Proceedings, Making Findings, and Imposing a Cease-and-Desist Order Pursuant to Section 8A of the Securities Act of 1933 and Section 21C of the Securities Exchange Act of 1934 ("Order"), as set forth below. + + III. + + On the basis of this Order and Respondent's Offer, the Commission finds 1 that: + + A. Fair, age 40, is a resident of Memphis, Tennessee. He was hired at the Company in September of 1997. He became the Company's Chief Financial Officer ("CFO") in April 1998 and remained in that position until his resignation in December 1999. + + Relevant Entity + + B. The Company completed its initial public offering of stock in June 1998, and its common stock was registered with the Commission pursuant to Section 12(g) of the Exchange Act. At the time of the relevant conduct, the Company was headquartered in Memphis, Tennessee and its stock was traded on the NASDAQ National Market System. On September 20, 2002, the Company was administratively dissolved by the State of Tennessee. + + Background + + C. In April 1999, Fair was aware of a plan designed by the Company's Chief Executive Officer to reclassify rents and salaries that the Company had already paid to its division presidents in the first quarter of 1999 (January through March) to assets such as prepaid expenses and accounts receivable. Fair was at least reckless in not knowing that the plan was improper. Under this plan, the Company made consolidating entries reclassifying $538,514 of salary expense and $420,370 of rent expense from the Company's March 31, 1999 income statement to various prepaid expense accounts and accounts receivable on its March 31, 1999 balance sheet. The reclassifications had the effect of increasing the Company's reported net income for the first quarter of 1999 by $633,000. + + D. The financial statements of a public company should accurately reflect the costs and expenses that the company incurs, including the payment of rents and salaries. The reclassification of salaries and rent payments by the Company departed from Generally Accepted Accounting Principles by improperly reducing the Company's costs of doing business and, consequently, artificially increasing the Company's net income. + + E. In its Form 10-Q quarterly report for the first quarter of 1999 filed with the Commission, the Company incorrectly reported net income of $753,000, 628% more than should have been reported. Fair signed this Form 10-Q. + + F. The reclassification improperly removed expenses from the Company's income statement and added assets to its balance sheet. This allowed the Company to appear to achieve the consensus earnings per share estimates made by analysts for the first quarter of 1999. Fair knew that the reclassification would have this effect. + + G. The Company's incorrectly reported net income for the first quarter of 1999 was incorporated by reference in a Form S-8 registration statement the Company filed with the Commission in June 1999. Fair signed this Form S-8. + + H. The improper reclassification of current expenses in the first quarter remained on the Company's books and records in the second quarter of 1999. Consequently, the Company reported a net loss of ($1,369,000) for the six months ended June 30, 1999, on its second quarter Form 10-Q quarterly report filed with the Commission, which understated the net loss by 46%. Fair signed this Form 10-Q. + + I. The improper reclassification of current expenses in the first quarter remained on the Company's books and records in the third quarter of 1999. Consequently, the Company reported a net loss of ($6,538,000) for the nine months ended September 30, 1999, on its third quarter Form 10-Q quarterly report filed with the Commission, which understated the net loss by 10%. Fair signed this Form 10-Q. + + Violations + + J. Section 17(a) of the Securities Act prohibits fraudulent conduct in the offer or sale of securities. Section 10(b) of the Exchange Act and Rule 10b-5 thereunder prohibit fraudulent conduct in connection with the purchase or sale of securities. + + K. Section 13(a) of the Exchange Act and Rule 13a-13 thereunder require issuers of registered securities to file with the Commission quarterly reports prepared in conformity with the requirements of the Commission's rules and regulations. Exchange Act Rule 12b-20 requires that these periodic reports contain, in addition to disclosures expressly required by statute and rules, such other information as is necessary to ensure that the statements made in those reports are not, under the circumstances, materially misleading. + + L. Section 13(b)(2)(A) of the Exchange Act requires issuers of registered securities to make and keep books, records and accounts which, in reasonable detail, accurately and fairly reflect their transactions and the dispositions of their assets. Exchange Act Rule 13b2-1 prohibits any person from, directly or indirectly, falsifying or causing to be falsified any book, record or account subject to Section 13(b)(2)(A). + + M. Section 13(b)(5) of the Exchange Act prohibits any person from knowingly circumventing or knowingly failing to implement a system of internal accounting controls or knowingly falsifying any book, record or account subject to Section 13(b)(2)(A) of the Exchange Act. + + N. Based on the conduct described above, Fair violated Section 17(a) of the Securities Act and Sections 10(b) and 13(b)(5) of the Exchange Act and Rules 10b-5 and 13b2-1 thereunder and caused the Company's violations of Sections 13(a) and 13(b)(2)(A) of the Exchange Act and Rules 12b-20 and 13a-13 thereunder. + + IV. + + In view of the foregoing, the Commission deems it appropriate to impose the sanctions specified in Respondent Fair's Offer. + + Accordingly, it is hereby ORDERED that: + + Respondent Fair cease and desist from committing or causing any violations and any future violations of Section 17(a) of the Securities Act and Sections 10(b) and 13(b)(5) of the Exchange Act and Rules 10b-5 and 13b2-1 thereunder and causing any violations and any future violations of Sections 13(a) and 13(b)(2)(A) of the Exchange Act and Rules 12b-20 and 13a-13 thereunder. + + By the Commission. + + +Jonathan G. Katz +Secretary + + + Endnotes + 1 The findings herein are made pursuant to Fair's Offer of Settlement and are not binding on any other person or entity in this or any other proceeding. + + + +  + + + + + + + + + + + + + + + + + + + + + + + + + Return to top + + + + + SEC homepage + + + + + + + + + + + + + + About the SEC + + + + + + Budget & Performance + + + Careers + + + Commission Votes + + + Contact + + + Contracts + + + + + + + + Transparency + + + + + + Accessibility & Disability + + + Super Intelligence + + + FOIA + + + Inspector General + + + No FEAR Act Data + + + Ombuds + + + SEC Excess Personal Property Guidance + + + + + + + + Websites + + + + + + Investor.gov + + + Related Sites + + + USA.gov + + + + + + + + Site Information + + + + + + Plain Writing + + + Privacy & Security + + + Site Map + + + + + + + + + + + + + + + + + + Stay connected. 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Individuals (SALI) + + + + + Enforcement Data Delivery Standards + + + + + Small Businesses + + + + + Appellate Briefs + + + + + Amicus / Friend of the Court Briefs + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + Home + + + Enforcement and Litigation + + + Administrative Proceedings + + + Paul Melvin Henson, Jr. + + + + + + + + + + + + Paul Melvin Henson, Jr. + + + + + + + + + + + + + + + + + + + + + + SECURITIES ACT OF 1933 +Release No. 33-8425 / May 19, 2004 + + SECURITIES EXCHANGE ACT OF 1934 +Release No. 34-49731 / May 19, 2004 + + ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 2020 / May 19, 2004 + + ADMINISTRATIVE PROCEEDING +File No. 3-11496 + + + + In the Matter of + Paul Melvin Henson, Jr., + Respondent. + + : : : : : : : : : : + + ORDER INSTITUTING CEASE-AND- +DESIST PROCEEDINGS, MAKING +FINDINGS, AND IMPOSING A CEASE +-AND-DESIST ORDER PURSUANT TO +SECTION 8A OF THE SECURITIES +ACT OF 1933 AND SECTION 21C OF +THE SECURITIES EXCHANGE ACT OF 1934 I. + + The Securities and Exchange Commission ("Commission") deems it appropriate that cease-and-desist proceedings be, and hereby are, instituted pursuant to Section 8A of the Securities Act of 1933 ("Securities Act") and Section 21C of the Securities Exchange Act of 1934 ("Exchange Act") against Paul Melvin Henson, Jr. ("Henson" or "Respondent"). + + II. + + In anticipation of the institution of these proceedings, Respondent has submitted an Offer of Settlement (the "Offer") which the Commission has determined to accept. Solely for the purpose of these proceedings and any other proceedings brought by or on behalf of the Commission, or to which the Commission is a party, and without admitting or denying the findings herein, except as to the Commission's jurisdiction over him and the subject matter of these proceedings, Respondent consents to the entry of this Order Instituting Cease-and-Desist Proceedings, Making Findings, and Imposing a Cease-and-Desist Order Pursuant to Section 8A of the Securities Act of 1933 and Section 21C of the Securities Exchange Act of 1934 ("Order"), as set forth below. + + III. + + On the basis of this Order and Respondent's Offer, the Commission finds 1 that: + + A. Henson, age 46, is a resident of Charlotte, North Carolina. He was hired at the Company in December 1997 as Chief Financial Officer ("CFO"). Henson became the Chief Accounting Officer in April 1998, and reported to the Company's CFO. He again became the Company's CFO in early 2000 and remained in that position until the Company's dissolution in 2002. + + Relevant Entity + + B. The Company is a defunct Tennessee corporation. The Company completed its initial public offering of stock in June 1998, and its common stock was registered with the Commission pursuant to Section 12(g) of the Exchange Act. At the time of the relevant conduct, the Company was headquartered in Memphis, Tennessee and its stock was traded on the NASDAQ National Market System. On September 20, 2002, the Company was administratively dissolved by the State of Tennessee. + + Background + + C. In April 1999, Henson put into practice a plan designed by the Company's Chief Executive Officer to improperly reclassify rents and salaries that the Company had already paid to its division presidents in the first quarter of 1999 (January through March) to assets such as prepaid expenses and accounts receivable. Henson sent e-mails to the respective controllers of each division telling them to debit particular asset accounts and to credit particular expense line items. Henson then made consolidating entries reclassifying $538,514 of salary expense and $420,370 of rent expense from the Company's March 31, 1999 income statement to various prepaid expense accounts and accounts receivable on its March 31, 1999 balance sheet. The reclassifications had the effect of increasing the Company's reported net income for the first quarter of 1999 by $633,000. + + D. The financial statements of a public company should accurately reflect the costs and expenses that the company incurs, including the payment of rents and salaries. The reclassification of salaries and rent payments by the Company departed from Generally Accepted Accounting Principles by improperly reducing the Company's costs of doing business and, consequently, artificially increasing the Company's net income. + + E. In its Form 10-Q quarterly report for the first quarter of 1999 filed with the Commission, the Company incorrectly reported net income of $753,000, 628% more than should have been reported. Henson signed this Form 10-Q. + + F. The reclassification improperly removed expenses from the Company's income statement and added assets to its balance sheet. This allowed the Company to appear to achieve the consensus earnings per share estimates made by analysts for the first quarter of 1999. Henson knew that the reclassification would have this effect. + + G. The Company's incorrectly reported net income for the first quarter of 1999 was incorporated by reference in a Form S-8 registration statement the Company filed with the Commission in June 1999. Henson signed this Form S-8. + + H. The improper reclassification of current expenses in the first quarter remained on the Company's books and records in the second quarter of 1999. Consequently, the Company reported a net loss of ($1,369,000) for the six months ended June 30, 1999, on its second quarter Form 10-Q quarterly report filed with the Commission, which understated the net loss by 46%. Henson signed this Form 10-Q. + + I. The improper reclassification of current expenses in the first quarter remained on the Company's books and records in the third quarter of 1999. Consequently, the Company reported a net loss of ($6,538,000) for the nine months ended September 30, 1999, on its third quarter Form 10-Q quarterly report filed with the Commission, which understated the net loss by 10%. Henson signed this Form 10-Q. + + Violations + + J. Section 17(a) of the Securities Act prohibits fraudulent conduct in the offer or sale of securities. Section 10(b) of the Exchange Act and Rule 10b-5 thereunder prohibit fraudulent conduct in connection with the purchase or sale of securities. + + K. Section 13(a) of the Exchange Act and Rule 13a-13 thereunder require issuers of registered securities to file with the Commission quarterly reports prepared in conformity with the requirements of the Commission's rules and regulations. Exchange Act Rule 12b-20 requires that these periodic reports contain, in addition to disclosures expressly required by statute and rules, such other information as is necessary to ensure that the statements made in those reports are not, under the circumstances, materially misleading. + + L. Section 13(b)(2)(A) of the Exchange Act requires issuers of registered securities to make and keep books, records and accounts which, in reasonable detail, accurately and fairly reflect their transactions and the dispositions of their assets. Exchange Act Rule 13b2-1 prohibits any person from, directly or indirectly, falsifying or causing to be falsified any book, record or account subject to Section 13(b)(2)(A). + M. Section 13(b)(5) of the Exchange Act prohibits any person from knowingly circumventing or knowingly failing to implement a system of internal accounting controls or knowingly falsifying any book, record or account subject to Section 13(b)(2)(A) of the Exchange Act. + + N. Based on the conduct described above, Henson violated Section 17(a) of the Securities Act and Sections 10(b) and 13(b)(5) of the Exchange Act and Rules 10b-5 and 13b2-1 thereunder and caused the Company's violations of Sections 13(a) and 13(b)(2)(A) of the Exchange Act and Rules 12b-20 and 13a-13 thereunder. + + O. In determining to accept the Offer, the Commission considered cooperation afforded by Henson to the Commission staff. + + IV. + + In view of the foregoing, the Commission deems it appropriate to impose the sanctions specified in Respondent Henson's Offer. + + Accordingly, it is hereby ORDERED that: + + Respondent Henson cease and desist from committing or causing any violations and any future violations of Section 17(a) of the Securities Act and Sections 10(b) and 13(b)(5) of the Exchange Act and Rules 10b-5 and 13b2-1 thereunder and causing any violations and any future violations of Sections 13(a) and 13(b)(2)(A) of the Exchange Act and Rules 12b-20 and 13a-13 thereunder. + + By the Commission. + + +Jonathan G. Katz +Secretary + + Endnotes + 1 The findings herein are made pursuant to Henson's Offer of Settlement and are not binding on any other person or entity in this or any other proceeding. + + + +  + + + + + + + + + + + + + + + + + + + + + + + + + Return to top + + + + + SEC homepage + + + + + + + + + + + + + + About the SEC + + + + + + Budget & Performance + + + Careers + + + Commission Votes + + + Contact + + + Contracts + + + + + + + + Transparency + + + + + + Accessibility & Disability + + + Super Intelligence + + + FOIA + + + Inspector General + + + No FEAR Act Data + + + Ombuds + + + SEC Excess Personal Property Guidance + + + + + + + + Websites + + + + + + Investor.gov + + + Related Sites + + + USA.gov + + + + + + + + Site Information + + + + + + Plain Writing + + + Privacy & Security + + + Site Map + + + + + + + + + + + + + + + + + + Stay connected. 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Cummings + + + + + + + + !function(){var e=navigator.userAgent,a=document.documentElement,n=a.className;n=n.replace("no-js","js"),/iPad|iPhone|iPod/.test(e)&&!window.MSStream&&(n+=" ua-ios"),a.className=n}(); + {"path":{"baseUrl":"\/","pathPrefix":"","currentPath":"node\/494161","currentPathIsAdmin":false,"isFront":false,"currentLanguage":"en"},"pluralDelimiter":"\u0003","suppressDeprecationErrors":true,"gtag":{"tagId":"","consentMode":false,"otherIds":[],"events":[],"additionalConfigInfo":[]},"ajaxPageState":{"libraries":"eJxdT0GOwzAI_JBdn_oei2DkeINNZLC22devlaZS2wtiBhhmcKNUTPo97jxyaXEH3GJpiZrFhQW38A4cMqgeYQGlV19JFTKpQ-kUmvQKXP7I0cO4tC2kPnbg2wVdFslM0SCHPMs3vsEPPD7J6hgOGdPCKJyoRxxqUuePHjLLAuzVjimenRJGSLW08NoBK9LUn6SHlrytVOlcpJShB63QLSpBx_WkOzHNePol4fRQo_qMPvQ36ZXsAmd99lMNr2t_GUR9n60EyX9a_wePd5ns","theme":"uswds_sec","theme_token":null},"ajaxTrustedUrl":[],"gtm":{"tagId":null,"settings":{"data_layer":"dataLayer","include_classes":false,"allowlist_classes":"","blocklist_classes":"","include_environment":false,"environment_id":"","environment_token":""},"tagIds":["GTM-TD3BKV"]},"data":{"extlink":{"extTarget":false,"extTargetAppendNewWindowDisplay":true,"extTargetAppendNewWindowLabel":"(opens in a new window)","extTargetNoOverride":false,"extNofollow":false,"extTitleNoOverride":false,"extNoreferrer":false,"extFollowNoOverride":false,"extClass":"0","extLabel":"(link is external)","extImgClass":false,"extSubdomains":true,"extExclude":".*\\.gov|http:\/\/www.xbrl.org\/utr\/2013-05-17\/utr.xml|http:\/\/www.xbrl.org\/dtr\/type\/numeric-2009-12-16.xsd|http:\/\/www.xbrl.org\/dtr\/type\/nonNumeric-2009-12-16.xsd|https:\/\/secir.secure.force.com\/ombudsman\/OMMSForm","extInclude":"","extCssExclude":".data-exempt","extCssInclude":"","extCssExplicit":"","extAlert":true,"extAlertText":"You are now leaving the SEC Website. 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Caggia and Louise A. Cummings + + + + + + + + + + + + Ocumed Group, Inc., Alfred R. Caggia and Louise A. Cummings + + + + + + + + + + + + + + + + + + + + + Securities and Exchange Commission v. Ocumed Group, Inc., Alfred R. Caggia and Louise A. Cummings (United States District Court for the District of Columbia C.A. No. 1:04CV00829) + + The Securities and Exchange Commission announced today that it filed a complaint in the U.S. District Court for the District of Columbia against Ocumed Group, Inc. ("Ocumed"), a Delaware corporation with its principal office in Roseland, New Jersey, and two of the company's officers and directors - Alfred Caggia and Louise Cummings - for violating the antifraud provisions of the federal securities laws by including a forged auditor's report in Ocumed's 2002 10-KSB filing with the Commission. The Commission also charges that Caggia violated the recordkeeping, ownership and disclosure, and certification requirements of the federal securities laws. + + According to the Commission's Complaint, in August 2002, Ocumed filed a Form 10-KSB for the fiscal year ended April 30, 2002 that contained what purported to be an auditor report issued by an independent auditor. The Complaint alleges that the auditor report was a forgery fabricated to make it appear as if Ocumed's 2002 financial statements were audited when, in fact, no audit ever occurred. + + The Complaint alleges Caggia and Ocumed's now deceased CFO created the forged auditor report and, with Caggia's knowledge, included the forged report in Ocumed's 10-KSB. Caggia and Cummings signed the 10-KSB. The complaint further alleges that Cummings failed to read or take any steps to ascertain whether the filing was true and accurate. +The Complaint further alleges that Caggia failed to file with the Commission required ownership and disclosure statements identifying his control of a substantial percentage of the outstanding Ocumed shares and his transfer of several shares to other individuals or entities. According to the Complaint, Caggia also failed to file certifications of accuracy and completeness required by Sarbanes-Oxley Rule 13a-14 with Ocumed's 10-QSBs for the quarters ended July 31, 2002, October 31, 2002, and January 31, 2003. + + The Complaint seeks an injunction against Ocumed based on its violations of Sections 10(b) and 13(a) of the Exchange Act and Exchange Act Rules 10b-5, 12b-20, and 13a-1. It seeks an injunction, officer and director bar, civil monetary penalty, and order of disgorgement against Caggia based on his violations of Exchange Act Sections 10(b), 13(b)(5), 13(d), and 16(a) and Exchange Act Rules 10b-5, 13a-14, 13d-1, 13d-2, and 16a-3, and his aiding and abetting violations of Exchange Act Section 13(a) and Exchange Act Rules 12b-20 and 13a-1. Lastly, the Complaint seeks an injunction, officer and director bar, and civil penalty against Cummings based on her violations of Exchange Act Section 10(b) and Exchange Act Rule 10b-5, and her aiding and abetting violations of Exchange Act Section 13(a) and Exchange Act Rules 12b-20 and 13a-1. + + + + + SEC Complaint in this matter + + + + +  + + + + + + + + + + + + + + + + + + + + + + + + + Return to top + + + + + SEC homepage + + + + + + + + + + + + + + About the SEC + + + + + + Budget & Performance + + + Careers + + + Commission Votes + + + Contact + + + Contracts + + + + + + + + Transparency + + + + + + Accessibility & Disability + + + Super Intelligence + + + FOIA + + + Inspector General + + + No FEAR Act Data + + + Ombuds + + + SEC Excess Personal Property Guidance + + + + + + + + Websites + + + + + + Investor.gov + + + Related Sites + + + USA.gov + + + + + + + + Site Information + + + + + + Plain Writing + + + Privacy & Security + + + Site Map + + + + + + + + + + + + + + + + + + Stay connected. 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Sebastian + + + + + + + + !function(){var e=navigator.userAgent,a=document.documentElement,n=a.className;n=n.replace("no-js","js"),/iPad|iPhone|iPod/.test(e)&&!window.MSStream&&(n+=" ua-ios"),a.className=n}(); + {"path":{"baseUrl":"\/","pathPrefix":"","currentPath":"node\/494176","currentPathIsAdmin":false,"isFront":false,"currentLanguage":"en"},"pluralDelimiter":"\u0003","suppressDeprecationErrors":true,"gtag":{"tagId":"","consentMode":false,"otherIds":[],"events":[],"additionalConfigInfo":[]},"ajaxPageState":{"libraries":"eJxdT0GOwzAI_JBdn_oei2DkeINNZLC22devlaZS2wtiBhhmcKNUTPo97jxyaXEH3GJpiZrFhQW38A4cMqgeYQGlV19JFTKpQ-kUmvQKXP7I0cO4tC2kPnbg2wVdFslM0SCHPMs3vsEPPD7J6hgOGdPCKJyoRxxqUuePHjLLAuzVjimenRJGSLW08NoBK9LUn6SHlrytVOlcpJShB63QLSpBx_WkOzHNePol4fRQo_qMPvQ36ZXsAmd99lMNr2t_GUR9n60EyX9a_wePd5ns","theme":"uswds_sec","theme_token":null},"ajaxTrustedUrl":[],"gtm":{"tagId":null,"settings":{"data_layer":"dataLayer","include_classes":false,"allowlist_classes":"","blocklist_classes":"","include_environment":false,"environment_id":"","environment_token":""},"tagIds":["GTM-TD3BKV"]},"data":{"extlink":{"extTarget":false,"extTargetAppendNewWindowDisplay":true,"extTargetAppendNewWindowLabel":"(opens in a new window)","extTargetNoOverride":false,"extNofollow":false,"extTitleNoOverride":false,"extNoreferrer":false,"extFollowNoOverride":false,"extClass":"0","extLabel":"(link is external)","extImgClass":false,"extSubdomains":true,"extExclude":".*\\.gov|http:\/\/www.xbrl.org\/utr\/2013-05-17\/utr.xml|http:\/\/www.xbrl.org\/dtr\/type\/numeric-2009-12-16.xsd|http:\/\/www.xbrl.org\/dtr\/type\/nonNumeric-2009-12-16.xsd|https:\/\/secir.secure.force.com\/ombudsman\/OMMSForm","extInclude":"","extCssExclude":".data-exempt","extCssInclude":"","extCssExplicit":"","extAlert":true,"extAlertText":"You are now leaving the SEC Website. 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Sebastian + + + + + + + + + + + + Thomas A. Sebastian + + + + + + + + + + + + + + + + + + + + + The Securities and Exchange Commission announced that on April 1, 2004, United States District Judge Manuel Real of the Central District of California entered a Final Judgment against Thomas A. Sebastian, former chief financial officer of L90, Inc., a former Internet advertising firm now known as MaxWorldwide, Inc., pursuant to Sebastian's consent. The Judgment resolves the Commission's claims against Sebastian in a civil action filed on September 25, 2003. As part of the settlement, Sebastian is ordered to pay approximately $415,000. + + In its complaint, the Commission alleged that Sebastian participated in a scheme to generate fraudulent revenues through advertising barter transactions with other Internet companies, including Homestore.com, Inc., in order to meet securities analysts' revenue estimates. Through the fraudulent barter transactions, L90 overstated its revenues in the third quarter of 2000 through the third quarter of 2001 by at least $4.3 million, or 7.9 percent overall, and by as much as 29 percent in one quarter. As a result, L90 was able to meet analysts' revenue estimates in all but one of these quarters. + + Sebastian consented, without admitting or denying the allegations in the Commission's complaint, to the entry of the judgment, which permanently enjoins him from violating the antifraud provisions of Section 17(a) of the Securities Act of 1933 and Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder; the reporting provisions of Section 13(a) of the Exchange Act and Rules 12b-20, 13a-1, and 13a-13 thereunder; the record-keeping provisions of Exchange Act Rule 13b2-1; the internal control provisions of Section 13(b)(5) of the Exchange Act; and the lying-to-the auditors provisions of Exchange Act Rule 13b2-2. The Judgment also imposes an officer and director bar against Sebastian and requires him to pay disgorgement and prejudgment interest totaling $265,972.65 and a civil penalty of $150,000. + + On March 8, 2004, in a related criminal matter, Sebastian pled guilty in federal court to conspiracy to commit securities fraud. He is scheduled to be sentenced in June by United States District Judge Percy Anderson. + + For further information, see LR-18100 (Apr. 23, 2003) and LR-18364 (Sep. 26, 2003). + + + + +  + + + + + + + + + + + + + + + + + + + + + + + + + Return to top + + + + + SEC homepage + + + + + + + + + + + + + + About the SEC + + + + + + Budget & Performance + + + Careers + + + Commission Votes + + + Contact + + + Contracts + + + + + + + + Transparency + + + + + + Accessibility & Disability + + + Super Intelligence + + + FOIA + + + Inspector General + + + No FEAR Act Data + + + Ombuds + + + SEC Excess Personal Property Guidance + + + + + + + + Websites + + + + + + Investor.gov + + + Related Sites + + + USA.gov + + + + + + + + Site Information + + + + + + Plain Writing + + + Privacy & Security + + + Site Map + + + + + + + + + + + + + + + + + + Stay connected. Sign up for email updates. + + + + + + Your email address + + Sign Up + + + + + + + + + + + + X + + + + + + + + Facebook + + + + + + + + Instagram + + + + + + + + RSS + + + + + + + + YouTube + + + + + + + + Email Updates + + + + + + + + + + + + + + + + + + + diff --git a/raw/aaer/2004/AAER-2023.txt b/raw/aaer/2004/AAER-2023.txt new file mode 100644 index 0000000000000000000000000000000000000000..f624c740bb84353b730e4ff7f2db5fd78a780c13 --- /dev/null +++ b/raw/aaer/2004/AAER-2023.txt @@ -0,0 +1,1361 @@ + + + + + + + + + + + + + + + + SEC.gov | Frank M. Bergonzi, Martin L. Grass, and Franklin C. Brown + + + + + + + + !function(){var e=navigator.userAgent,a=document.documentElement,n=a.className;n=n.replace("no-js","js"),/iPad|iPhone|iPod/.test(e)&&!window.MSStream&&(n+=" ua-ios"),a.className=n}(); + {"path":{"baseUrl":"\/","pathPrefix":"","currentPath":"node\/494181","currentPathIsAdmin":false,"isFront":false,"currentLanguage":"en"},"pluralDelimiter":"\u0003","suppressDeprecationErrors":true,"gtag":{"tagId":"","consentMode":false,"otherIds":[],"events":[],"additionalConfigInfo":[]},"ajaxPageState":{"libraries":"eJxdT0GOwzAI_JBdn_oei2DkeINNZLC22devlaZS2wtiBhhmcKNUTPo97jxyaXEH3GJpiZrFhQW38A4cMqgeYQGlV19JFTKpQ-kUmvQKXP7I0cO4tC2kPnbg2wVdFslM0SCHPMs3vsEPPD7J6hgOGdPCKJyoRxxqUuePHjLLAuzVjimenRJGSLW08NoBK9LUn6SHlrytVOlcpJShB63QLSpBx_WkOzHNePol4fRQo_qMPvQ36ZXsAmd99lMNr2t_GUR9n60EyX9a_wePd5ns","theme":"uswds_sec","theme_token":null},"ajaxTrustedUrl":[],"gtm":{"tagId":null,"settings":{"data_layer":"dataLayer","include_classes":false,"allowlist_classes":"","blocklist_classes":"","include_environment":false,"environment_id":"","environment_token":""},"tagIds":["GTM-TD3BKV"]},"data":{"extlink":{"extTarget":false,"extTargetAppendNewWindowDisplay":true,"extTargetAppendNewWindowLabel":"(opens in a new window)","extTargetNoOverride":false,"extNofollow":false,"extTitleNoOverride":false,"extNoreferrer":false,"extFollowNoOverride":false,"extClass":"0","extLabel":"(link is external)","extImgClass":false,"extSubdomains":true,"extExclude":".*\\.gov|http:\/\/www.xbrl.org\/utr\/2013-05-17\/utr.xml|http:\/\/www.xbrl.org\/dtr\/type\/numeric-2009-12-16.xsd|http:\/\/www.xbrl.org\/dtr\/type\/nonNumeric-2009-12-16.xsd|https:\/\/secir.secure.force.com\/ombudsman\/OMMSForm","extInclude":"","extCssExclude":".data-exempt","extCssInclude":"","extCssExplicit":"","extAlert":true,"extAlertText":"You are now leaving the SEC Website. 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Share sensitive information only on official, secure websites. + + + + + + + + + + + + + + + + + SEC homepage + + + + + + + Menu + + + + + + + + + + + + + + Close + + + + + + + + + + + + + Search SEC.gov & EDGAR + + + + + + Search + + + + + + + + + + + + + + + + + Search Filings + + + + + + + + + Search Filings + + + + + + + + + Full Text Search + + + + + + Latest Filings + + + + + + Mutual Fund Search + + + + + + Variable Insurance Products Search + + + + + + SIC Codes + + + + + + CIK Lookup + + + + + + Public Dissemination Service (PDS) + + + + + + Search Assistance + + + + + + + + + + + + + Submit Filings + + + + + + + + + Submit Filings + + + + + + + + + EDGAR Filer Management Portal + + + + + + EDGAR Filing Portal + + + + + + Online Forms Management Portal + + + + + + EDGAR Next + + + + + + Forms Index + + + + + + Filer Support & Resources + + + + + + + + + + + + + Data & Research + + + + + + + + + Data & Research + + + + + + + + + Data Library + + + + + + Statistics & Data Visualizations + + + + + + Structured Data + + + + + + Investment Management Data + + + + + + Open Data at the SEC + + + + + + + + + + + + + Rules, Enforcement, & Compliance + + + + + + + + + + + + + + + + + + + + Rules & Regulations + + + + + + + + + Rulemaking Activity + + + + + + Submit Public Comments + + + + + + Staff Guidance + + + + + + No-Action, Interpretive, and Exemptive Letters + + + + + + Self-Regulatory Organization Rulemaking + + + + + + Public Petitions for Rulemaking + + + + + + + + + + + + + + + + + Enforcement & Litigation + + + + + + + + + Litigation Releases + + + + + + Administrative Proceedings + + + + + + Administrative Law Judge Orders and Initial Decisions + + + + + + Trading Suspensions + + + + + + Distributions to Harmed Investors + + + + + + Receiverships + + + + + + + + + + + + + + + + + Compliance + + + + + + + + + Examination Priorities + + + + + + Risk Alerts + + + + + + Compliance Outreach Program + + + + + + + + + + + + + + + + + + + + + + + Proposed Rules + + + + + + What's New + + + + + + Whistleblower Program + + + + + + + + + + + + + + + + + + + Featured Topics + + + + + + + + + Featured Topics + + + + + + + + + Crypto Task Force + + + + + + Cybersecurity + + + + + + Market Structure Analytics + + + + + + Saving and Investing for Military Personnel + + + + + + Saving and Investing for Teachers + + + + + + SEC-CFTC Harmonization Initiative + + + + + + Treasury Clearing Implementation + + + + + + + + + + + + + About + + + + + + + + + About + + + + + + + + + Mission + + + + + + Commissioners + + + + + + Divisions & Offices + + + + + + Division & Office Directors + + + + + + Advisory Committees + + + + + + Budget & Performance + + + + + + Reports & Publications + + + + + + Commission Votes + + + + + + Contact the SEC + + + + + + Careers + + + + + + + + + + + + + Submit a Tip or Complaint + + + + + + + + + + + + + + + + + Newsroom + + + | + + + Investors + + + Small Businesses + + + Whistleblowers + + + + + + + + + + + + + + + Newsroom + + + | + + + Investors + + + Small Businesses + + + Whistleblowers + + + + + + + + + + + + + + + + + Search SEC.gov & EDGAR + + + + + + Search + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + More in this Section + + + + + + + + + + + + + Enforcement & Litigation + + + + + + + Litigation Releases + + + + + Administrative Proceedings + + + + + Administrative Law Judge Orders and Initial Decisions + + + + + Trading Suspensions + + + + + Distributions to Harmed Investors + + + + + Receiverships + + + + + Electronic Filings in Administrative Proceedings (eFAP) + + + + + Rules of Practice + + + + + Applications for Reentry + + + + + Reports of Investigations + + + + + Whistleblower Program + + + + + Public Alert: Unregistered Soliciting Entities (PAUSE) + + + + + SEC Action Lookup - Individuals (SALI) + + + + + Enforcement Data Delivery Standards + + + + + Small Businesses + + + + + Appellate Briefs + + + + + Amicus / Friend of the Court Briefs + + + + + + + + + + + + + + + + + + + + + + + + + + Enforcement & Litigation + + + + + + + Litigation Releases + + + + + Administrative Proceedings + + + + + Administrative Law Judge Orders and Initial Decisions + + + + + Trading Suspensions + + + + + Distributions to Harmed Investors + + + + + Receiverships + + + + + Electronic Filings in Administrative Proceedings (eFAP) + + + + + Rules of Practice + + + + + Applications for Reentry + + + + + Reports of Investigations + + + + + Whistleblower Program + + + + + Public Alert: Unregistered Soliciting Entities (PAUSE) + + + + + SEC Action Lookup - Individuals (SALI) + + + + + Enforcement Data Delivery Standards + + + + + Small Businesses + + + + + Appellate Briefs + + + + + Amicus / Friend of the Court Briefs + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + Home + + + Enforcement and Litigation + + + Litigation Releases + + + Frank M. Bergonzi, Martin L. Grass, and Franklin C. Brown + + + + + + + + + + + + Frank M. Bergonzi, Martin L. Grass, and Franklin C. Brown + + + + + + + + + + + + + + + + + + + + + WASHINGTON - The Securities and Exchange Commission announced today that it has reached a settlement with former Rite Aid Corporation CFO Frank M. Bergonzi. On June 21, 2002, the Commission filed accounting fraud charges in federal district court in the Middle District of Pennsylvania against Bergonzi and two other former senior executives of Rite Aid, the nationwide drug store chain based in Harrisburg, Pennsylvania. The Commission submitted the judgment, to which Bergonzi consented without admitting or denying the allegations in the Commission's complaint, to the Hon. J. Rambo. The Commission's case has been stayed pending the outcome of the related criminal actions against Bergonzi and others. Bergonzi, who pled guilty to criminal charges involving his conduct while at Rite Aid in a case filed by the United States Attorney for the Middle District of Pennsylvania, was sentenced earlier today in connection to significant criminal sanctions. + + In its civil action, the Commission charged that Bergonzi, Martin L. Grass, Rite Aid's former CEO, and Franklin C. Brown, the former vice chairman and chief legal officer, were responsible for one of the most egregious accounting frauds in recent history. The Commission alleged that Bergonzi and the others conducted a wide-ranging accounting fraud scheme that resulted in the significant inflation of Rite Aid's net income in every quarter from May 1997 to May 1999. After the discovery of improper and unsubstantiated accounting transactions, in July and October 2000 Rite Aid restated cumulative pretax income by a massive $2.3 billion dollars and cumulative net income by $1.6 billion dollars. Rite Aid's restatement was, at the time, by far the largest financial restatement ever by a public company. The Commission's subsequent investigation into the reasons for the restatement culminated in its charges against Bergonzi and the others. + + The judgment would order Bergonzi to be barred from acting as an officer or director of a public company. In addition, Bergonzi would be permanently enjoined from future violations of the antifraud, reporting, books and records, internal controls, and other provisions of the Securities Act of 1933 and the Securities Exchange Act of 1934, specifically Section 17(a) of the Securities Act, Sections 10(b) and 13(b)(5) of the Exchange Act, and Rules 10b-5, 13b2-1, and 13b2-2 thereunder, and, as a controlling person pursuant to Section 20(a) of the Exchange Act, Sections 13(a) and 13(b)(2) of the Exchange Act and Rules 12b-20, 13a-1 and 13a-13. Bergonzi would not be ordered to pay civil penalties, and disgorgement of $299,774.00 plus prejudgment interest of $199,066.70 would be waived, based on his financial condition. + + + + +  + + + + + + + + + + + + + + + + + + + + + + + + + Return to top + + + + + SEC homepage + + + + + + + + + + + + + + About the SEC + + + + + + Budget & Performance + + + Careers + + + Commission Votes + + + Contact + + + Contracts + + + + + + + + Transparency + + + + + + Accessibility & Disability + + + Super Intelligence + + + FOIA + + + Inspector General + + + No FEAR Act Data + + + Ombuds + + + SEC Excess Personal Property Guidance + + + + + + + + Websites + + + + + + Investor.gov + + + Related Sites + + + USA.gov + + + + + + + + Site Information + + + + + + Plain Writing + + + Privacy & Security + + + Site Map + + + + + + + + + + + + + + + + + + Stay connected. 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Bergonzi, Martin L. Grass, And Franklin C. Brown + + + + + + + + + + + + Frank M. Bergonzi, Martin L. Grass, And Franklin C. Brown + + + + + + + + + + + + + + + + + + + + + WASHINGTON - The Securities and Exchange Commission announced today that it has reached a settlement with former Rite Aid Corporation CEO Martin L. Grass. On June 21, 2002, the Commission filed accounting fraud charges in federal district court in the Middle District of Pennsylvania against Grass and two other former senior executives of Rite Aid, the nationwide drug store chain based in Harrisburg, Pennsylvania. The Commission submitted the judgment, to which Grass consented without admitting or denying the allegations in the Commission's complaint, to the Hon. J. Rambo today. The Commission's case has been stayed pending the outcome of related criminal actions filed by the United States Attorney for the Middle District of Pennsylvania against Grass and others. Grass, who pled guilty to criminal charges involving his conduct while at Rite Aid, was sentenced earlier today to significant criminal sanctions. + + In its civil action, the Commission charged that Grass, Frank M. Bergonzi, Rite Aid's former CFO, and Franklin C. Brown, Rite Aid's former vice chairman and chief legal officer, were responsible for one of the most egregious accounting frauds in recent history. The Commission alleged that Grass and the others conducted a wide-ranging accounting fraud scheme that resulted in the significant inflation of Rite Aid's net income in every quarter from May 1997 to May 1999. The Commission also charged Grass and Brown with concealing certain related party transactions that enriched Grass at shareholder expense, and charged Grass with fabricating Board committee minutes in order to support a lie he told in connection with obtaining a loan critical to keeping Rite Aid in business. After the discovery of improper and unsubstantiated accounting transactions, in July and October 2000 Rite Aid restated cumulative pretax income by a massive $2.3 billion dollars and cumulative net income by $1.6 billion dollars. Rite Aid's restatement was, at the time, by far the largest financial restatement ever by a public company. The Commission's subsequent investigation into the reasons for the restatement culminated in its charges against Grass and the others. + + If accepted by the Court, the judgment would order Grass to be barred from acting as an officer or director of a public company. In addition, Grass would be permanently enjoined from future violations of the antifraud, reporting, books and records, internal controls, proxy, and other provisions of the Securities Act of 1933 and the Securities Exchange Act of 1934, specifically Section 17(a) of the Securities Act, Sections 10(b) and 13(b)(5) of the Exchange Act, and Rules 10b-5, 13b2-1, and 13b2-2 thereunder, and, as a controlling person pursuant to Section 20(a) of the Exchange Act, Sections 13(a), 13(b)(2), and 14(a) of the Exchange Act and Rules 12b-20, 13a-1, 13a-11, and 14a-9(a). The judgment further provides that the Commission's claim for disgorgement of ill-gotten gains is satisfied by Grass's civil forfeiture of $3 million in connection with his criminal case, and no civil penalty would be imposed in view of such forfeiture. + + + + + +  + + + + + + + + + + + + + + + + + + + + + + + + + Return to top + + + + + SEC homepage + + + + + + + + + + + + + + About the SEC + + + + + + Budget & Performance + + + Careers + + + Commission Votes + + + Contact + + + Contracts + + + + + + + + Transparency + + + + + + Accessibility & Disability + + + Super Intelligence + + + FOIA + + + Inspector General + + + No FEAR Act Data + + + Ombuds + + + SEC Excess Personal Property Guidance + + + + + + + + Websites + + + + + + Investor.gov + + + Related Sites + + + USA.gov + + + + + + + + Site Information + + + + + + Plain Writing + + + Privacy & Security + + + Site Map + + + + + + + + + + + + + + + + + + Stay connected. 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Jones + + + + + + + + !function(){var e=navigator.userAgent,a=document.documentElement,n=a.className;n=n.replace("no-js","js"),/iPad|iPhone|iPod/.test(e)&&!window.MSStream&&(n+=" ua-ios"),a.className=n}(); + {"path":{"baseUrl":"\/","pathPrefix":"","currentPath":"node\/367876","currentPathIsAdmin":false,"isFront":false,"currentLanguage":"en"},"pluralDelimiter":"\u0003","suppressDeprecationErrors":true,"gtag":{"tagId":"","consentMode":false,"otherIds":[],"events":[],"additionalConfigInfo":[]},"ajaxPageState":{"libraries":"eJxdT0GOwzAI_JBdn_oei2DkeINNZLC22devlaZS2wtiBhhmcKNUTPo97jxyaXEH3GJpiZrFhQW38A4cMqgeYQGlV19JFTKpQ-kUmvQKXP7I0cO4tC2kPnbg2wVdFslM0SCHPMs3vsEPPD7J6hgOGdPCKJyoRxxqUuePHjLLAuzVjimenRJGSLW08NoBK9LUn6SHlrytVOlcpJShB63QLSpBx_WkOzHNePol4fRQo_qMPvQ36ZXsAmd99lMNr2t_GUR9n60EyX9a_wePd5ns","theme":"uswds_sec","theme_token":null},"ajaxTrustedUrl":[],"gtm":{"tagId":null,"settings":{"data_layer":"dataLayer","include_classes":false,"allowlist_classes":"","blocklist_classes":"","include_environment":false,"environment_id":"","environment_token":""},"tagIds":["GTM-TD3BKV"]},"data":{"extlink":{"extTarget":false,"extTargetAppendNewWindowDisplay":true,"extTargetAppendNewWindowLabel":"(opens in a new window)","extTargetNoOverride":false,"extNofollow":false,"extTitleNoOverride":false,"extNoreferrer":false,"extFollowNoOverride":false,"extClass":"0","extLabel":"(link is external)","extImgClass":false,"extSubdomains":true,"extExclude":".*\\.gov|http:\/\/www.xbrl.org\/utr\/2013-05-17\/utr.xml|http:\/\/www.xbrl.org\/dtr\/type\/numeric-2009-12-16.xsd|http:\/\/www.xbrl.org\/dtr\/type\/nonNumeric-2009-12-16.xsd|https:\/\/secir.secure.force.com\/ombudsman\/OMMSForm","extInclude":"","extCssExclude":".data-exempt","extCssInclude":"","extCssExplicit":"","extAlert":true,"extAlertText":"You are now leaving the SEC Website. 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Individuals (SALI) + + + + + Enforcement Data Delivery Standards + + + + + Small Businesses + + + + + Appellate Briefs + + + + + Amicus / Friend of the Court Briefs + + + + + + + + + + + + + + + + + + + + + + + + + + Enforcement & Litigation + + + + + + + Litigation Releases + + + + + Administrative Proceedings + + + + + + + Information for Respondents in Administrative Proceedings  + + + + + Open Litigated Administrative Proceedings + + + + + Closed Litigated Administrative Proceedings + + + + + Commission Opinions and Adjudicatory Orders + + + + + Delinquent Filings + + + + + Stop Orders + + + + + + + + Administrative Law Judge Orders and Initial Decisions + + + + + Trading Suspensions + + + + + Distributions to Harmed Investors + + + + + Receiverships + + + + + Electronic Filings in Administrative Proceedings (eFAP) + + + + + Rules of Practice + + + + + Applications for Reentry + + + + + Reports of Investigations + + + + + Whistleblower Program + + + + + Public Alert: Unregistered Soliciting Entities (PAUSE) + + + + + SEC Action Lookup - Individuals (SALI) + + + + + Enforcement Data Delivery Standards + + + + + Small Businesses + + + + + Appellate Briefs + + + + + Amicus / Friend of the Court Briefs + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + Home + + + Enforcement and Litigation + + + Administrative Proceedings + + + David A. Jones + + + + + + + + + + + + David A. Jones + + + + + + + + + + + + + + + + + + + Securities Exchange Act of 1934 +Release No. 49784 / May 28, 2004 + + Accounting and Auditing Enforcement +Release No. 2025 / May 28, 2004 + + Administrative Proceeding +File No. 3-11504 + + + + + + + + In the Matter of + + DAVID A. JONES, CPA + + + : + : + : + : + : + : + : + : + + ORDER INSTITUTING PROCEEDINGS + PURSUANT TO RULE 102(e) OF + THE COMMISSION'S RULES OF + PRACTICE, MAKING FINDINGS, AND + IMPOSING REMEDIAL SANCTIONS + + + + + I. + + The Securities and Exchange Commission ("Commission") deems it appropriate and in the public interest that administrative proceedings be, and hereby are, instituted against David A. Jones ("Jones" or "Respondent") pursuant to Rule 102(e)(3) of the Commission's Rules of Practice. 1 + + II. + + In anticipation of the institution of these proceedings, Jones has submitted an Offer of Settlement ("Offer") that the Commission has determined to accept. Solely for the purpose of these proceedings and any other proceedings brought by or on behalf of the Commission or to which the Commission is a party, and without admitting or denying the findings contained herein, except as to the Commission's jurisdiction over him and the matters herein and the entry of the injunction, which are admitted, Jones consents to the findings and sanctions set forth below. + + Accordingly, IT IS ORDERED that proceedings pursuant to Rule 102(e) of the Commission's Rules of Practice be, and they hereby are, instituted. + + III. + + On the basis of this Order Instituting Proceedings Pursuant to Rule 102(e) of the Commission's Rules of Practice, Making Findings, and Imposing Remedial Sanctions ("Order") and the Offer submitted by Jones, the Commission finds that: + + A. On July 12, 2002, the Commission filed a complaint (the "Complaint") in the United States District Court for the District of Utah against Intelliquis International, Inc., Mark W. Tippets, David A. Jones, and Kevin E. Orton. The Complaint alleges, among other things, that Jones violated Section 17(a)(1), (2) or (3) of the Securities Act of 1933 ("Securities Act") and Section 10(b) of the Securities Exchange Act of 1934 ("Exchange Act") and Rules 10b-5 and 13b2-1 thereunder. The Complaint further alleges Jones aided and abetted Intelliquis' violations of Sections 13(a) and 13(b)(2)(A) and (B) of the Exchange Act and Rules 12b-20, 13a-1 and 13a-13 thereunder. Through its Complaint, the Commission sought a permanent injunction and other relief against Jones. + + B. The Complaint alleges that Jones, Chief Financial Officer of Intelliquis and a certified public accountant licensed to practice in the State of Utah, knowingly permitted Intelliquis to engage in improper revenue recognition practices in violation of Generally Accepted Accounting Principles ("GAAP"). + + C. The Complaint also alleges Jones allowed Intelliquis to recognize revenue from the sale of its software products upon shipment despite the fact that Intelliquis' contracts with its distributor granted the distributor an unlimited right to return Intelliquis products. + + D. The Complaint alleges that: (1) under GAAP, Intelliquis should not have recognized revenue upon shipment and, as a result overstated income and revenue; (2) Jones prepared Intelliquis' financial statements which included the improperly recorded revenue; and (3) the improper revenue from transactions with its distributor caused Intelliquis' financial statements to be materially misstated. + + E. The Complaint also alleges Intelliquis included those materially inaccurate financial statements with its Forms 10-KSB for the years ended December 31, 1998 and December 31, 1999, in its Forms 10-QSB for the quarters ended March 31, 1999, June 30, 1999, and September 30, 1999, and in a Form SB-2 registration statement that was filed with the Commission. + + F. On March 24, 2004, without admitting or denying the allegations in the Complaint, Jones was enjoined by the United States District Court for the District of Utah from future violations of Section 17(a) of the Securities Act, Section 10(b) of the Exchange Act and Rule 10b-5 thereunder, and from aiding and abetting future violations of Sections 13(a) and 13(b)(2)(A) and (B) of the Exchange Act and Rules 12b-20, 13a-1, and 13a-13 thereunder, and ordered to disgorge $34,591.32 plus prejudgment interest thereon of $5,088.56. Payment of all but $5,000 of that amount was waived based on the representations in Jones' sworn financial statement. In addition, no penalty was imposed on Jones based on the representations in his sworn financial statements. + + IV. + + In view of the foregoing, the following sanctions agreed to in the Offer submitted by Jones are imposed. Accordingly, IT IS ORDERED that: + + A. Jones is suspended from appearing or practicing before the Commission as an accountant. + + B. After 5 years from the date of this order, Jones may request that the Commission consider his reinstatement by submitting an application (attention: Office of the Chief Accountant) to resume appearing or practicing before the Commission as: + + 1. a preparer or reviewer, or a person responsible for the preparation or review, of any public company's financial statements that are filed with the Commission. Such an application must satisfy the Commission that Jones' work in his practice before the Commission will be reviewed either by the independent audit committee of the public company for which he works or in some other acceptable manner, as long as he practices before the Commission in this capacity; and/or + + 2. an independent accountant. Such an application must satisfy the Commission that: + + + + (a) Respondent, or the public accounting firm with which he/she is associated, is registered with the Public Company Accounting Oversight Board ("Board") in accordance with the Sarbanes-Oxley Act of 2002, and such registration continues to be effective; + + (b) Respondent, or the registered public accounting firm with which he is associated, has been inspected by the Board and that inspection did not identify any criticisms of or potential defects in the Respondent's or the firm's quality control system that would indicate that the Respondent will not receive appropriate supervision or, if the Board has not conducted an inspection, has received an unqualified report relating to his, or the firm's, most recent peer review conducted in accordance with the guidelines adopted by the former SEC Practice Section of the American Institute of Certified Public Accountants Division for CPA Firms or an organization providing equivalent oversight and quality control functions; + + (c) Respondent has resolved all disciplinary issues with the Board, and has complied with all terms and conditions of any sanctions imposed by the Board (other than reinstatement by the Commission); and + + (d) Respondent acknowledges his responsibility, as long as Respondent appears or practices before the Commission as an independent accountant, to comply with all requirements of the Commission and the Board, including, but not limited to, all requirements relating to registration, inspections, concurring partner reviews and quality control standards. + + + + C. The Commission will consider an application by Jones to resume appearing or practicing before the Commission provided that his state CPA license is current and he has resolved all other disciplinary issues with the applicable state boards of accountancy. However, if state licensure is dependant on reinstatement by the Commission, the Commission will consider an application on its other merits. The Commission's review may include consideration of, in addition to the matters referenced above, any other matters relating to Jones' character, integrity, professional conduct, or qualifications to appear or practice before the Commission. + + The sanctions ordered herein shall become effective immediately. + + By the Commission. + + + Jonathan G. Katz +Secretary + + Endnotes + + + + + + + 1 Rule 102(e)(3)(i) provides, in relevant part, that: + + The Commission, with due regard to the public interest and without preliminary hearing, may, by order, . . . suspend from appearing or practicing before it any . . . accountant . . . who has been by name . . . permanently enjoined by any court of competent jurisdiction, by reason of his or her misconduct in an action brought by the Commission, from violating or aiding and abetting the violation of any provision of the Federal securities laws or of the rules and regulations thereunder. + + + + + + + + + + + + + + + + + + + + + + + + + Return to top + + + + + SEC homepage + + + + + + + + + + + + + + About the SEC + + + + + + Budget & Performance + + + Careers + + + Commission Votes + + + Contact + + + Contracts + + + + + + + + Transparency + + + + + + Accessibility & Disability + + + Super Intelligence + + + FOIA + + + Inspector General + + + No FEAR Act Data + + + Ombuds + + + SEC Excess Personal Property Guidance + + + + + + + + Websites + + + + + + Investor.gov + + + Related Sites + + + USA.gov + + + + + + + + Site Information + + + + + + Plain Writing + + + Privacy & Security + + + Site Map + + + + + + + + + + + + + + + + + + Stay connected. 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Individuals (SALI) + + + + + Enforcement Data Delivery Standards + + + + + Small Businesses + + + + + Appellate Briefs + + + + + Amicus / Friend of the Court Briefs + + + + + + + + + + + + + + + + + + + + + + + + + + Enforcement & Litigation + + + + + + + Litigation Releases + + + + + Administrative Proceedings + + + + + Administrative Law Judge Orders and Initial Decisions + + + + + Trading Suspensions + + + + + Distributions to Harmed Investors + + + + + Receiverships + + + + + Electronic Filings in Administrative Proceedings (eFAP) + + + + + Rules of Practice + + + + + Applications for Reentry + + + + + Reports of Investigations + + + + + Whistleblower Program + + + + + Public Alert: Unregistered Soliciting Entities (PAUSE) + + + + + SEC Action Lookup - Individuals (SALI) + + + + + Enforcement Data Delivery Standards + + + + + Small Businesses + + + + + Appellate Briefs + + + + + Amicus / Friend of the Court Briefs + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + Home + + + Enforcement and Litigation + + + Litigation Releases + + + Eric Tyra, Scott Wynne, Peter Berman, and Scott Carey + + + + + + + + + + + + Eric Tyra, Scott Wynne, Peter Berman, and Scott Carey + + + + + + + + + + + + + + + + + + + U.S. Securities and Exchange Commission + + Litigation Release No. 18731 / June 1, 2004 + + Accounting and Auditing Enforcement Release No. 2026 / June 1, 2004 + + SECURITIES AND EXCHANGE COMMISSION v. Eric Tyra, Scott Wynne, Peter Berman, and Scott Carey , Civil Action No. CV-04-P-1052-S (N.D. Al.). + + On May 21, 2004, the Securities and Exchange Commission filed a Complaint in the U.S. District Court for the Northern District of Alabama against Eric Tyra, Scott Wynne, and Peter Berman of Birmingham, Alabama, and Scott Carey of Tarpon Springs, Florida, in connection with the 1998 financial statements of Just for Feet, Inc., a large shoe and sports apparel retailer formerly headquartered in Birmingham, Alabama. Tyra was an Executive Vice-President and Chief Financial Officer for the company; Wynne was a Vice-President of Operations and subsequently the President of the company's Superstore Division; Berman was the company's Controller. Carey was Strategic Account Manager for the Southeastern United States for Nike, Inc., a shoe and sportswear company that was a major supplier for Just for Feet. + + The Complaint alleges that from 1997 through 1999 defendants Tyra, Wynne and Berman engaged in a number of schemes which were undertaken in an effort to fraudulently bolster revenue reporting for the company, including improper accounting for advertising expenses and inventory. The Complaint also alleges that in the spring of 1999, Tyra, Wynne, and Berman, aided and abetted by Carey, were instrumental in the acquisition and presentation to outside auditors of fraudulent confirmations used to allegedly confirm the validity of unearned receivables Just for Feet had recognized from its vendors. The complaint further alleges that the overstatement of income and assets resulting from the misconduct was reflected on Just for Feet's financial statements included in its Form 10-K filed for fiscal year 1998, Forms 10-Q filed for the first and second quarters of fiscal year 1999, and in its registration statements on Forms S-8 and S-4 filed in May and June of 1999, respectively. + + The Complaint seeks a permanent injunction enjoining Tyra, Wynne, Berman and Carey from further violations or aiding and abetting violations of Section 17(a) of the Securities Act of 1933 and Sections 10(b) and 13(a) of the Securities Exchange Act of 1934 and Rules 10b-5, 12b-20 and 13a-1 thereunder, and enjoining Tyra, Wynne, and Berman from further violations of Section 13(b)(5) of the Exchange Act and from aiding and abetting violations of Sections 13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act and Rules 13 a-13, 13b2-1 and 13b2-2 thereunder. In addition, the Complaint seeks disgorgement and prejudgment interest thereon against Tyra, Wynne and Berman, and civil penalties against Tyra, Wynne, Berman and Carey. The Complaint further seeks an order permanently prohibiting Tyra, Wynne and Berman from acting as officers or directors of any issuer that has a class of securities registered with the Commission. + + The Commission acknowledges the assistance of the United States Department of Justice, the Office of the U.S. Attorney for the Northern District of Alabama and the Alabama Securities Commission in this matter. The Commission's investigation is continuing. + + See also: + L.R. 18575 (February 13, 2004); + L.R. 18571 (February 6, 2004); and + L.R. 18139 (May 15, 2003) + + + SEC Complaint in this matter + + + + + +  + + + + + + + + + + + + + + + + + + + + + + + + + Return to top + + + + + SEC homepage + + + + + + + + + + + + + + About the SEC + + + + + + Budget & Performance + + + Careers + + + Commission Votes + + + Contact + + + Contracts + + + + + + + + Transparency + + + + + + Accessibility & Disability + + + Super Intelligence + + + FOIA + + + Inspector General + + + No FEAR Act Data + + + Ombuds + + + SEC Excess Personal Property Guidance + + + + + + + + Websites + + + + + + Investor.gov + + + Related Sites + + + USA.gov + + + + + + + + Site Information + + + + + + Plain Writing + + + Privacy & Security + + + Site Map + + + + + + + + + + + + + + + + + + Stay connected. 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Trugman, Michael H. Taber, David Engel, Seymour Rubin, and David Michael + + + + + + + + + + + + Del Global Technologies Corp., Inc., Leonard A. Trugman, Michael H. Taber, David Engel, Seymour Rubin, and David Michael + + + + + + + + + + + + + + + + + + + + + On June 1, 2004, the Commission filed a Complaint in the United States District Court for the Southern District of New York against Del Global Technologies Corp., Inc. ("Del"), a company headquartered in Valhalla, New York, and five of its former officers and directors. The Commission charged Del, Leonard A. Trugman (Del's former chairman and chief executive officer), Michael H. Taber (Del's former chief financial officer), David Engel (Del's former executive vice president and chief financial officer), Seymour Rubin (a former Del executive and director), and David Michael (a former Del director and former chairman of Del's audit committee) (collectively, the "Defendants") with participating in a multi-year accounting fraud at Del between 1997 and 2000. As detailed below, defendants Del, Taber, Engel and Rubin have agreed to settle this matter without admitting or denying the allegations in the Commission's Complaint. + + The Commission's Complaint alleges, among other things, that Trugman orchestrated, and Taber, Engel and Rubin carried out a financial fraud at Del that resulted in Del materially overstating its reported revenues and caused Del to make numerous material misrepresentations in Commission filings and in press releases. According to the Complaint, Del routinely engaged in improper revenue recognition when it held open quarters, prematurely shipped products to third-party warehouses, and recorded sales on products that Del had not yet manufactured. The Complaint also alleges that Del improperly accounted for inventory by recording obsolete inventory at full value and overstating certain engineering work in process values. In addition, the Complaint alleges that Del improperly characterized certain ordinary expenses as capital expenditures. As alleged in the Complaint, these actions contravened Generally Accepted Accounting Principles and resulted in the overstatement of Del's reported pre-tax income by at least $3.7 million (110%) in fiscal year 1997, $5.2 million (161%) in fiscal year 1998, and $7.9 million (466%) in fiscal year 1999 - and allowed Del to represent that its' performance was on par with internal and external expectations in the first three quarters of fiscal year 2000, when in fact those expectations outpaced the company's actual performance by a wide margin. + + The Complaint further alleges that the Defendants engaged in a cover-up to prevent Del's outside auditors from discovering the fraud. Del kept two sets of books (one set for its auditors and one correct set) and falsified documents such as shipping logs, quality control records, and accounts receivable documents to hide its fraudulent accounting practices from its outside auditors. The Complaint alleges that defendants Rubin and Michael participated in some of these practices. Specifically, the Complaint alleges that in October 2000, they submitted phony invoices to Del to support Taber's attempt to improperly capitalize costs related to a Del acquisition. Michael was previously suspended from appearing or practicing as an accountant before the Commission, pursuant to Rule 102(e) of the Commission's Rules of Practice. See In the Matter of Michael, Adest & Blumenkrantz, et al. , Securities Exchange Act of 1934 Rel. No. 41284, Accounting and Auditing Enforcement Rel. No. 1125 (April 14, 1999). + + The Commission's Complaint alleges that by engaging in the foregoing conduct: (i) defendant Del violated the antifraud provisions of the federal securities laws (Section 17(a) of the Securities Act of 1933 ("Securities Act"), Section 10(b) of the Securities Exchange Act of 1934 ("Exchange Act") and Exchange Act Rule 10b-5), as well as the reporting, books and records, and internal controls provisions of the Exchange Act (Sections 13(a), 13(b)(2)(A) and 13(b)(2)(B), and Exchange Act Rules 12b-20, 13a-1, and 13a-13); (ii) defendants Trugman, Engel, Taber and Rubin violated the antifraud provisions of the federal securities laws (Section 17(a) of the Securities Act, Section 10(b) of the Exchange Act and Exchange Act Rule 10b-5), the internal control and books and records provisions of the Exchange Act (Section 13(b)(5) and Exchange Act Rule 13b2-1), and the provisions of the Exchange Act that prohibit an officer or director from making misleading statements to accountants (Exchange Act Rule 13b2-2), and (iii) defendant Michael violated the internal control and books and records provisions of the Exchange Act (Section 13(b)(5) and Exchange Act Rule 13b2-1), as well as the provisions of the Exchange Act that prohibit an officer or director from making misleading statements to accountants (Exchange Act Rule 13b2-2). The Complaint additionally charges Trugman with (i) aiding and abetting Del's violations of Sections 10(b), 13(a), 13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act, and Exchange Act Rules 10b-5, 12b-20, 13a-1, and 13a-13, and (ii) acting as a control person of Del, pursuant to Exchange Act Section 20(a). + + Defendants Del, Engel, Taber and Rubin have consented to the entry of final judgments against them, without admitting or denying the allegations in the Commission's Complaint. The Commission expects the penalties from the settling defendants to be distributed pursuant to the Fair Fund provisions of Section 308(a) of the Sarbanes-Oxley Act of 2002. The settlement terms are subject to court approval. + + Del consented to entry of a final judgment against the company that permanently enjoins it from further violations of Section 17(a) of the Securities Act, Sections 10(b), 13(a), 13(b)(2)(A), and 13(b)(2)(B) of the Exchange Act, and Exchange Act Rules 12b-20, 13a-1, and 13a-13. Del will also pay a civil penalty of $400,000 and $1 in disgorgement. The $400,000 civil penalty was imposed, in part, because the company, upon the discovery of the fraudulent accounting scheme by the firm's auditors, commissioned an internal investigation that sought to shield the architect of the fraud, former Del Chairman and CEO defendant Leanord A. Trugman ("Trugman"), from liability. For example, Del's Audit Committee hired Trugman's close personal friend to conduct the investigation. Moreover, during the internal investigation, Trugman and his associate were permitted to speak to (and intimidate) witnesses prior to their interviews. After the Commission commenced its' inquiry in this matter, Del hired independent outside counsel who cooperated with the staff's investigation. + + Taber, Engel and Rubin consented to entry of final judgments against them that permanently enjoin them from further violations of Section 17(a) of the Securities Act, Sections 10(b) and 13(b)(5) of the Exchange Act, and Exchange Act Rules 13b2-1 and 13b2-2 -- and permanently bar each of them from acting as an officer or director of a public company. Additionally, Engel has agreed to pay $50,000 in disgorgement of ill-gotten gains, $15,940 in prejudgment interest thereon, and a $50,000 civil penalty. Rubin has agreed to pay $32,162.97 in disgorgement of ill-gotten gains, $8,941.69 in prejudgment interest thereon, and a $75,000 civil penalty. Taber has also agreed to entry of a Commission order, pursuant to Rule 102(e) of the Commission's Rules of Practice, that will bar him from appearing or practicing before the Commission as an accountant. The judgment against Taber waives his disgorgement obligation and does not impose a civil penalty, based on Taber's sworn statement of financial condition and other information furnished to the Commission. + + With respect to the two remaining defendants -- Trugman and Michael -- the Commission's Complaint seeks a final judgment permanently enjoining them from future violations of the federal securities laws, barring them from serving as officers or directors of a public company, and ordering them to pay civil penalties. The Complaint also seeks to have Trugman disgorge his ill-gotten gains obtained from the foregoing conduct, and prejudgment interest thereon. + + + SEC Complaint in this matter + + + + + +  + + + + + + + + + + + + + + + + + + + + + + + + + Return to top + + + + + SEC homepage + + + + + + + + + + + + + + About the SEC + + + + + + Budget & Performance + + + Careers + + + Commission Votes + + + Contact + + + Contracts + + + + + + + + Transparency + + + + + + Accessibility & Disability + + + Super Intelligence + + + FOIA + + + Inspector General + + + No FEAR Act Data + + + Ombuds + + + SEC Excess Personal Property Guidance + + + + + + + + Websites + + + + + + Investor.gov + + + Related Sites + + + USA.gov + + + + + + + + Site Information + + + + + + Plain Writing + + + Privacy & Security + + + Site Map + + + + + + + + + + + + + + + + + + Stay connected. 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Individuals (SALI) + + + + + Enforcement Data Delivery Standards + + + + + Small Businesses + + + + + Appellate Briefs + + + + + Amicus / Friend of the Court Briefs + + + + + + + + + + + + + + + + + + + + + + + + + + Enforcement & Litigation + + + + + + + Litigation Releases + + + + + Administrative Proceedings + + + + + Administrative Law Judge Orders and Initial Decisions + + + + + Trading Suspensions + + + + + Distributions to Harmed Investors + + + + + Receiverships + + + + + Electronic Filings in Administrative Proceedings (eFAP) + + + + + Rules of Practice + + + + + Applications for Reentry + + + + + Reports of Investigations + + + + + Whistleblower Program + + + + + Public Alert: Unregistered Soliciting Entities (PAUSE) + + + + + SEC Action Lookup - Individuals (SALI) + + + + + Enforcement Data Delivery Standards + + + + + Small Businesses + + + + + Appellate Briefs + + + + + Amicus / Friend of the Court Briefs + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + Home + + + Enforcement and Litigation + + + Litigation Releases + + + Paul Melvin Henson, Jr. and Lance Turner Fair + + + + + + + + + + + + Paul Melvin Henson, Jr. and Lance Turner Fair + + + + + + + + + + + + + + + + + + + + + On May 27, 2004, the Securities and Exchange Commission filed a complaint in the United States District Court for the Western District of Tennessee against Lance Turner Fair and Paul Melvin Henson, Jr. Fair is the former Chief Financial Officer and Henson the former Chief Accounting Officer of Master Graphics, Inc., a Tennessee-based printing company that was publicly traded on the NASDAQ National Market System, but is now defunct. The complaint alleges that, in the spring of 1999, Fair, Henson and Master Graphics' Chief Executive Officer implemented a scheme to fraudulently overstate the company's net income to meet analysts' expectations. Pursuant to the plan, the company fraudulently reclassified rent and salary expenses that Master Graphics had already paid to its division presidents in the first quarter to assets on the company's balance sheet, thus reducing expenses and increasing income. According to the complaint, this scheme fraudulently overstated Master Graphics' net income by 628%, 46% and 10% in the first, second and third quarter financial statements, respectively, that the company filed with the Commission in 1999. + + The complaint alleges that Henson and Fair violated the antifraud provisions of the federal securities laws (Section 17(a) of the Securities Act of 1933, Section 10(b) of the Securities Exchange Act of 1934 ("Exchange Act") and Exchange Act Rule 10b-5), as well as the books and records and internal controls provisions of the Exchange Act (Section 13(b)(5) and Exchange Act Rule 13b2-1). Without admitting or denying the allegations of the complaint, Henson and Fair have consented to a final judgment that imposes a $25,000 civil penalty against each defendant. + + Fair and Henson previously consented to cease and desist orders finding that, based on the same conduct discussed herein, they violated not only the provisions cited above but, also caused Master Graphics to violate the reporting and books and records provisions of the Exchange Act (Sections 13(a) and 13(b)(2)(A) of the Exchange Act and Exchange Act Rules 12b-20 and 13a-13). See In the Matter of Paul Melvin Henson, Jr. , Securities Act Rel. No. 8425 (May 19, 2004), In the Matter of Lance Turner Fair , Securities Act Rel. 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Symbol Technologies, Inc., Tomo Razmilovic, Kenneth Jaeggi, Leonard Goldner, Brian Burke, Michael DeGennaro, Frank Borghese, Christopher DeSantis, James Heuschneider, Gregory Mortenson, James Dean and Robert Donlon , CV 04 2276 (LDW)(WDW) (EDNY) + + SEC CHARGES SYMBOL TECHNOLOGIES, INC. AND 11 FORMER SYMBOL EXECUTIVES WITH SECURITIES FRAUD + + SYMBOL AGREES TO PAY $37 MILLION PENALTY + + On June 3, 2004, the Commission filed a civil injunctive action in the United States District Court for the Eastern District of New York charging Symbol Technologies, Inc. ("Symbol"), with securities fraud and related violations. The SEC also charged eleven former Symbol executives in connection with their roles in the fraud. Symbol has agreed to settle the Commission's charges by paying a $37 million penalty and consenting to injunctive relief. The entire amount of the penalty will be distributed to injured investors. One individual defendant, James Dean, has consented to injunctive relief. + + The SEC's complaint alleges that from at least 1998 until early 2003, Symbol and the other defendants engaged in numerous fraudulent accounting practices and other misconduct that had a cumulative net impact of over $230 million on Symbol's reported revenue and over $530 million on its pre-tax earnings. Based in Holtsville, New York, Symbol supplies mobile information systems using bar code scanners and related technology and its stock is publicly traded on the New York Stock Exchange. + + SEC Complaint + + Individuals Sued : In addition to Symbol, the Commission's complaint names the following individual defendants who worked at Symbol during the relevant period: + + Tomo Razmilovic, age 62, former President and CEO + Kenneth Jaeggi, age 58, former CFO + Leonard Goldner, age 56, former General Counsel + Brian Burke, age 57, former Senior Vice President of Worldwide Operations and the former Chief Accounting Officer + Michael DeGennaro, age 39, former Senior Vice President of Finance + Frank Borghese, age 49, former Senior Vice President of Worldwide Sales and Service + Christopher DeSantis, age 38, former Vice President of Sales Finance + James Heuschneider, age 47, former Director of Customer Service Finance + Gregory Mortenson, age 38, former Senior Director of Finance + James Dean, age 34, former Manager and Director of Operations Finance + Robert Donlon, age 37, former Director of Sales Operations + Conduct : The complaint alleges that Symbol and other defendants engaged in a fraudulent scheme to inflate revenue, earnings and other measures of financial performance in order to create the false appearance that Symbol had met or exceeded its financial projections. Razmilovic and others fostered a "numbers driven" corporate culture obsessed with meeting Wall Street estimates. + + With no regard for generally accepted accounting principles or their financial reporting obligations, defendants used the following fraudulent schemes to align Symbol's reported financial results with market expectations: + + (a) a "Tango sheet" process through which baseless accounting entries were made to conform the raw quarterly results to management's projections; + + (b) the fabrication and misuse of restructuring and other non-recurring charges to artificially reduce operating expenses, create "cookie jar" reserves and further manage earnings; + + (c) channel stuffing and other revenue recognition schemes, involving both product sales and customer services; and + + (d) the manipulation of inventory levels and accounts receivable data to conceal the adverse side effects of the revenue recognition schemes. + Razmilovic, Jaeggi, Burke, DeGennaro and Borghese directed the fraud, while DeSantis, Heuschneider, Mortenson, Dean and Donlon implemented the schemes. + + While the accounting fraud was occurring, Goldner manipulated stock option exercise dates to enable select senior executives, including himself, to profit unfairly at the company's expense. Rather than use the actual exercise date as defined by the option plans, Goldner instituted, without board approval or public disclosure, a practice of using a more advantageous date chosen from a 30-day "look-back" period so as to reduce the cost of the exercise to the executive. To create the false appearance that these exercises occurred on the selected dates, Goldner had his staff backdate transactional documents and use the phony exercise dates in the forms on which the executives reported their acquisitions to the Commission and the public. + + In addition to committing securities fraud, some of the defendants interfered with two internal investigations into Symbol's accounting practices and delayed the Commission's investigation. After the Commission began its investigation, Jaeggi directed subordinates to discard copies of "Tango sheets" and other incriminating documents. During the same relevant period, DeGennaro rigged the revenue recognition data provided to the forensic accountants involved in the first internal inquiry, instructed subordinates to withhold information from subsequent internal investigators, and directed employees to sanitize key portions of schedules that they provided to the investigators. + + Statutory Violations : The Commission's complaint alleges that by engaging in this conduct, the defendants violated antifraud provisions of the federal securities laws, and also violated, or are secondarily liable for Symbol's violations of, numerous reporting, record-keeping, internal control and proxy solicitation provisions. Specifically, the complaint alleges that Symbol violated Section 17(a) of the Securities Act of 1933 ("Securities Act") and Sections 10(b), 13(a), 13(b)(2) and 14(a) of the Securities Exchange Act of 1934 ("Exchange Act") and Rules 10b-5, 12b-20, 13a-1, 13a-13, 14a-3 and 14a-9. Each individual defendant is alleged to have violated Sections 10(b) and 13(b)(5) of the Exchange Act and Rules 10b-5 and 13b2-1. Razmilovic, Jaeggi, Goldner and Burke are also alleged to have violated Section 17(a) of the Securities Act, and Goldner is alleged to have also violated Section 16(a) of the Exchange Act and Rule 16a-3. In addition, the complaint alleges that Razmilovic, Jaeggi, Burke and DeGennaro made, or directed others to make, false statements to Symbol's accountants in violation of Exchange Act Rule 13b2-2. + + Relief Sought : The complaint seeks final judgments enjoining violations of these provisions of the federal securities laws; ordering all defendants to pay disgorgement and civil money penalties; and barring defendants Razmilovic, Jaeggi, Goldner, Burke, DeGennaro and Borghese from acting as an officer or director of any public company. + + Settlements + + Symbol, without admitting or denying the allegations in the Complaint, has agreed to the following relief: + + A permanent injunction against future violations of the relevant antifraud, reporting, books and records and internal controls provisions of the federal securities laws. + + A civil penalty of $37 million and nominal disgorgement of $1, all of which will be distributed to injured investors. + + Various remedial measures, including the appointment of an independent examiner to review Symbol's accounting practices and internal control systems and assess the status of remedial actions undertaken or planned by the company in those and other areas. + Dean has also agreed, without admitting or denying the allegations, to the imposition of the injunctive relief sought by the Commission. + + *     *     * + + The Commission's claims for disgorgement and civil penalties against Dean, and all of its claims against the other individual defendants, remain pending. + + This is the third enforcement action the Commission has brought as a result of its investigation into Symbol's financial reporting. On March 25, 2003, the Commission charged Robert Asti, a former sales executive at Symbol. See LR-18050 (March 25, 2003). On June 19, 2003, the Commission charged Robert Korkuc, a former chief accounting officer at Symbol. See LR-18194 (June 19, 2003). The Commission's investigation is continuing. + + The Commission acknowledges the assistance and cooperation of the United States Attorney's Office for the Eastern District of New York and the U.S. Postal Inspection Service in this matter. + + + SEC Complaint in this matter + + + + + +  + + + + + + + + + + + + + + + + + + + + + + + + + Return to top + + + + + SEC homepage + + + + + + + + + + + + + + About the SEC + + + + + + Budget & Performance + + + Careers + + + Commission Votes + + + Contact + + + Contracts + + + + + + + + Transparency + + + + + + Accessibility & Disability + + + Super Intelligence + + + FOIA + + + Inspector General + + + No FEAR Act Data + + + Ombuds + + + SEC Excess Personal Property Guidance + + + + + + + + Websites + + + + + + Investor.gov + + + Related Sites + + + USA.gov + + + + + + + + Site Information + + + + + + Plain Writing + + + Privacy & Security + + + Site Map + + + + + + + + + + + + + + + + + + Stay connected. 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Peach, Chartered Accountant + + + + + + + + + + + + James H. Peach, Chartered Accountant + + + + + + + + + + + + + + + + + + + + + SECURITIES EXCHANGE ACT of 1934 +Release No. 49836 / June 9, 2004 + + ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 2030 / June 9, 2004 + + ADMINISTRATIVE PROCEEDING +File No. 3-11516 + + IN THE MATTER OF JAMES H. PEACH, CHARTERED ACCOUNTANT + + The Commission announced the issuance of an Order Instituting Administrative Proceedings Pursuant to Rule 102(e) of the Commission's Rules of Practice against James H. Peach, a chartered accountant in British Columbia, Canada. The Division of Enforcement alleges that Peach engaged in improper professional conduct in connection with his audit of the fiscal 2000 financial statements of LASV Enterprises, Inc. (LASV), a Canadian-based company. The Division alleges that LASV's audited financial statements did not comply with generally accepted accounting principles because LASV recorded a Dominican Republic real estate property as its sole asset on its balance sheet when, in fact, the company did not own the property. The Division further alleges that Peach failed to comply with generally accepted auditing standards by, among other things, failing to obtain sufficient competent evidential matter upon which to base an audit opinion, including any evidence from third parties relating to LASV's purported ownership of the property. + + A hearing will be scheduled before an administrative law judge to determine whether the allegations contained in the Order are true and whether Peach should be censured by the Commission or temporarily or permanently denied the privilege of practicing before the Commission. + + Pursuant to the Commission's Rules of Practice, an initial decision shall be issued by the administrative law judge within 300 days from the service of the Order upon the Respondent. + + + See also the Order in this matter + + + + +  + + + + + + + + + + + Resources + + + + + the Order in this matter + + + + + + + + + + + + + + + + + + + + + + + + Return to top + + + + + SEC homepage + + + + + + + + + + + + + + About the SEC + + + + + + Budget & Performance + + + Careers + + + Commission Votes + + + Contact + + + Contracts + + + + + + + + Transparency + + + + + + Accessibility & Disability + + + Super Intelligence + + + FOIA + + + Inspector General + + + No FEAR Act Data + + + Ombuds + + + SEC Excess Personal Property Guidance + + + + + + + + Websites + + + + + + Investor.gov + + + Related Sites + + + USA.gov + + + + + + + + Site Information + + + + + + Plain Writing + + + Privacy & Security + + + Site Map + + + + + + + + + + + + + + + + + + Stay connected. 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Individuals (SALI) + + + + + Enforcement Data Delivery Standards + + + + + Small Businesses + + + + + Appellate Briefs + + + + + Amicus / Friend of the Court Briefs + + + + + + + + + + + + + + + + + + + + + + + + + + Enforcement & Litigation + + + + + + + Litigation Releases + + + + + Administrative Proceedings + + + + + Administrative Law Judge Orders and Initial Decisions + + + + + Trading Suspensions + + + + + Distributions to Harmed Investors + + + + + Receiverships + + + + + Electronic Filings in Administrative Proceedings (eFAP) + + + + + Rules of Practice + + + + + Applications for Reentry + + + + + Reports of Investigations + + + + + Whistleblower Program + + + + + Public Alert: Unregistered Soliciting Entities (PAUSE) + + + + + SEC Action Lookup - Individuals (SALI) + + + + + Enforcement Data Delivery Standards + + + + + Small Businesses + + + + + Appellate Briefs + + + + + Amicus / Friend of the Court Briefs + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + Home + + + Enforcement and Litigation + + + Litigation Releases + + + Greg Waring and Craig Treloar + + + + + + + + + + + + Greg Waring and Craig Treloar + + + + + + + + + + + + + + + + + + + + + United States Securities and Exchange Commission v. Greg Waring, Craig Treloar , 1:03CV2030 (N.D. Ohio, Sept. 30, 2003) + + The Securities and Exchange Commission (Commission) announced that on May 25, 2004, the honorable Judge Bourke of the County Court of Victoria, Australia, sentenced Mr. Craig Leigh Treloar on criminal fraud charges, following an investigation by the Australian Securities and Investments Commission (ASIC). Treloar, a resident of Wyndham Vale, Victoria, Australia, was sentenced for violations of the Crimes Act (Victoria) 1958 (the Crimes Act) and the Corporations Act 2001 (Corporations Act), to which he had pled guilty on December 1, 2003. + + Treloar is the former financial accountant of Corrpro Companies Australia Pty Ltd. (Corrpro Australia), the Australian subsidiary of Corrpro Companies, Inc. (Corrpro), a U.S. public corporation based in Medina, Ohio. Treloar and Greg Waring, the former managing director of the Australian subsidiary, were the subjects of a civil injunctive action filed by the Commission on September 30, 2003 in the United States District Court for the Northern District of Ohio ( United States Securities and Exchange Commission v. Greg Waring and Craig Treloar , 1:03CV2030, Polster, J.). The Commission's complaint in that matter alleged that from at least October 2000 through February 2002, Waring and Treloar falsified accounting and other financial records of Corrpro Australia in order to inflate its net income and its net assets so that Corrpro Australia would meet financial performance targets set by managers at the parent company. The Commission further alleged that Waring and Treloar took steps to fabricate documents to be reviewed by the company's independent auditors. On April 2, 2004, the court entered orders by default against both Waring and Treloar. The orders permanently enjoined Waring and Treloar from further violations of certain provisions of the Securities and Exchange Act of 1934. The court's orders also imposed an officer and director bar on both defendants, which prohibits them from acting as an officer or director of any company registered with the Commission. + + In the Australian criminal case, Treloar was sentenced to 16 months imprisonment, all of which was suspended, for the Crimes Act charges. Treloar was sentenced to 10 months imprisonment for the Corporations Act charges. However, Treloar will be released without serving prison time, upon entering into a 3-year parole agreement. If Treloar fails to be of good behavior during the 3-year parole period, he risks the possibility of serving his prison sentence, and paying an AD$8,000 fine. Treloar has undertaken to continue to assist ASIC in its ongoing investigation in relation to this matter. + + In a separate criminal case, Australian authorities have charged Waring with violations of the Crimes Act and Corporations Act. Waring has not yet entered a plea. The criminal cases against Treloar and Waring both involve the same course of conduct as alleged in the Commission's civil case against Treloar and Waring. + + The Commission acknowledges the assistance of the Australian Securities and Investments Commission in its investigation. + + For additional information, see Litigation Release Nos. 18382 (October 1, 2003). + + + +  + + + + + + + + + + + + + + + + + + + + + + + + + Return to top + + + + + SEC homepage + + + + + + + + + + + + + + About the SEC + + + + + + Budget & Performance + + + Careers + + + Commission Votes + + + Contact + + + Contracts + + + + + + + + Transparency + + + + + + Accessibility & Disability + + + Super Intelligence + + + FOIA + + + Inspector General + + + No FEAR Act Data + + + Ombuds + + + SEC Excess Personal Property Guidance + + + + + + + + Websites + + + + + + Investor.gov + + + Related Sites + + + USA.gov + + + + + + + + Site Information + + + + + + Plain Writing + + + Privacy & Security + + + Site Map + + + + + + + + + + + + + + + + + + Stay connected. 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Individuals (SALI) + + + + + Enforcement Data Delivery Standards + + + + + Small Businesses + + + + + Appellate Briefs + + + + + Amicus / Friend of the Court Briefs + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + Home + + + Enforcement and Litigation + + + Administrative Proceedings + + + Schering-Plough Corporation + + + + + + + + + + + + Schering-Plough Corporation + + + + + + + + + + + + + + + + + + + + + SECURITIES EXCHANGE ACT OF 1934 +Release No. 49838 / June 9, 2004 + + ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 2032 / June 9, 2004 + + ADMINISTRATIVE PROCEEDING +File No. 3-11517 + + + + In the Matter of + Schering-Plough Corporation, + Respondent. + + : : : : : : : : : : + + ORDER INSTITUTING PROCEEDINGS +PURSUANT TO SECTION 21C OF THE +SECURITIES EXCHANGE ACT OF 1934, +MAKING FINDINGS AND IMPOSING A +CEASE-AND-DESIST ORDER I. + +The Securities and Exchange Commission ("Commission") deems it appropriate that public administrative proceedings be, and hereby are, instituted pursuant to Section 21C of the Securities Exchange Act of 1934 ("Exchange Act") against Schering-Plough Corporation ("Respondent" or "Schering-Plough"). + + II. + + In anticipation of the institution of these proceedings, Respondent has submitted an Offer of Settlement (the "Offer"), which the Commission has determined to accept. Solely for the purpose of these proceedings and any other proceedings brought by or on behalf of the Commission, or to which the Commission is a party, and without admitting or denying the findings herein, except as to the Commission's jurisdiction over it and the subject matter of these proceedings, which Respondent admits, Respondent consents to the issuance of this Order Instituting Proceedings Pursuant to Section 21C of the Securities Exchange Act of 1934, Making Findings, and Imposing a Cease-and-Desist Order ("Order"). 1 III. + + On the basis of this Order and Respondent's Offer, the Commission finds 2 that: + + A. Respondent + +Schering-Plough Corporation ("Schering-Plough") is a New Jersey corporation with its headquarters in Kenilworth, New Jersey. Its common stock is registered with the Commission pursuant to Section 12(b) of the Exchange Act and is listed on the New York Stock Exchange. + + B. Other Relevant Parties + +Schering-Plough Poland ("S-P Poland"), headquartered in Warsaw, Poland, is a branch office of Schering-Plough Central East AG, a wholly owned subsidiary of Schering-Plough that is headquartered in Lucerne, Switzerland. + +Chudow Castle Foundation ("Foundation") is a charitable organization that was established in 1995 to restore castles and other historic sites in the Silesian region of Poland. The founder of the Foundation was the Director of the Silesian Health Fund ("Director"), one of sixteen regional government health authorities in Poland. The Director also served as president of the Foundation. + + C. Facts + + 1. Summary + + This matter involves Schering-Plough's violations of the books and records and internal controls provisions of the Foreign Corrupt Practices Act ("FCPA") (Sections 13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act), through certain payments made by S-P Poland to influence decisions by a Polish government official. Specifically, the Commission finds that, between February 1999 and March 2002, S-P Poland paid 315,800 zlotys (PLN) (approximately $76,000) to the Foundation to induce the Director to influence the purchase of Schering-Plough's pharmaceutical products within the health fund. 3 None of the payments made by S-P Poland to the Foundation was accurately reflected on the books and records of Schering-Plough Central East AG. Additionally, Schering-Plough's system of internal accounting controls was inadequate to prevent or detect the improper payments. + + 2. Payments to the Chudow Castle Foundation + + The Silesian Health Fund was a government body that, among other things, provided monies for the purchase of pharmaceutical products and influenced the purchase of those products by other entities, such as hospitals, through the allocation of health fund resources. In February 1999, shortly after the Director assumed his position of leadership in the Silesian Health Fund, S-P Poland made the first of a series of payments to the Foundation. + + In early 2000, the Director solicited S-P Poland's oncology unit manager ("the Manager") to make additional payments to the Foundation. Between March 2000 and March 2002, the Manager arranged for twelve additional payments from S-P Poland to the Foundation. Some of these payments were structured so that they were at or below the Manager's approval limit, apparently for the purpose of concealing the nature of the payments. Moreover, the Manager provided false medical justifications for most of the payments on the documents that he submitted to the company's finance department. In total, S-P Poland paid 315,800 zlotys (PLN) (approximately $76,000) to the Foundation, as summarized in the table below. + + +   + Date of Payment + Payment Amount(in PLN and $U.S.) + Stated Medical Justification for Payments + 1 + 2/23/1999 + 3,000 PLN ($777) + Covering fight against viral hepatitis + 2 + 3/17/2000 + 20,000 PLN ($4,909) + Support of health campaign within county of Gilwice + 3 + 7/19/2000 + 34,800 PLN ($8,065) + Financing second stage of health prevention campaign in Gilwice + 4 + 11/8/2000 + 40,000 PLN ($8,766) + Financing for Foundation + 5 + 12/20/2000 + 40,000 PLN ($9,292) + Financing second stage of research + 6 + 3/19/2001 + 18,000 PLN ($4,340) + Financing lung cancer prevention program + 7 + 3/22/2001 + 20,000 PLN ($4,854) + Financing screening examinations to detect skin cancer + 8 + 4/25/2001 + 20,000 PLN ($4,958) + Support of lung cancer prevention campaign + 9 + 6/4/2001 + 20,000 PLN ($5,019) + Support of lung cancer prevention campaign + 10 + 10/29/2001 + 20,000 PLN ($4,878) + Support of a coronary disease prevention program and promote the image of the company in the medical community + 11 + 12/18/2001 + 40,000 PLN ($10,067) + Support of an anti-chain smoking health program and promote the company as one that cares about the people of Silesia + 12 + 12/19/2001 + 20,000 PLN ($5,067) + Financing of Foundation + 13 + 3/25/2002 + 20,000 PLN ($4,868) + Support actions of Foundation in preventing infectious diseases of the liver +   + Total + 315,800 PLN ($75,860) +   + S-P Poland paid more money to the Foundation than any other recipient of promotional donations. During 2000 and 2001, the payments to the Foundation constituted approximately 40% and 20%, respectively, of S-P Poland's total promotional donations budget. Moreover, the Foundation was the only recipient of such donations that received multiple payments, making the four payments in 2000 and seven payments in 2001 highly unusual. + + All of the payments to the Foundation were classified by S-P Poland in its books and records as donations. However, the Commission finds that, while the payments in fact were made to a bona fide charity, they were made to influence the Director with respect to the purchase of Schering-Plough's products. 4 In fact, the Manager did not view the payments to the Foundation as charitable, but as "dues" that were required to be paid for assistance from the Director. + + Prior to March 2002, Schering-Plough's policies and procedures for detecting possible FCPA violations by its foreign subsidiaries were inadequate in that they did not require employees to conduct any due diligence prior to making promotional or charitable donations to determine whether any government officials were affiliated with proposed recipients. For this reason, the Director of the Silesian Health Fund's relationship to the Foundation was never considered by S-P Poland as a potential FCPA issue. + + The company should have been alerted to the fact that there were FCPA issues relating to S-P Poland's payments to the Foundation, because: (i) the Foundation is not a healthcare related entity, yet still received payments; 5 (ii) of the magnitude of the payments to the Foundation in relation to the company's budget for such donations; (iii) of the apparent structuring of certain payments by the Manager, which allowed him to exceed his authorization limits; and (iv) the Director was the founder and Chairman of the Foundation and also a Polish government official with the ability to influence the purchase of S-P Poland's products by hospitals within the Silesian Health Fund. + + + IV. + + LEGAL DISCUSSION + + The FCPA, enacted in 1977, added Exchange Act Section 13(b)(2)(A) to require public companies to make and keep books, records, and accounts, which, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the issuer. The FCPA also added Exchange Act Section 13(b)(2)(B) to require such companies to devise and maintain a system of internal accounting controls sufficient to provide reasonable assurances that: (i) transactions are executed in accordance with management's general or specific authorization; and (ii) transactions are recorded as necessary to permit preparation of financial statements in conformity with generally accepted accounting principles or any other criteria applicable to such statements, and to maintain accountability for assets. Issuers are also responsible for ensuring that their foreign subsidiaries comply with Sections 13(b)(2)(A) and 13(b)(2)(B). + + As detailed above, S-P Poland made numerous improper payments to influence decisions by a government official in Poland. In connection with these payments, Schering-Plough failed to make and keep accurate books, records, and accounts as required by Exchange Act Section 13(b)(2)(A). Moreover, as evidenced by the extent and duration of the improper payments to the Polish government official by its foreign subsidiary, and the improper recording of these payments in the subsidiary's books and records, Schering-Plough failed to devise and maintain an effective system of internal accounting controls as required by Exchange Act Section 13(b)(2)(B). + + V. + + As a result of the conduct described above, the Commission finds that Schering-Plough violated Sections 13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act. + + VI. + + UNDERTAKINGS + + Schering-Plough has undertaken to: + + Retain, within 30 days of the issuance of this Order, an independent consultant ("Independent Consultant"), not unacceptable to the staff of the Commission, to review and evaluate Schering-Plough's internal controls, record-keeping, and financial reporting policies and procedures as they relate to Schering-Plough's compliance with the FCPA. Schering-Plough shall cooperate fully with the Independent Consultant and shall provide the Independent Consultant with access to its files, books, records, and personnel as reasonably requested for the review; + + Require that the Independent Consultant issue a report within 150 days after being retained, recommending policies and procedures reasonably designed to ensure compliance with the federal securities laws as they relate to the FCPA. Simultaneously with providing that report to Schering-Plough, Schering-Plough shall require that the Independent Consultant provide the report to the Securities and Exchange Commission, Division of Enforcement (attention: Scott W. Friestad, Assistant Director); + + Adopt all recommendations in the report of the Independent Consultant; provided, however, that within 60 days after the Independent Consultant serves that report, Schering-Plough shall in writing advise the Independent Consultant, and the Commission of any recommendations that it considers to be unduly burdensome, impractical, or costly. With respect to any recommendation that Schering-Plough considers unduly burdensome, impractical or costly, Schering-Plough need not adopt that recommendation at that time but shall propose in writing an alternative policy, procedure or system designed to achieve the same objective or purpose. As to any recommendation on which Schering-Plough and the Independent Consultant do not agree, such parties shall attempt in good faith to reach an agreement within 60 days after Schering-Plough serves the written advice. In the event Schering-Plough and the Independent Consultant are unable to agree on an alternative proposal, Schering-Plough will abide by the determinations of the Independent Consultant; and + + Require the Independent Consultant to enter into an agreement that provides that for the period of engagement and for a period of two years from completion of the engagement, the Independent Consultant shall not enter into any employment, consultant, attorney-client, auditing or other professional relationship with Schering-Plough, or any of its present or former affiliates, directors, officers, employees, or agents acting in their capacity. The agreement will also provide that the Independent Consultant will require that any firm with which he/she is affiliated or of which he/she is a member, and any person engaged to assist the Independent Consultant in performance of his/her duties under this Order shall not, without prior written consent of the Securities and Exchange Commission's Division of Enforcement, enter into any employment, consultant, attorney-client, auditing or other professional relationship with Schering-Plough, or any of its present or former affiliates, directors, officers, employees, or agents acting in their capacity as such for the period of the engagement and for a period of two years after the engagement. + VII. + + Accordingly, it is hereby ORDERED, pursuant to Section 21C of the Exchange Act, that Schering-Plough: + + (i) cease and desist from committing or causing any violations and any future violations of Sections 13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act; and + + (ii) comply with the undertakings enumerated in Section VI, above. + + + By the Commission. + + +Jonathan G. Katz +Secretary + + + Endnotes + 1 The Commission has contemporaneously filed a complaint in the United States District Court for the District of Columbia against Schering-Plough alleging violations of Sections 13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act and seeking a civil penalty. Without admitting or denying the Commission's allegations, Schering-Plough has consented to the entry of a final judgment by the Court that requires the company to pay a $500,000 civil penalty. See SEC v. Schering-Plough Corporation, Case No. 1:04CV00945 (PLF) (D.D.C.) (June 9, 2004). + + 2 The findings herein are made pursuant to Respondent's Offer of Settlement and are not binding on any other person or entity in this or any other proceeding. + + 3 The payments to the Foundation were made without the knowledge or approval of any Schering-Plough employee in the United States. + + 4 During the period in which the payments were being made to the Foundation, S-P Poland's sales of Intron A and Temodal, two of its oncology products, increased disproportionately compared with sales of those products in other regions of Poland. By 2002, 53% of the Intron A and 40% of the Temodal sold in Poland were in Silesia. + + 5 S-P Poland's internal policies provided that promotional donations generally were supposed to be made to healthcare institutions and relate to the practice of medicine. Although the Foundation represented to S-P Poland that its by-laws permitted the Foundation to engage in healthcare related programs, the Commission finds that the Manager knew that the Foundation did not, in fact, engage in such programs. + + + + +  + + + + + + + + + + + + + + + + + + + + + + + + + Return to top + + + + + SEC homepage + + + + + + + + + + + + + + About the SEC + + + + + + Budget & Performance + + + Careers + + + Commission Votes + + + Contact + + + Contracts + + + + + + + + Transparency + + + + + + Accessibility & Disability + + + Super Intelligence + + + FOIA + + + Inspector General + + + No FEAR Act Data + + + Ombuds + + + SEC Excess Personal Property Guidance + + + + + + + + Websites + + + + + + Investor.gov + + + Related Sites + + + USA.gov + + + + + + + + Site Information + + + + + + Plain Writing + + + Privacy & Security + + + Site Map + + + + + + + + + + + + + + + + + + Stay connected. 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("i2" or "Respondent"). + + II. + + In anticipation of the institution of these proceedings, i2 has submitted an Offer of Settlement ("Offer") that the Commission has determined to accept. Solely for the purpose of these proceedings or any other proceeding brought by or on behalf of the Commission, or to which the Commission is a party, and without admitting or denying the findings contained herein, except that i2 admits the Commission's jurisdiction over it and over the subject matter of these proceedings, i2 consents to the entry of this Order Instituting Proceedings Pursuant to Section 8A of the Securities Act of 1933 and Section 21C of the Securities Exchange Act of 1934, Making Findings, and Imposing a Cease-and-Desist Order. + + III. + + On the basis of this Order and Respondent's Offer, the Commission finds 1 that: + + A. Respondent + + i2 is a Delaware corporation headquartered in Dallas, Texas that develops and markets enterprise supply chain management solutions, including supply chain software and service offerings. i2's common stock is registered with the Commission pursuant to Section 12(g) of the Exchange Act and currently is quoted in the OTC Pink Sheets. During the periods relevant to this matter, i2's common stock traded on the Nasdaq National Market. + + B. Summary + + For the four years ended December 31, 2001, and the first three quarters of 2002 (the "restatement period"), i2 misstated approximately $1 billion of software license revenues. As a result, i2's periodic filings with the Commission and earnings releases during the restatement period materially misrepresented i2's revenues and earnings. + + Historically, i2 favored up-front recognition of software license revenues, purportedly in accordance with AICPA Statement of Position 97-2, "Software Revenue Recognition" ("SOP 97-2"). However, immediate recognition of revenue was inappropriate for some of i2's software licenses because they required lengthy and intense implementation and customization efforts to meet customer needs. See SOP 97-2, ¶ 7. 2 In some cases, i2 shipped certain products and product lines that lacked functionality essential to commercial use by a broad range of users. In other cases, the company licensed certain software that required additional functionality to be usable by particular customers. On still other occasions, i2 exaggerated certain product capabilities, or entered into side agreements with certain customers that were not properly reflected in the accounting for those transactions. In each case, significant modification and customization efforts were necessary to provide the required functionality. i2 knew or was reckless in not knowing that these facts precluded up-front recognition under generally accepted accounting principles ("GAAP"). + + i2 also improperly recorded software license revenue from four nonmonetary, or "barter," transactions. i2's inclusion of these revenues in its filings with the Commission and earnings releases was materially misleading . + + On July 21, 2003, following an internal investigation, i2 restated its financial statements for the restatement period. The net effect of the revenue adjustments that were made in connection with the restatement was to decrease total revenue by $130.9 million, $477.0 million and $137.6 million in 1999, 2000 and 2001, respectively, and to increase total revenue by $385.8 million in 2002 (the cumulative impact of the revenue adjustments for the restatement period was to reduce revenue by $359.7 million, $232.4 million of which was deferred and could be recognized in the future). i2 also made certain adjustments to its expenses. The cumulative impact of all the revenue and expense adjustments for the restatement period was to increase net loss by $207.1 million. + + C. Accounting for Software Sales + + SOP 97-2 specifies the circumstances in which a company may recognize software license revenue up-front, and when a company must recognize such revenues in accordance with contract accounting principles. Software license revenue is generally recognizable up-front under SOP 97-2 if no significant production, customization or modification of software is required, if the remaining undelivered elements of the parties' arrangement are not essential to the functionality of the software, and if the following four basic criteria are met: (i) persuasive evidence of an arrangement exists, (ii) delivery of the software has occurred, (iii) the vendor's fee is fixed or determinable and (iv) collectibility is probable. 3 If significant production, modification or customization is necessary, or if the additional services are essential to the functionality of delivered software, the vendor may not recognize software license revenue at the time of the sale but instead must apply contract accounting principles under ARB 45and SOP 81-1. Moreover, if software arrangements (1) do not require significant production, customization or modification and (2) do not include undelivered elements that are essential to the functionality of the software, then up-front recognition is still precluded under SOP 97-2 if the four basic criteria are not met. + + In assessing whether software delivered to a customer possesses the necessary functionality for immediate revenue recognition, it is irrelevant that the customer physically possesses and may use the delivered software at the outset of the arrangement; what matters is whether the customer has been delivered software with the functionality the customer agreed to purchase under the software license. If further significant services or modifications are necessary to permit the customer to effectively use the delivered software in the agreed manner, then the vendor is prohibited from up-front revenue recognition under GAAP. + + D. Factual Background + + 1. i2 Becomes a Billion Dollar Company + + In 1988, i2's founders created the company's first software program in a two-bedroom Dallas apartment. Their work was groundbreaking in what later came to be known as the supply chain management industry. i2 went public in April 1996 and thereafter reported ever-increasing annual revenues, which grew from approximately $101 million in 1996 to more than $1.1 billion in 2000. This growth was fueled in part by numerous acquisitions, including a $68 million acquisition of Smart Technologies, Inc. in July 1999, a $390 million acquisition of SupplyBase, Inc. in May 2000, and an $8.8 billion acquisition of Aspect Development, Inc. in June 2000. + + Large software license agreements provided the bulk of i2's revenue. i2 favored up-front recognition of the fees from these licenses. i2's compensation structure fostered this preference, because compensation of sales and pre-sales personnel was largely based on the amount of revenue recognized and cash collected in the current period. Hence, there was a bias toward structuring large license agreements to permit up-front revenue recognition. + + 2. i2's Increased Complexity Leads to Overstated Revenues + + i2's stock price peaked at over $110 per share in 2000, the same year it first reported $1 billion in sales. The rise in i2's stock price was powered in part by the company's ability to meet or exceed analyst expectations for revenue growth. It also benefited from the general increase in technology stock values during this period. Simultaneously, the company experienced rapid and tremendous growth in its customer base, number of employees and product offerings. From 1996 through 2000, i2's customer base grew to over 1,000, its employee base grew to more than 6,300, and its price list grew to more than 140 products. + + In addition to becoming more numerous, i2's products also grew more complex. Some of i2's software solutions were not "off-the-shelf" but instead were sophisticated enterprise solutions requiring significant efforts to implement and scale to customer needs. 4 These products frequently demanded extensive adaptation to unique customer specifications, which often required customization by i2 technicians. Accordingly, license revenue for those transactions was ineligible for up-front revenue recognition under SOP 97-2, and the company should instead have recognized revenue in conformity with contract accounting principles. i2, however, knowingly or recklessly failed to do so and therefore its financial statements during the restatement period failed to comply with GAAP. + + i2's improper revenue recognition occurred under four basic scenarios: (a) i2 recorded revenue from certain products that, while on its price list, lacked essential functionality to a broad range of users; (b) i2 recognized revenue from certain products that required additional functionality to be usable by particular customers; (c) i2 exaggerated certain product capabilities, which required significant customization efforts to provide; and (d) i2 entered into side agreements with certain customers that were not reflected in the corresponding license documentation. + + a. i2 Recorded Revenue from Certain Products Lacking Essential Functionality + + On some occasions, i2 recorded license revenue from certain products and product lines that lacked basic functionality, and instead required considerable code-writing, modification and customization efforts to be usable by a broad range of customers. Consequently, recognition of license revenues from these transactions at the time of sale was inappropriate under SOP 97-2. i2 should instead have recognized license revenue from these transactions under contract accounting principles, which would in these cases have required deferral of license revenue over time. + + b. i2 Recorded Revenue from Certain Products that Required Additional Functionality to be Usable by Particular Customers + + i2 licensed certain software that required development of additional customer-specific functionality. Certain i2 sales management and sales representatives knew about the functionality problems, at times describing the i2 products involved as "vapor" (i.e., non-functional software) and discussing instances of "rewriting entire code" in front of customers. These problems were known to the company and should have precluded up-front recognition of all or most license revenue from these transactions. i2, however, continued to recognize all revenue on these transactions up-front under SOP 97-2, rather than applying contract accounting principles. + + c. i2 Exaggerated Certain Product Capabilities + + To close certain sales, i2 sales representatives exaggerated or oversold what certain software products could actually do. After these deals closed, i2 technicians were, in many instances, able to write code to create the promised functionality, but these efforts took much time, effort and expense. Given these substantial post-license development and modification activities, i2 should have recognized revenue from these transactions applying contract accounting principles. Instead, i2 recognized all such revenues up-front. + + d. i2 Executed Side Agreements and Altered Contract Language, +but Failed Properly to Account for Such Changes + + i2 also entered into undisclosed side agreements with certain customers. These side agreements outlined significant additional work and customization necessary for i2's software to meet customer specifications. i2 did not include the side agreement terms in the original license agreements, and did not provide the side agreements to its auditors. Under GAAP, these side agreements would have required i2 to defer license revenues from the transactions. i2, however, recognized license revenue from these transactions entirely up-front. + + In addition, on multiple occasions, i2 replaced contractual terms such as "development" with "implementation," "gap analysis" with "fit analysis," and "functionality" with "features." i2 believed that these terms, if unchanged, could endanger up-front recognition of license fees under the agreements. + + 3. Barter Transactions + + i2 also improperly recorded revenue from four barter transactions during the restatement period. These transactions involved third-party purchases of software licenses from i2, from which i2 recognized revenue immediately, in exchange for i2's agreement to purchase from the other parties in the future a comparable amount of products or services. In some of these transactions, i2 paid a premium over the prevailing rates for those products or services, in an effort to equalize both sides of the deal. + + When i2 recorded revenue from these transactions, it could not determine the fair value of the items exchanged within reasonable limits. Accordingly, i2's recognition of license revenue from these transactions at the time of delivering software was improper. See AICPA Accounting Principles Board Opinion No. 29, Accounting for Nonmonetary Transactions. Moreover, i2's financial statements and Commission filings failed to disclose the true nature of these transactions, which improperly inflated i2's reported revenues by approximately $44 million. i2 knew, or was reckless in not knowing, that immediate recognition of revenues from these transactions in its financial statements was improper. + + 4. i2 Fails to Act on Revenue Recognition Warnings in 2001 + + During the Summer of 2001, i2 received two documents flagging issues impacting software license revenue recognition. First, in June 2001, i2 generated a summary of revenue recognition risks, outlining such potential problems as identifying products to meet customer needs after licenses were signed; including wrong or incorrectly positioned products in deals; substantial underestimation of implementation services necessary to meet customer needs; the provision of development and customization services without separate formal agreements; and barter transactions . + + Second, also in June 2001, i2 received the initial report of a Massachusetts Institute of Technology professor whom it had hired to analyze i2's release management and product marketing processes. This report - entitled "Product Development at i2 Technologies: Problems and Recommendations" - identified deficiencies within the organization, from shortcomings in its product and technology strategy to weaknesses in its sales practices, product release management, and quality assurance. This report specifically identified problems with certain software products that, according to the report, had become largely custom software requiring significant post-license development and implementation services to meet customer's needs. + + i2 ignored, or was reckless in not recognizing, the revenue recognition implications of these two presentations. In fact, neither i2's auditors nor Audit Committee learned of the MIT professor's report until September 2002. + + 5. i2's Public Misrepresentations of its Financial Results + + For the four years ended December 31, 2001, and the first three quarters of 2002, i2's reports to the Commission on Forms 10-K and 10-Q materially misrepresented i2's revenues and earnings. During this period, i2 also filed numerous registration statements on Forms S-4 and S-8, each incorporating by reference the misleading periodic reports, and offered and sold securities to the public during the restatement period. + + i2 repeated these misstatements in quarterly and annual earnings releases to the public. In its earnings releases, i2 focused heavily on its continuing growth in revenues, increasing pro forma net income, and its positive relationships with its existing customers. In reality, these representations were misleading. During this period, i2's revenue was being significantly inflated by the inclusion of ineligible up-front licensing revenues, i2 was losing money, even on a pro forma basis in many quarters, and i2's relationship with some customers had been strained, due in part to the substantial post-license work i2 had to perform to make its software deliver what had been agreed upon. + + 6. i2 Restates Prior Results + + On July 21, 2003, following an internal investigation, i2 restated its financial statements for the restatement period. The net effect of the revenue adjustments that were made in connection with the restatement was to decrease total revenue by $130.9 million, $477 million and $137.6 million in 1999, 2000 and 2001, respectively, and to increase total revenue by $385.8 million in 2002 (the cumulative impact of the revenue adjustments for the restatement period was to reduce revenue by $359.7 million, $232.4 million of which was deferred and could be recognized in the future). i2 also made certain adjustments to expenses. The cumulative impact of all the revenue and expense adjustments for the restatement period was to increase net loss by $207.1 million. These restatements were material. + + E. Conclusion + + Based on the foregoing, the Commission finds that Respondent i2 violated Section 17(a) of the Securities Act and Sections 10(b), 13(a), 13(b)(2)(A), 13(b)(2)(B) and 13(b)(5) of the Exchange Act, and Rules 10b-5, 12b-20, 13a-1, 13a-13 and 13b2-1 thereunder. + + F. Remedial Acts + + In determining to accept i2's Offer, the Commission considered remedial acts undertaken by Respondent and cooperation afforded the Commission staff. + + G. Undertakings + + Respondent has undertaken to: + + 1. Continue cooperating with the staff of the Commission in the staff's ongoing investigation in this matter; and + + 2. Produce all documents requested by subpoena duces tecum currently outstanding or subsequently issued in this case, except to the extent of good faith assertions of the attorney-client privilege, work product doctrine, or other applicable privilege or exemption. + + IV. + + In view of the foregoing, the Commission deems it appropriate to impose the sanctions agreed to in the Offer. 5 + + Accordingly, it is hereby ORDERED, pursuant to Section 8A of the Securities Act and Section 21C of the Exchange Act, that Respondent i2 cease and desist from committing or causing any violation and any future violation of Section 17(a) of the Securities Act and Sections 10(b), 13(a), 13(b)(2)(A), 13(b)(2)(B), and 13(b)(5) of the Exchange Act and Rules 10b-5, 12b-20, 13a-1, 13a-13, and 13b2-1 promulgated thereunder. + + + By the Commission. + + +Jonathan G. Katz +Secretary + + Endnotes + 1 The findings herein are made pursuant to Respondent's Offer and are not binding on any other person or entity in this or any other proceeding. + + 2 This paragraph provides: "If an arrangement to deliver software or a software system … requires significant production, modification, or customization of software, the entire arrangement should be accounted for in conformity with Accounting Research Bulletin No. 45, Long-Term Construction-Type Contracts ("ARB 45"), using the relevant guidance herein, and in AICPA Statement of Position 81-1, Accounting for Performance of Construction-Type and Certain Production-Type Contracts" ("SOP 81-1"). + + 3 There are other factors that may further preclude up-front recognition under SOP 97-2. For example, in multiple element software arrangements, vendor-specific evidence of fair value ("VSOE") must exist for up-front recognition of the delivered elements. + + 4 "Off-the-shelf" software is defined under SOP 97-2 as "software marketed as a stock item that customers can use with little or no customization." + + 5 i2 has agreed to pay $1 in disgorgement and a $10 million civil penalty in connection with a parallel civil action. See In the Matter of i2 Technologies, Inc., Lit. Rel. 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Individuals (SALI) + + + + + Enforcement Data Delivery Standards + + + + + Small Businesses + + + + + Appellate Briefs + + + + + Amicus / Friend of the Court Briefs + + + + + + + + + + + + + + + + + + + + + + + + + + Enforcement & Litigation + + + + + + + Litigation Releases + + + + + Administrative Proceedings + + + + + Administrative Law Judge Orders and Initial Decisions + + + + + Trading Suspensions + + + + + Distributions to Harmed Investors + + + + + Receiverships + + + + + Electronic Filings in Administrative Proceedings (eFAP) + + + + + Rules of Practice + + + + + Applications for Reentry + + + + + Reports of Investigations + + + + + Whistleblower Program + + + + + Public Alert: Unregistered Soliciting Entities (PAUSE) + + + + + SEC Action Lookup - Individuals (SALI) + + + + + Enforcement Data Delivery Standards + + + + + Small Businesses + + + + + Appellate Briefs + + + + + Amicus / Friend of the Court Briefs + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + Home + + + Enforcement and Litigation + + + Litigation Releases + + + i2 Technologies, Inc. + + + + + + + + + + + + i2 Technologies, Inc. + + + + + + + + + + + + + + + + + + + + + The Securities and Exchange Commission today announced a settled enforcement action against i2 Technologies, Inc. ("i2") in connection with alleged accounting improprieties and misleading revenue recognition by the Dallas-based developer and marketer of enterprise supply chain software and management solutions. i2 agreed to pay a $10 million civil penalty and nominal $1 disgorgement in a civil suit the Commission filed in the United States District Court for the Northern District of Texas (Dallas Division). As part of the settlement, but without admitting or denying the Commission's substantive findings or allegations, i2 consented to the entry of a cease-and-desist order finding that i2 committed securities fraud in accounting for certain software license agreements and in accounting for and improperly disclosing four "barter" transactions. As provided under the Sarbanes-Oxley Act of 2002, the penalty amount will become part of a disgorgement fund for the benefit of injured i2 investors. + + In summary, the Commission's cease-and-desist order finds and civil complaint alleges that, for the four years ended December 31, 2001 and the first three quarters of 2002, i2 misstated approximately $1 billion of software license revenues. As a result, i2's periodic filings with the Commission and earnings releases during this period materially misrepresented i2's revenues and earnings. + + Specifically, the order finds and complaint alleges that i2 favored up-front recognition of software license revenues, purportedly in accordance with generally accepted accounting principals ("GAAP"). i2's compensation structure fostered this preference, because compensation of sales and pre-sales personnel was largely based on the amount of revenue recognized and cash collected in the current period. However, as i2 knew or recklessly ignored, immediate recognition of revenue was inappropriate for some of i2's software licenses because they required lengthy and intense implementation and customization efforts to meet customer needs. In some cases, i2 shipped certain products and product lines that lacked functionality essential to commercial use by a broad range of users. In other cases, the company licensed certain software that required additional functionality to be usable by particular customers. On still other occasions, i2 exaggerated certain product capabilities, or entered into side agreements with certain customers that were not properly reflected in the accounting for those transactions. In each case, significant modification and customization efforts were necessary to provide the required functionality. + + i2 also improperly recorded revenue from four barter transactions during the restatement period. These transactions involved third-party purchases of software licenses from i2, with i2 recognizing the revenue immediately, in exchange for i2's agreement to purchase from the other parties in the future a comparable amount of products or services. In some of these transactions, i2 paid a premium over the prevailing rates for those products or services, in an effort to equalize both sides of the deal. When i2 recorded revenue from these transactions, it could not determine the fair value of the items exchanged within reasonable limits. Accordingly, i2's up-front recognition of license revenue from these transactions was improper under GAAP. Moreover, i2's financial statements and Commission filings failed to disclose the true nature of these transactions, which improperly inflated i2's reported revenues by approximately $44 million. + + The Commission also found and alleges that, during the summer of 2001, i2 received two documents flagging issues impacting software license revenue recognition. First, in June 2001, i2 generated a summary of revenue recognition risks, outlining such potential problems as identifying products to meet customer needs after licenses were signed; bundling wrong or incorrectly positioned products in deals; substantial underestimation of implementation services necessary to meet customer needs; the provision of development and customization services without separate formal agreements; and barter transactions. + + Second, also in June 2001, i2 received the initial report of a Massachusetts Institute of Technology professor the company had hired to examine its business practices. The professor's report identified serious deficiencies within the organization, from shortcomings in its product and technology strategy to weaknesses in its sales practices, product release management, and quality assurance. Critically, this report indicated that i2's products had largely become "custom" software requiring considerable customization and modification, which would preclude up-front recognition of revenue from these licenses. Neither i2's auditors nor Audit Committee learned of the MIT professor's report until September 2002. + + ********** + + The cease-and-desist order finds and civil complaint alleges that i2 violated Sections 17(a) of the Securities Act of 1933 and Sections 10(b), 13(a), 13(b)(2)(A), 13(b)(2)(B), and 13(b)(5) of the Securities Exchange Act of 1934 and Rules 10b-5, 12b-20, 13a-1, 13a-13 and 13b2-1 thereunder. + + The Commission's investigation continues as to other individuals and entities. + + + + SEC Complaint in this matter + + + + +  + + + + + + + + + + + + + + + + + + + + + + + + + Return to top + + + + + SEC homepage + + + + + + + + + + + + + + About the SEC + + + + + + Budget & Performance + + + Careers + + + Commission Votes + + + Contact + + + Contracts + + + + + + + + Transparency + + + + + + Accessibility & Disability + + + Super Intelligence + + + FOIA + + + Inspector General + + + No FEAR Act Data + + + Ombuds + + + SEC Excess Personal Property Guidance + + + + + + + + Websites + + + + + + Investor.gov + + + Related Sites + + + USA.gov + + + + + + + + Site Information + + + + + + Plain Writing + + + Privacy & Security + + + Site Map + + + + + + + + + + + + + + + + + + Stay connected. 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Miller + + + + + + + + !function(){var e=navigator.userAgent,a=document.documentElement,n=a.className;n=n.replace("no-js","js"),/iPad|iPhone|iPod/.test(e)&&!window.MSStream&&(n+=" ua-ios"),a.className=n}(); + {"path":{"baseUrl":"\/","pathPrefix":"","currentPath":"node\/494266","currentPathIsAdmin":false,"isFront":false,"currentLanguage":"en"},"pluralDelimiter":"\u0003","suppressDeprecationErrors":true,"gtag":{"tagId":"","consentMode":false,"otherIds":[],"events":[],"additionalConfigInfo":[]},"ajaxPageState":{"libraries":"eJxdT0GOwzAI_JBdn_oei2DkeINNZLC22devlaZS2wtiBhhmcKNUTPo97jxyaXEH3GJpiZrFhQW38A4cMqgeYQGlV19JFTKpQ-kUmvQKXP7I0cO4tC2kPnbg2wVdFslM0SCHPMs3vsEPPD7J6hgOGdPCKJyoRxxqUuePHjLLAuzVjimenRJGSLW08NoBK9LUn6SHlrytVOlcpJShB63QLSpBx_WkOzHNePol4fRQo_qMPvQ36ZXsAmd99lMNr2t_GUR9n60EyX9a_wePd5ns","theme":"uswds_sec","theme_token":null},"ajaxTrustedUrl":[],"gtm":{"tagId":null,"settings":{"data_layer":"dataLayer","include_classes":false,"allowlist_classes":"","blocklist_classes":"","include_environment":false,"environment_id":"","environment_token":""},"tagIds":["GTM-TD3BKV"]},"data":{"extlink":{"extTarget":false,"extTargetAppendNewWindowDisplay":true,"extTargetAppendNewWindowLabel":"(opens in a new window)","extTargetNoOverride":false,"extNofollow":false,"extTitleNoOverride":false,"extNoreferrer":false,"extFollowNoOverride":false,"extClass":"0","extLabel":"(link is external)","extImgClass":false,"extSubdomains":true,"extExclude":".*\\.gov|http:\/\/www.xbrl.org\/utr\/2013-05-17\/utr.xml|http:\/\/www.xbrl.org\/dtr\/type\/numeric-2009-12-16.xsd|http:\/\/www.xbrl.org\/dtr\/type\/nonNumeric-2009-12-16.xsd|https:\/\/secir.secure.force.com\/ombudsman\/OMMSForm","extInclude":"","extCssExclude":".data-exempt","extCssInclude":"","extCssExplicit":"","extAlert":true,"extAlertText":"You are now leaving the SEC Website. 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Miller + + + + + + + + + + + + John P. Miller + + + + + + + + + + + + + + + + + + + + + On June 8, 2004, the Securities and Exchange Commission filed a complaint in the United States District Court for the Northern District of Georgia against John P. Miller. Miller is the former president, chief executive officer and chairman of the board of directors of Master Graphics, Inc., a Tennessee-based printing company that was publicly traded on the NASDAQ National Market System, but is now defunct. The complaint alleges that, in the spring of 1999, Miller devised and implemented a scheme to fraudulently overstate the company's net income to meet analysts' expectations. Pursuant to the plan, the company fraudulently reclassified rent and salary expenses that Master Graphics had already paid to its division presidents in the first quarter to assets on the company's balance sheet, thus reducing expenses and increasing income. According to the complaint, this scheme fraudulently overstated Master Graphics' net income by 628%, 46% and 10% in the first, second and third quarter financial statements, respectively, that the company filed with the Commission in 1999. + The complaint alleges that Miller violated the antifraud provisions of the federal securities laws (Section 17(a) of the Securities Act of 1933, Section 10(b) of the Securities Exchange Act of 1934 ("Exchange Act") and Exchange Act Rule 10b-5) and the books and records and internal controls provisions of the Exchange Act (Section 13(b)(5) and Exchange Act Rule 13b2-1). The complaint also alleges that Miller aided and abetted Master Graphics' violations of the reporting provisions of the Exchange Act (Section 13(a) of the Exchange Act and Rules 12b-20 and 13a-13 thereunder). The complaint seeks an injunction, disgorgement plus prejudgment interest, civil penalties and an officer and director bar. + This complaint is the second lawsuit that the Commission filed in connection with Master Graphics' accounting issue. See Litigation Release No. 18733 (June 2, 2004). + + + SEC Complaint in this matter --> + + + + + + + + + + + + + + + + + + + + + + + + + + Return to top + + + + + SEC homepage + + + + + + + + + + + + + + About the SEC + + + + + + Budget & Performance + + + Careers + + + Commission Votes + + + Contact + + + Contracts + + + + + + + + Transparency + + + + + + Accessibility & Disability + + + Super Intelligence + + + FOIA + + + Inspector General + + + No FEAR Act Data + + + Ombuds + + + SEC Excess Personal Property Guidance + + + + + + + + Websites + + + + + + Investor.gov + + + Related Sites + + + USA.gov + + + + + + + + Site Information + + + + + + Plain Writing + + + Privacy & Security + + + Site Map + + + + + + + + + + + + + + + + + + Stay connected. Sign up for email updates. + + + + + + Your email address + + Sign Up + + + + + + + + + + + + X + + + + + + + + Facebook + + + + + + + + Instagram + + + + + + + + RSS + + + + + + + + YouTube + + + + + + + + Email Updates + + + + + + + + + + + + + + + + + + + diff --git a/raw/aaer/2004/AAER-2036.txt b/raw/aaer/2004/AAER-2036.txt new file mode 100644 index 0000000000000000000000000000000000000000..d552679760ddc90cff6941f52778268fcde0946d --- /dev/null +++ b/raw/aaer/2004/AAER-2036.txt @@ -0,0 +1,1379 @@ + + + + + + + + + + + + + + + + SEC.gov | Prabhat K. Goyal + + + + + + + + !function(){var e=navigator.userAgent,a=document.documentElement,n=a.className;n=n.replace("no-js","js"),/iPad|iPhone|iPod/.test(e)&&!window.MSStream&&(n+=" ua-ios"),a.className=n}(); + {"path":{"baseUrl":"\/","pathPrefix":"","currentPath":"node\/494286","currentPathIsAdmin":false,"isFront":false,"currentLanguage":"en"},"pluralDelimiter":"\u0003","suppressDeprecationErrors":true,"gtag":{"tagId":"","consentMode":false,"otherIds":[],"events":[],"additionalConfigInfo":[]},"ajaxPageState":{"libraries":"eJxdT0GOwzAI_JBdn_oei2DkeINNZLC22devlaZS2wtiBhhmcKNUTPo97jxyaXEH3GJpiZrFhQW38A4cMqgeYQGlV19JFTKpQ-kUmvQKXP7I0cO4tC2kPnbg2wVdFslM0SCHPMs3vsEPPD7J6hgOGdPCKJyoRxxqUuePHjLLAuzVjimenRJGSLW08NoBK9LUn6SHlrytVOlcpJShB63QLSpBx_WkOzHNePol4fRQo_qMPvQ36ZXsAmd99lMNr2t_GUR9n60EyX9a_wePd5ns","theme":"uswds_sec","theme_token":null},"ajaxTrustedUrl":[],"gtm":{"tagId":null,"settings":{"data_layer":"dataLayer","include_classes":false,"allowlist_classes":"","blocklist_classes":"","include_environment":false,"environment_id":"","environment_token":""},"tagIds":["GTM-TD3BKV"]},"data":{"extlink":{"extTarget":false,"extTargetAppendNewWindowDisplay":true,"extTargetAppendNewWindowLabel":"(opens in a new window)","extTargetNoOverride":false,"extNofollow":false,"extTitleNoOverride":false,"extNoreferrer":false,"extFollowNoOverride":false,"extClass":"0","extLabel":"(link is external)","extImgClass":false,"extSubdomains":true,"extExclude":".*\\.gov|http:\/\/www.xbrl.org\/utr\/2013-05-17\/utr.xml|http:\/\/www.xbrl.org\/dtr\/type\/numeric-2009-12-16.xsd|http:\/\/www.xbrl.org\/dtr\/type\/nonNumeric-2009-12-16.xsd|https:\/\/secir.secure.force.com\/ombudsman\/OMMSForm","extInclude":"","extCssExclude":".data-exempt","extCssInclude":"","extCssExplicit":"","extAlert":true,"extAlertText":"You are now leaving the SEC Website. 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Goyal + + + + + + + + + + + + Prabhat K. Goyal + + + + + + + + + + + + + + + + + + + + + The Securities and Exchange Commission today filed civil fraud charges in the United States District Court for the Northern District of California against Prabhat K. Goyal. Goyal was Vice President and Chief Financial Officer at Santa Clara, California-based software manufacturer Network Associates, Inc. until his departure in 2000. The Commission's complaint alleges that from the second quarter of fiscal 1998 through the fourth quarter of fiscal 2000, Goyal engaged in a fraudulent scheme to, among other things, overstate Network Associates' revenue and earnings in violation of the federal securities laws. The Commission's complaint also alleges that Goyal sold stock while in possession of material non-public information regarding the financial fraud at Network Associates. + + According to the complaint, Network Associates oversold products to its distributors and Goyal oversaw the improper recognition of hundreds of millions of dollars of revenue. In particular, the complaint alleges that Goyal and others at his direction: + + used a wholly-owned Network Associates subsidiary to repurchase products previously sold to distributors in order to reduce distributor inventory levels and limit product returns, + made secret payments to distributors to induce them to hold excess inventory and buy more products, + offered distributors deep discounts and rebates on amounts that distributors already owed to Network Associates for prior product purchases and from which Network Associates already had recorded revenues, and + sold products to distributors on consignment in violation of Network Associates' written sales contracts and stated revenue recognition practices. + The complaint further alleges that Goyal took action to conceal the fraud, directing that payments and discounts to distributors be misrecorded in Network Associates's books, and directing the release of unrelated tax reserves to cover payments to distributors and to increase inadequate sales reserves. The complaint alleges that Goyal knowingly or recklessly defrauded investors through the reporting of false and materially misleading financial information in periodic reports, financial statements, and securities registration statements that Network Associates filed with the Commission, in press releases, and in other public statements. + + The Commission's complaint seeks to permanently enjoin Goyal from violating, or aiding and abetting future violations of, the antifraud provisions of the federal securities laws, Section 17(a) of the Securities Act of 1933, Section 10(b) of the Securities Exchange Act of 1934, and Exchange Act Rule 10b-5; from violating the provisions of the federal securities laws that prohibit falsifying corporate records and lying to accountants, Exchange Act Section 13(b)(5) and Exchange Act Rules 13b2-1 and 13b2-2; and from aiding and abetting future violations of certain reporting and recordkeeping provisions of the federal securities laws, Exchange Act Sections 13(a), 13(b)(2)(A) and 13(b)(2)(B), and Exchange Act Rules 12b-20, 13a-1, and 13a-13. The complaint also seeks an accounting, disgorgement of ill-gotten gains both in the form of salary and bonuses and from sales of stock, prejudgment interest, civil money penalties, and an order prohibiting Goyal from acting as an officer or a director of any reporting company. + + The United States Attorney for the Northern District of California today announced criminal charges against Goyal arising from the same conduct charged in the Commission's complaint. + + This is the second lawsuit that the Commission filed in connection with accounting issues at Network Associates. See SEC v. Terry W. Davis, Litigation Release No. 18189 (June 12, 2003). + + The Commission thanks the U.S. Attorney's Office for the Northern District of California and the Federal Bureau of Investigation for their cooperation in this matter. + + The Commission's investigation into these matters is continuing. + + + SEC Complaint in this matter + + + + + +  + + + + + + + + + + + + + + + + + + + + + + + + + Return to top + + + + + SEC homepage + + + + + + + + + + + + + + About the SEC + + + + + + Budget & Performance + + + Careers + + + Commission Votes + + + Contact + + + Contracts + + + + + + + + Transparency + + + + + + Accessibility & Disability + + + Super Intelligence + + + FOIA + + + Inspector General + + + No FEAR Act Data + + + Ombuds + + + SEC Excess Personal Property Guidance + + + + + + + + Websites + + + + + + Investor.gov + + + Related Sites + + + USA.gov + + + + + + + + Site Information + + + + + + Plain Writing + + + Privacy & Security + + + Site Map + + + + + + + + + + + + + + + + + + Stay connected. 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Individuals (SALI) + + + + + Enforcement Data Delivery Standards + + + + + Small Businesses + + + + + Appellate Briefs + + + + + Amicus / Friend of the Court Briefs + + + + + + + + + + + + + + + + + + + + + + + + + + Enforcement & Litigation + + + + + + + Litigation Releases + + + + + Administrative Proceedings + + + + + Administrative Law Judge Orders and Initial Decisions + + + + + Trading Suspensions + + + + + Distributions to Harmed Investors + + + + + Receiverships + + + + + Electronic Filings in Administrative Proceedings (eFAP) + + + + + Rules of Practice + + + + + Applications for Reentry + + + + + Reports of Investigations + + + + + Whistleblower Program + + + + + Public Alert: Unregistered Soliciting Entities (PAUSE) + + + + + SEC Action Lookup - Individuals (SALI) + + + + + Enforcement Data Delivery Standards + + + + + Small Businesses + + + + + Appellate Briefs + + + + + Amicus / Friend of the Court Briefs + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + Home + + + Enforcement and Litigation + + + Litigation Releases + + + Victor Jacobowitz, et al. + + + + + + + + + + + + Victor Jacobowitz, et al. + + + + + + + + + + + + + + + + + + + + + Today, the United States Securities and Exchange Commission filed a complaint in the United States District Court for the Eastern District of New York alleging that Victor Jacobowitz, former Chairman of the Board of Directors of Allou Healthcare, Inc. ("Allou"), and four other former executives engaged in financial reporting fraud. The Commission's complaint alleges that beginning in the 1990s and continuing through March 2003, the defendants engaged in a scheme to defraud Allou's lenders and public investors. The defendants falsified Allou's accounting records, earnings reports, and periodic filings with the Commission by, among other things, materially overstating revenue and inventory. The complaint alleges that the defendants manipulated Allou's net income and earnings per share to meet Wall Street's expectations. The complaint also alleges that the defendants conducted this scheme, in part, for their own personal enrichment. + + The complaint names the following defendants: + + Victor Jacobowitz (aka Victor Jacobs), age 72, is a resident of Brooklyn, New York. Victor Jacobs served as the chairman of Allou's board of directors from 1985 to May 2003. + + Herman Jacobowitz (aka Herman Jacobs), age 44, is a resident of Brooklyn, New York. Herman Jacobs served as Allou's CEO from July 2000 to April 2003, and as a director from 1985 to May 2003. Herman Jacobs is a son of Victor Jacobs. + + Jacob Jacobowitz (aka Jacob Jacobs), age 41, is a resident of Brooklyn, New York. Jacob Jacobs served as executive vice president of Allou from July 2000 to April 2003, and as a director from 1985 to May 2003. Jacob Jacobs is also a son of Victor Jacobs. + + David Shamilzadeh, age 58, is a resident of New York, New York. Shamilzadeh served as Allou's CFO from April 1990 to September 2001, as Allou's president from July 2000 to April 2003 and as principal accounting officer from September 2001 to April 2003. Shamilzadeh served as a director of Allou from July 1989 to April 2003. + + Irvin Brown, age 43, is a resident of Monsey, New York. Brown worked at Allou from at least 1991. As the head of the information technology department, Brown functioned as Allou's de facto chief information officer. + The complaint alleges the following. Allou, currently a bankrupt distributor of pharmaceuticals and health and beauty products, defrauded its lenders of hundreds of millions of dollars, as well as its public investors. Victor Jacobs and Herman Jacobs engaged in a scheme to misappropriate funds by overstating Allou's revenue, accounts receivable, and inventory. Specifically, Herman Jacobs recorded millions of dollars in false sales to Allou customers, and together with Victor Jacobs, manipulated Allou's accounts receivable to make it appear customers were paying for the products. David Shamilzadeh and Irvin Brown prepared a second set of books through password protected computer files to conceal the false invoices and manipulated accounts receivable. Jacob Jacobs was aware of the scheme. In September 2002, a fire destroyed a warehouse in Brooklyn used to store some of Allou's inventory. Allou reported in filings made with the Commission that the inventory destroyed in the fire had a cost-basis value of approximately $86 million. + + During the fifteen months ended in March 2003, Allou recorded approximately $220 million of falsified sales. As a result of the defendants' conduct, Allou was able to overstate its revenue and accounts receivable and to borrow from its trade creditors significantly more funds than Allou's legitimate business merited. For example, Allou's Form 10-Q, dated February 11, 2003, which reported revenue of $471 million for the nine months ended December 31, 2002 included approximately $153 million of falsified sales, overstating actual revenue by forty-eight percent. + + In addition, Shamilzadeh and Herman Jacobs manipulated Allou's net income and earnings per share by overstating inventory. By overstating inventory, Allou could understate expenses, and therefore manipulate net income and earnings per share so they would be in line with forecasts Shamilzadeh provided to Wall Street. Allou also borrowed funds from its lenders secured by this nonexistent inventory. Victor Jacobs and Jacob Jacobs were aware of the scheme. Victor Jacobs was simultaneously involved in misappropriating money from Allou by transferring millions of dollars to entities the Jacobs family controlled purportedly to pay for nonexistent inventory. Allou made approximately $179 million in payments to affiliated entities for nonexistent inventory during fiscal year 2002. + + The complaint alleges that, based on the foregoing, Victor Jacobs, Herman Jacobs, Jacob Jacobs, Shamilzadeh, and Brown violated and/or aided and abetted Allou's violations of the antifraud, issuer reporting, internal controls, and books and records provisions of the federal securities laws. The complaint also alleges that Victor Jacobs, Herman Jacobs, and Shamilzadeh lied to Allou's auditors, and that Herman Jacobs and Shamilzadeh violated the certification requirements of the Sarbanes-Oxley Act of 2002. The Commission's complaint seeks an order permanently enjoining each defendant and ordering them to pay disgorgement and civil penalties. The Commission's complaint also seeks an order barring each defendant from acting as an officer or director of a public company. The specific charges alleged in the complaint are as follows: + + Victor Jacobs: violations of Section 17(a) of the Securities Act of 1933 ("Securities Act"), Sections 10(b) and 13(b)(5) of the Securities Exchange Act of 1934 ("Exchange Act"), and Rules 10b-5, 13b2-1, and 13b2-2; and aiding and abetting violations of Sections 13(a) and 13(b)(2)(A)&(B) of the Exchange Act, and Rules 12b-20, 13a-1, and 13a-13; + + Herman Jacobs and Shamilzadeh: violations of Section 17(a) of the Securities Act, Sections 10(b) and 13(b)(5) of the Exchange Act, and Rules 10b-5, 13a-14, 13b2-1, and 13b2-2; and aiding and abetting violations of Sections 13(a) and 13(b)(2)(A)&(B) of the Exchange Act, and Rules 12b-20, 13a-1, and 13a-13; + + Jacob Jacobs: violations of Section 17(a) of the Securities Act, Section 10(b) of the Exchange Act, and Rule 10b-5; and aiding and abetting violations of Sections 13(a) of the Exchange Act, and Rules 12b-20 and 13a-1; and + + Brown: violations of Section 17(a) of the Securities Act, Sections 10(b) and 13(b)(5) of the Exchange Act, and Rules 10b-5 and 13b2-1; and aiding and abetting violations of Sections 13(a) and 13(b)(2)(A)&(B) of the Exchange Act, and Rules 12b-20, 13a-1, and 13a-13. + + The Commission acknowledges the assistance of the United States Attorney for the Eastern District of New York and the United States Postal Inspection Service in connection with this matter. + + + SEC Complaint in this matter + + + + +  + + + + + + + + + + + + + + + + + + + + + + + + + Return to top + + + + + SEC homepage + + + + + + + + + + + + + + About the SEC + + + + + + Budget & Performance + + + Careers + + + Commission Votes + + + Contact + + + Contracts + + + + + + + + Transparency + + + + + + Accessibility & Disability + + + Super Intelligence + + + FOIA + + + Inspector General + + + No FEAR Act Data + + + Ombuds + + + SEC Excess Personal Property Guidance + + + + + + + + Websites + + + + + + Investor.gov + + + Related Sites + + + USA.gov + + + + + + + + Site Information + + + + + + Plain Writing + + + Privacy & Security + + + Site Map + + + + + + + + + + + + + + + + + + Stay connected. 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Bruce Hill, et al. , (United States District Court for the District of Massachusetts, Civil Action No. 02-CV-11244 (EFH), Filed June 21, 2002) + + The Commission announced today that on June 9, 2004, the United States District Court for the District of Massachusetts entered judgment by default against Graham J. Marshall, a former manager of Inso Corporation. The Court held Marshall liable for securities fraud, providing false information to accountants, circumventing internal accounting controls, and aiding and abetting Inso's filing of false financial information with the Commission. Marshall, age 56 and formerly of Lexington, Massachusetts, was a senior manager at Inso, a now defunct software company that was headquartered in Boston, Massachusetts. The Court ordered Marshall to pay $345,685.98 in disgorgement plus prejudgment interest, plus a $25,000 civil penalty. The Court also permanently enjoined Marshall from committing future violations, and barred Marshall from serving as an officer or director of a public company. On November 12, 2003, Marshall was indicted on criminal charges brought by the United States Attorney for the District of Massachusetts based on the same conduct at issue in the Commission's action. + + The Commission filed its complaint in June 2002 against Marshall and others. The Commission's complaint alleged that Marshall arranged for a Malaysian distributor to place a $3 million purchase order on the evening of September 30, 1998, which was the close of Inso's third quarter, when an anticipated sale to a major customer fell through. The transaction was a sham and should not have been included in Inso's reported financial results because Marshall promised the distributor he would not have to pay Inso for the purchase, and that Inso would resell the software. Marshall concealed the terms of the purported sale from Inso's finance department. Consequently, Inso improperly included the $3 million purchase order as revenue in its third quarter 1998 financial statements. Marshall took steps later in 1998 to cover up the fraudulent nature of the transaction. + + The Court's judgment held that Marshall violated the antifraud provisions of the federal securities laws [Section 17(a) of the Securities Act of 1933 and Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder]; circumvented Inso's internal accounting controls and falsified records [in violation of Section 13(b)(5) of the Exchange Act and Exchange Act Rule 13b2-1]; provided false information to accountants [in violation of Exchange Act Rule 13b2-2]; and aided and abetted Inso's uncharged violations of the periodic reporting and books and records provisions [in violation of Sections 13(a) and 13(b)(2)(A) of the Exchange Act and Rules 12b-20 and 13a-13 thereunder]. + + For more information see +Litigation Release No. 18699 (May 7, 2004), +Litigation Release No. 18394 (October 4, 2003), and Litigation Release No. 17578 (June 21, 2002). + + + +  + + + + + + + + + + + + + + + + + + + + + + + + + Return to top + + + + + SEC homepage + + + + + + + + + + + + + + About the SEC + + + + + + Budget & Performance + + + Careers + + + Commission Votes + + + Contact + + + Contracts + + + + + + + + Transparency + + + + + + Accessibility & Disability + + + Super Intelligence + + + FOIA + + + Inspector General + + + No FEAR Act Data + + + Ombuds + + + SEC Excess Personal Property Guidance + + + + + + + + Websites + + + + + + Investor.gov + + + Related Sites + + + USA.gov + + + + + + + + Site Information + + + + + + Plain Writing + + + Privacy & Security + + + Site Map + + + + + + + + + + + + + + + + + + Stay connected. Sign up for email updates. + + + + + + Your email address + + Sign Up + + + + + + + + + + + + X + + + + + + + + Facebook + + + + + + + + Instagram + + + + + + + + RSS + + + + + + + + YouTube + + + + + + + + Email Updates + + + + + + + + + + + + + + + + + + + diff --git a/raw/aaer/2004/AAER-2039.txt b/raw/aaer/2004/AAER-2039.txt new file mode 100644 index 0000000000000000000000000000000000000000..86328308fbdb15be41c2f31bfd144bf6d62cecfd --- /dev/null +++ b/raw/aaer/2004/AAER-2039.txt @@ -0,0 +1,1466 @@ + + + + + + + + + + + + + + + + SEC.gov | Michael Sullivan, CPA + + + + + + + + !function(){var e=navigator.userAgent,a=document.documentElement,n=a.className;n=n.replace("no-js","js"),/iPad|iPhone|iPod/.test(e)&&!window.MSStream&&(n+=" ua-ios"),a.className=n}(); + {"path":{"baseUrl":"\/","pathPrefix":"","currentPath":"node\/367771","currentPathIsAdmin":false,"isFront":false,"currentLanguage":"en"},"pluralDelimiter":"\u0003","suppressDeprecationErrors":true,"gtag":{"tagId":"","consentMode":false,"otherIds":[],"events":[],"additionalConfigInfo":[]},"ajaxPageState":{"libraries":"eJxdT0GOwzAI_JBdn_oei2DkeINNZLC22devlaZS2wtiBhhmcKNUTPo97jxyaXEH3GJpiZrFhQW38A4cMqgeYQGlV19JFTKpQ-kUmvQKXP7I0cO4tC2kPnbg2wVdFslM0SCHPMs3vsEPPD7J6hgOGdPCKJyoRxxqUuePHjLLAuzVjimenRJGSLW08NoBK9LUn6SHlrytVOlcpJShB63QLSpBx_WkOzHNePol4fRQo_qMPvQ36ZXsAmd99lMNr2t_GUR9n60EyX9a_wePd5ns","theme":"uswds_sec","theme_token":null},"ajaxTrustedUrl":[],"gtm":{"tagId":null,"settings":{"data_layer":"dataLayer","include_classes":false,"allowlist_classes":"","blocklist_classes":"","include_environment":false,"environment_id":"","environment_token":""},"tagIds":["GTM-TD3BKV"]},"data":{"extlink":{"extTarget":false,"extTargetAppendNewWindowDisplay":true,"extTargetAppendNewWindowLabel":"(opens in a new window)","extTargetNoOverride":false,"extNofollow":false,"extTitleNoOverride":false,"extNoreferrer":false,"extFollowNoOverride":false,"extClass":"0","extLabel":"(link is external)","extImgClass":false,"extSubdomains":true,"extExclude":".*\\.gov|http:\/\/www.xbrl.org\/utr\/2013-05-17\/utr.xml|http:\/\/www.xbrl.org\/dtr\/type\/numeric-2009-12-16.xsd|http:\/\/www.xbrl.org\/dtr\/type\/nonNumeric-2009-12-16.xsd|https:\/\/secir.secure.force.com\/ombudsman\/OMMSForm","extInclude":"","extCssExclude":".data-exempt","extCssInclude":"","extCssExplicit":"","extAlert":true,"extAlertText":"You are now leaving the SEC Website. 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Individuals (SALI) + + + + + Enforcement Data Delivery Standards + + + + + Small Businesses + + + + + Appellate Briefs + + + + + Amicus / Friend of the Court Briefs + + + + + + + + + + + + + + + + + + + + + + + + + + Enforcement & Litigation + + + + + + + Litigation Releases + + + + + Administrative Proceedings + + + + + + + Information for Respondents in Administrative Proceedings  + + + + + Open Litigated Administrative Proceedings + + + + + Closed Litigated Administrative Proceedings + + + + + Commission Opinions and Adjudicatory Orders + + + + + Delinquent Filings + + + + + Stop Orders + + + + + + + + Administrative Law Judge Orders and Initial Decisions + + + + + Trading Suspensions + + + + + Distributions to Harmed Investors + + + + + Receiverships + + + + + Electronic Filings in Administrative Proceedings (eFAP) + + + + + Rules of Practice + + + + + Applications for Reentry + + + + + Reports of Investigations + + + + + Whistleblower Program + + + + + Public Alert: Unregistered Soliciting Entities (PAUSE) + + + + + SEC Action Lookup - Individuals (SALI) + + + + + Enforcement Data Delivery Standards + + + + + Small Businesses + + + + + Appellate Briefs + + + + + Amicus / Friend of the Court Briefs + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + Home + + + Enforcement and Litigation + + + Administrative Proceedings + + + Michael Sullivan, CPA + + + + + + + + + + + + Michael Sullivan, CPA + + + + + + + + + + + + + + + + + + + + + SECURITIES EXCHANGE ACT OF 1934 +Release No. 49893 / June 18, 2004 + + ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 2039 / June 18, 2004 + + ADMINISTRATIVE PROCEEDING +File No. 3-10953 + + + + In the Matter of + Michael B. Sullivan, CPA + + : : : : : : : + + ORDER GRANTING APPLICATION FOR REINSTATEMENT TO APPEAR AND PRACTICE BEFORE THE COMMISSION AS AN ACCOUNTANT RESPONSIBLE FOR THE PREPARATION OR REVIEW OF FINANCIAL STATEMENTS REQUIRED TO BE FILED WITH THE COMMISSION On November 26, 2002, Michael B. Sullivan ("Sullivan") was suspended from appearing or practicing as an accountant before the Commission as a result of settled public administrative proceedings instituted by the Commission against Sullivan pursuant to Rule 102(e) of the Commission's Rules of Practice. 1 This order is issued in response to Sullivan's application for reinstatement to practice before the Commission as an accountant responsible for the preparation or review of financial statements required to be filed with the Commission. + + During 1997 and 1998, Sullivan engaged in improper professional conduct as the engagement partner on Arthur Andersen's audits and quarterly reviews of the consolidated financial statements of Golden Bear Golf, Inc. ("Golden Bear" or the "Company") for the fiscal years ended 1996, 1997 and 1998. Sullivan was reckless in the performance of his professional duties, namely his failure to direct, supervise and perform audit procedures required by Generally Accepted Auditing Standards. The audited procedures that Sullivan failed to perform primarily involved the Company's changes in accounting and disclosure for percentage-of-completion accounting related to golf course construction contracts. Initially the Company used a methodology based upon actual costs when applying percentage-of-completion accounting to its construction contracts and subsequently changed to an "earned value" methodology that was highly subjective and based upon management's estimates. + + In his capacity as a preparer or reviewer, or as a person responsible for the preparation or review, of financial statements of a public company to be filed with the Commission, Sullivan attests that he will undertake to have his work reviewed by the independent audit committee of any company for which he works, or in some other manner acceptable to the Commission, while practicing before the Commission in this capacity. Sullivan is not, at this time, seeking to appear or practice before the Commission as an independent accountant. If he should wish to resume appearing and practicing before the Commission as an independent accountant, he will be required to submit an application to the Commission showing that he has complied and will comply with the terms of the original suspension order in this regard. Therefore, Sullivan's suspension from practice before the Commission as an independent accountant continues in effect until the Commission determines that a sufficient showing has been made in this regard in accordance with the terms of the original suspension order. + + Rule 102(e)(5) of the Commission's Rules of Practice governs applications for reinstatement, and provides that the Commission may reinstate the privilege to appear and practice before the Commission "for good cause shown." This "good cause" determination is necessarily highly fact specific. + + On the basis of information supplied, representations made, and undertakings agreed to by Sullivan, it appears that Sullivan has complied with the terms of the November 26, 2002 order suspending him from practice before the Commission as an accountant, that no information has come to the attention of the Commission relating to his character, integrity, professional conduct or qualifications to practice before the Commission that would be a basis for adverse action against Sullivan pursuant to Rule 102(e) of the Commission's Rules of Practice, and that Sullivan, by undertaking to have his work reviewed by the independent audit committee of any company for which he works, or in some other manner acceptable to the Commission, in his practice before the Commission as a preparer or reviewer of financial statements required to be filed with the Commission, has shown good cause for reinstatement. Therefore, it is accordingly, + + ORDERED pursuant to Rule 102(e)(5)(i) of the Commission's Rules of Practice that Michael B. Sullivan, CPA is hereby reinstated to appear and practice before the Commission as an accountant responsible for the preparation or review of financial statements required to be filed with the Commission. + + By the Commission. + + +Jonathan G. Katz +Secretary + + + Endnotes + 1 See Accounting and Auditing Enforcement Release No. 1676, dated November 26, 2002. Sullivan was permitted, pursuant to the order, to apply for reinstatement after one year upon making certain showings. + + Rule 102(e)(5)(i) provides: + + "An application for reinstatement of a person permanently suspended or disqualified under paragraph (e)(1) or (e)(3) of this section may be made at any time, and the applicant may, in the Commission's discretion, be afforded a hearing; however, the suspension or disqualification shall continue unless and until the applicant has been reinstated by the Commission for good cause shown." 17 C.F.R. § 201.102(e)(5)(i). + + + +  + + + + + + + + + + + + + + + + + + + + + + + + + Return to top + + + + + SEC homepage + + + + + + + + + + + + + + About the SEC + + + + + + Budget & Performance + + + Careers + + + Commission Votes + + + Contact + + + Contracts + + + + + + + + Transparency + + + + + + Accessibility & Disability + + + Super Intelligence + + + FOIA + + + Inspector General + + + No FEAR Act Data + + + Ombuds + + + SEC Excess Personal Property Guidance + + + + + + + + Websites + + + + + + Investor.gov + + + Related Sites + + + USA.gov + + + + + + + + Site Information + + + + + + Plain Writing + + + Privacy & Security + + + Site Map + + + + + + + + + + + + + + + + + + Stay connected. 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Cruciotti + + + + + + + + + + + + Augustine M. Cruciotti + + + + + + + + + + + + + + + + + + + + + SECURITIES ACT OF 1933 +Release No. 8431/ June 21, 2004 + + SECURITIES EXCHANGE ACT OF 1934 +Release No. 49896 / June 21, 2004 + + ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 2040 / June 21, 2004 + + Admin. Proc. File No. 3-11525 + + + + In the Matter of + Augustine M. Cruciotti + Respondent. + + : : : : : : : : + ORDER INSTITUTING PROCEEDINGS PURSUANT TO SECTION 8A OF THE SECURITIES ACT OF 1933 AND SECTION 21C OF THE SECURITIES EXCHANGE ACT OF 1934, MAKING FINDINGS, AND IMPOSING A CEASE-AND-DESIST ORDER + I. + The Securities and Exchange Commission ("Commission") deems it appropriate that public cease-and-desist proceedings be, and hereby are, instituted pursuant to Section 8A of the Securities Act of 1933 ("Securities Act") and Section 21C of the Securities Exchange Act of 1934 ("Exchange Act") against Augustine M. Cruciotti ("Respondent" or "Cruciotti"). 1 + + II. + In anticipation of the institution of these proceedings, Respondent has submitted an Offer of Settlement (the "Offer"), which the Commission has determined to accept. Solely for the purpose of these proceedings and any other proceedings brought by or on behalf of the Commission, or to which the Commission is a party, and without admitting or denying the findings herein, except that Respondent has admitted the Commission's jurisdiction over him and over the matters set forth herein, Respondent has consented to the entry of this Order Instituting Proceedings Pursuant to Section 8A of the Securities Act of 1933 and Section 21C of the Securities Exchange Act of 1934, Making Findings, and Imposing a Cease-and-Desist Order ("Order") as set forth below. + + III. + On the basis of this Order and Respondent's Offer, the Commission finds 2 that: + 1. Qwest Communications International, Inc. ("Qwest") is a telecommunications company based in Denver, Colorado. On July 18, 1999, Qwest entered into a merger agreement with US West, Inc., then a "Baby Bell" telephone company for a 14-state western region. Pre-merger, Qwest was a broadband Internet-based data, voice and image communications company building fiber-optic cable networks. Qwest currently provides broadband Internet communications, data, and multimedia services on a national and global basis, as well as wireless services, local telephone service and related services in a 14-state local service area. + 2. Qwest's common stock is registered with the Commission pursuant to Section 12(b) of the Securities Exchange Act of 1934 ("Exchange Act") and the company files reports on Forms 10 K and 10 Q. Qwest common stock is traded on the New York Stock Exchange. Qwest registered exchange offerings by filing Forms S-4 with the Commission on January 17, 2001, July 12, 2001, and October 30, 2001. Moreover, on December 5, 2001, April 30, 2002, and June 28, 2002, Qwest filed Forms S-8 registration of securities to be offered to employees in employee benefit plans. On October 31, 2001 and November 5, 2001, Qwest filed Forms SC TO-I and SC TO-I/A, tender offer statements by issuer for securities to be offered to eligible employees. Many of the stock offering materials incorporated by reference Qwest's financial statements filed with the Commission. + 3. Cruciotti, age 40, of Elizabeth, Colorado, was an officer of Qwest from August 1999 until his resignation in March 2004. From August 1999 to December 2000, Cruciotti was the Senior Vice President of "Qwestlink," Qwest's construction business unit responsible for building its fiber-optic cable network in the United States. From December 2000 to May 2002, Cruciotti was the Executive Vice President of Qwest's local networks, which included Qwestlink. From May 2002 to March 2004, Cruciotti was the Executive Vice President of Qwest's network services. + 4. In the United States, through its Qwestlink business unit, Qwest constructed its fiber-optic network by laying fiber-optic cable around and between major metropolitan cities. In addition to building the network for Qwest's use, Qwestlink sold fiber-optic cable to other telecommunications companies. + 5. During 2000 and 2001, as well as in other time periods, in SEC filings and in public statements, Qwest emphasized its projected revenues and earnings growth, and focused investors on the revenues and growth generated from its nationwide fiber-optic network. Qwest could not, however, meet its projected revenues and earnings growth through legitimate means. + 6. Therefore, Qwest senior management relied on undisclosed "IRU" sales as a method to make up the difference between Qwest's real revenues and its projected revenue targets. An IRU, or Indefeasible Right of Use, is an irrevocable right to use a specific amount of fiber-optic cable or fiber capacity for a specified time period. Qwest accounted for IRUs as sales-type leases, and recognized revenue upon purported delivery and acceptance of the fiber (i.e., upfront). Qwest senior management commonly referred to IRUs as "gap fillers." + 7. In three IRU transactions executed between December 2000 and June 2001, Qwestlink persuaded purchasers of dark fiber to enter into IRU agreements ahead of any actual business requirement for the fiber. The purchasers agreed, but only on condition of having the ability to port, or exchange, the fiber purchased for other fiber in the future. In each instance, Cruciotti understood that the IRU transactions would not be executed without an agreement to port. Cruciotti also knew or was reckless in not knowing that Qwest's corporate accountants would deny upfront revenue recognition if the contracts contained any reference to portability. Portability created a future contingency defeating, under Generally Accepted Accounting Principles ("GAAP"), the upfront revenue recognition sought by Qwest. + 8. Cruciotti knew that all aspects of an IRU agreement must be contained within the four corners of the contract so that Qwest's accountants could review the agreements fully. Therefore, in order to circumvent Qwest's internal accounting controls, Cruciotti authorized his subordinates on two occasions to provide purchasers with an undisclosed verbal side agreement to port, and Cruciotti personally provided an undisclosed verbal side agreement to port on a third occasion. In each of the three instances, Cruciotti knew or was reckless in not knowing that providing an undisclosed verbal side agreement, rather than including portability in the IRU agreements, would conceal material facts from Qwest's corporate accountants. + 9. Because the three IRU sales wrongly appeared eligible for upfront revenue recognition, Cruciotti was a cause of Qwest recognizing improperly $15.1 million of revenue for the first quarter ended March 31, 2001, and $11.5 million of revenue for the second quarter ended June 30, 2001. + 10. Section 17(a) of the Securities Act makes it unlawful to employ any device, scheme, or artifice to defraud in the offer or sale of any securities. Section 10(b) of the Exchange Act and Rule 10b-5 thereunder prohibit the misrepresentation of or misleading omission of material facts in connection with the purchase or sale of securities. By engaging in the conduct described in paragraphs III.7. through III.9. above, Cruciotti was a cause of Qwest's violations of Section 17(a) of the Securities Act and Section 10(b) of the Exchange Act and Rule 10b-5 thereunder. + 11. Section 13(a) of the Exchange Act requires all issuers with securities registered under Section 12 of the Exchange Act to file periodic and other reports with the Commission containing such information as the Commission's rules prescribe. Pursuant to Section 13(a), the Commission promulgated Rules 13a-1, 13a-11 and 13a-13 that require issuers to file annual, current and quarterly reports, respectively. The reporting requirements necessarily include the requirement that the issuer supply accurate information. In addition, Rule 12b-20 requires that reports contain such further material information as may be necessary to make the required statements, in light of the circumstances under which they were made, not misleading. As a result of the conduct described in paragraphs III.7. through III.9. above, Cruciotti was a cause of Qwest's violations of Section 13(a) of the Exchange Act and Rules 12b-20, 13a-1, 13a-11 and 13a-13 thereunder. + 12. Section 13(b)(2)(A) of the Exchange Act states that every Section 12 registrant must "make and keep books, records, and accounts, which, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the issuer." Rule 13b2-1 provides that no person shall, directly or indirectly falsify or cause to be falsified, any book, record, or account subject to Section 13(b)(2)(A). As a result of the conduct described in paragraphs III.7. through III.9. above, Cruciotti committed violations of Rule 13b2-1 of the Exchange Act, and was a cause of Qwest's violations of Section 13(b)(2)(A) of the Exchange Act. + 13. Section 13(b)(5) of the Exchange Act provides that: "No person shall knowingly circumvent or knowingly fail to implement a system of internal accounting controls or knowingly falsify any book, record, or account described in [Section 13(b)(2)]." By engaging in the conduct described in paragraphs III.7. through III.9. above, Cruciotti committed violations of Section 13(b)(5) of the Exchange Act. + + IV. + + In view of the foregoing, the Commission deems it appropriate to impose the sanction agreed to in Respondent Cruciotti's Offer. + Accordingly, it is hereby ORDERED that Respondent cease and desist from committing or causing any violations and any future violations of Section 17(a) of the Securities Act, and Sections 10(b) and 13(b)(5) of the Exchange Act and Rules 10b-5 and 13b2-1 thereunder, and from causing any violations and any future violations of Sections 13(a) and 13(b)(2)(A) of the Exchange Act and Rules 12b-20, 13a-1, 13a-11 and 13a-13 thereunder. + IT IS FURTHERED ORDERED that Respondent shall, within ten days of the entry of this Order, pay disgorgement and prejudgment interest in the total amount of $204,967 to the United States Treasury. Such payment shall be: (A) made by United States postal money order, certified check, bank cashier's check or bank money order; (B) made payable to the Securities and Exchange Commission; (C) hand-delivered or mailed to the Office of Financial Management, Securities and Exchange Commission, Operations Center, 6432 General Green Way, Alexandria, Stop 0-3, VA 22312; and (D) submitted under cover letter that identifies Augustine M. Cruciotti as a Respondent in these proceedings, the file number of these proceedings, a copy of which cover letter and money order or check shall be sent to Donald M. Hoerl, Associate Director, Division of Enforcement, Securities and Exchange Commission, 1801 California Street, Suite 1500, Denver, Colorado 80202-2648. Within 10 days of receipt of the payment, the Office of Financial Management shall send the amount of payment to the Clerk of Court, U.S. District Court for the District of Colorado, to be held in such Court's Court Registry Investment System ("CRIS") account established for the matter Securities and Exchange Commission v. Augustine M. Cruciotti , until further order of such Court. + + By the Commission. + + + + Jonathan G. Katz + Secretary + + + Endnotes + 1 This matter is related to a civil action, Securities and Exchange Commission v. Augustine M. Cruciotti , in which Cruciotti has consented to pay a $150,000 penalty. + 2 The findings herein are made pursuant to Respondent's Offer and are not binding on any other person or entity in this or any other proceeding. + + + + + + + + + + + + + + + + + + + + + + + + + + + Return to top + + + + + SEC homepage + + + + + + + + + + + + + + About the SEC + + + + + + Budget & Performance + + + Careers + + + Commission Votes + + + Contact + + + Contracts + + + + + + + + Transparency + + + + + + Accessibility & Disability + + + Super Intelligence + + + FOIA + + + Inspector General + + + No FEAR Act Data + + + Ombuds + + + SEC Excess Personal Property Guidance + + + + + + + + Websites + + + + + + Investor.gov + + + Related Sites + + + USA.gov + + + + + + + + Site Information + + + + + + Plain Writing + + + Privacy & Security + + + Site Map + + + + + + + + + + + + + + + + + + Stay connected. Sign up for email updates. + + + + + + Your email address + + Sign Up + + + + + + + + + + + + X + + + + + + + + Facebook + + + + + + + + Instagram + + + + + + + + RSS + + + + + + + + YouTube + + + + + + + + Email Updates + + + + + + + + + + + + + + + + + + + diff --git a/raw/aaer/2004/AAER-2041.txt b/raw/aaer/2004/AAER-2041.txt new file mode 100644 index 0000000000000000000000000000000000000000..1fd367f2edd53b2a391d6d5941548004008eeb43 --- /dev/null +++ b/raw/aaer/2004/AAER-2041.txt @@ -0,0 +1,1485 @@ + + + + + + + + + + + + + + + + SEC.gov | Steven L. 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Haggerty + + + + + + + + + + + + Steven L. Haggerty + + + + + + + + + + + + + + + + + + + + + SECURITIES ACT OF 1933 +Release No. 8432 / June 21, 2004 + + SECURITIES EXCHANGE ACT OF 1934 +Release No. 49897 / June 21, 2004 + + ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 2041 / June 21, 2004 + + Admin. Proc. File No. 3-11526 + + + + In the Matter of + Steven L. Haggerty, + Respondent. + + : : : : : : : : + ORDER INSTITUTING PROCEEDINGS PURSUANT TO SECTION 8A OF THE SECURITIES ACT OF 1933 AND SECTION 21C OF THE SECURITIES EXCHANGE ACT OF 1934, MAKING FINDINGS, AND IMPOSING A CEASE-AND-DESIST ORDER + I. + The Securities and Exchange Commission ("Commission") deems it appropriate that public cease-and-desist proceedings be, and hereby are, instituted pursuant to Section 8A of the Securities Act of 1933 ("Securities Act") and Section 21C of the Securities Exchange Act of 1934 ("Exchange Act") against Steven L. Haggerty ("Respondent" or "Haggerty"). 1 + + II. + In anticipation of the institution of these proceedings, Respondent has submitted an Offer of Settlement (the "Offer"), which the Commission has determined to accept. Solely for the purpose of these proceedings and any other proceedings brought by or on behalf of the Commission, or to which the Commission is a party, and without admitting or denying the findings herein, except that Respondent has admitted the Commission's jurisdiction over him and over the matters set forth herein, Respondent has consented to the entry of this Order Instituting Proceedings Pursuant to Section 8A of the Securities Act of 1933 and Section 21C of the Securities Exchange Act of 1934, Making Findings, and Imposing a Cease-and-Desist Order ("Order") as set forth below. + + III. + On the basis of this Order and Respondent's Offer, the Commission finds 2 that: + 1. Qwest Communications International, Inc. ("Qwest") is a telecommunications company based in Denver, Colorado. On July 18, 1999, Qwest entered into a merger agreement with US West, Inc., then a "Baby Bell" telephone company for a 14-state western region. Pre-merger, Qwest was a broadband Internet-based data, voice and image communications company building fiber-optic cable networks. Qwest currently provides broadband Internet communications, data, and multimedia services on a national and global basis, as well as wireless services, local telephone service and related services in a 14-state local service area. + 2. Qwest's common stock is registered with the Commission pursuant to Section 12(b) of the Securities Exchange Act of 1934 ("Exchange Act") and the company files reports on Forms 10 K and 10 Q. Qwest common stock is traded on the New York Stock Exchange. Qwest registered exchange offerings by filing Forms S-4 with the Commission on January 17, 2001, July 12, 2001, and October 30, 2001. Moreover, on December 5, 2001, April 30, 2002, and June 28, 2002, Qwest filed Forms S-8 registration of securities to be offered to employees in employee benefit plans. On October 31, 2001 and November 5, 2001, Qwest filed Forms SC TO-I and SC TO-I/A, tender offer statements by issuer for securities to be offered to eligible employees. Many of the stock offering materials incorporated by reference Qwest's financial statements filed with the Commission. + 3. Haggerty, age 57, of Walnut Creek, California, was an officer of Qwest from November 1999 until his resignation in May 2003. From November 1999 to December 2000, Haggerty was a Regional Vice President of "Qwestlink," Qwest's construction business unit responsible for building its fiber-optic cable network in the United States. From December 2000 to May 2003, Haggerty was the Senior Vice President of Qwestlink. + 4. In the United States, through its Qwestlink business unit, Qwest constructed its fiber-optic network by laying fiber-optic cable around and between major metropolitan cities. In addition to building the network for Qwest's use, Qwestlink sold fiber-optic cable to other telecommunications companies. + 5. During 2001, as well as in other time periods, in SEC filings and in public statements, Qwest emphasized its projected revenues and earnings growth, and focused investors on the revenues and growth generated from its nationwide fiber-optic network. In turn, Qwest senior executives placed extraordinary pressure throughout the company to meet or exceed the revenue targets. Qwest could not, however, meet its targets through legitimate means. + 6. Therefore, Qwest senior management relied on undisclosed "IRU" sales as a method to make up the difference between Qwest's real revenues and its projected revenue targets. An IRU, or Indefeasible Right of Use, is an irrevocable right to use a specific amount of fiber-optic cable or fiber capacity for a specified time period. Qwest accounted for IRUs as sales-type leases, and recognized revenue upon purported delivery and acceptance of the fiber (i.e., upfront). Qwest senior management commonly referred to IRUs as "gap fillers." IRUs were further referred to as "heroin," and Qwest as a drug user, meaning that Qwest was addicted to using IRUs as a means to meet revenue targets. + 7. In June 2001, Qwestlink persuaded a purchaser of dark fiber to enter into an IRU agreement ahead of any actual business requirement for the fiber. The purchaser agreed, but only on condition of having the ability to port, or exchange, the fiber purchased for other fiber in the future. Haggerty understood that the IRU transaction would not be executed without an agreement to port. Haggerty also knew or was reckless in not knowing that Qwest's corporate accountants would deny upfront revenue recognition if the contracts contained any reference to portability. Portability created a future contingency defeating, under Generally Accepted Accounting Principles ("GAAP"), the upfront revenue recognition sought by Qwest. + 8. Haggerty knew that all aspects of an IRU agreement must be contained within the four corners of the contract so that Qwest's accountants could review the agreements fully. Therefore, in order to circumvent Qwest's internal accounting controls, Haggerty assisted in providing the purchaser with an undisclosed verbal side agreement to port. Haggerty knew or was reckless in not knowing that providing an undisclosed verbal side agreement, rather than including portability in the IRU agreement, would conceal material facts from Qwest's corporate accountants. + 9. Because the IRU sale wrongly appeared eligible for upfront revenue recognition, Haggerty was a cause of Qwest recognizing improperly $11.5 million of revenue for the second quarter ended June 30, 2001. + 10. Section 17(a) of the Securities Act makes it unlawful to employ any device, scheme, or artifice to defraud in the offer or sale of any securities. Section 10(b) of the Exchange Act and Rule 10b-5 thereunder prohibit the misrepresentation of or misleading omission of material facts in connection with the purchase or sale of securities. By engaging in the conduct described in paragraphs III.7. through III.9. above, Haggerty was a cause of Qwest's violations of Section 17(a) of the Securities Act and Section 10(b) of the Exchange Act and Rule 10b-5 thereunder. + 11. Section 13(a) of the Exchange Act requires all issuers with securities registered under Section 12 of the Exchange Act to file periodic and other reports with the Commission containing such information as the Commission's rules prescribe. Pursuant to Section 13(a), the Commission promulgated Rules 13a-1, 13a-11 and 13a-13 that require issuers to file annual, current and quarterly reports, respectively. The reporting requirements necessarily include the requirement that the issuer supply accurate information. In addition, Rule 12b-20 requires that reports contain such further material information as may be necessary to make the required statements, in light of the circumstances under which they were made, not misleading. As a result of the conduct described in paragraphs III.7. through III.9. above, Haggerty was a cause of Qwest's violations of Section 13(a) of the Exchange Act and Rules 12b-20, 13a-1, 13a-11 and 13a-13 thereunder. + 12. Section 13(b)(2)(A) of the Exchange Act states that every Section 12 registrant must "make and keep books, records, and accounts, which, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the issuer." Rule 13b2-1 provides that no person shall, directly or indirectly falsify or cause to be falsified, any book, record, or account subject to Section 13(b)(2)(A). As a result of the conduct described in paragraphs III.7. through III.9. above, Haggerty committed violations of Rule 13b2-1 of the Exchange Act, and was a cause of Qwest's violations of Section 13(b)(2)(A) of the Exchange Act. + 13. Section 13(b)(5) of the Exchange Act provides that: "No person shall knowingly circumvent or knowingly fail to implement a system of internal accounting controls or knowingly falsify any book, record, or account described in [Section 13(b)(2)]." By engaging in the conduct described in paragraphs III.7. through III.9. above, Haggerty committed violations of Section 13(b)(5) of the Exchange Act. + Respondent's Cooperation + 14. In determining to accept the Offer, the Commission considered Respondent's cooperation afforded the Commission staff. + Undertakings + 15. Respondent undertakes to cooperate with the Commission staff in preparing for and presenting any civil litigation or administrative proceeding concerning any transaction or related transaction that is the subject of the Order. Respondent understands that if he fails to comply with these undertakings, the Commission reserves the right to reopen this proceeding and reconsider the appropriateness of the Order imposed. + 16. In determining whether to accept the Offer, the Commission has considered these undertakings. + + IV. + + In view of the foregoing, the Commission deems it appropriate to impose the sanction agreed to in Respondent Haggerty's Offer. + Accordingly, it is hereby ORDERED that Respondent cease and desist from committing or causing any violations and any future violations of Section 17(a) of the Securities Act, and Sections 10(b) and 13(b)(5) of the Exchange Act and Rules 10b-5 and 13b2-1 thereunder, and from causing any violations and any future violations of Sections 13(a) and 13(b)(2)(A) of the Exchange Act and Rules 12b-20, 13a-1, 13a-11 and 13a-13 thereunder. + By the Commission. + + + + Jonathan G. Katz + Secretary + + + + Endnotes + 1 This matter is related to a civil action, U.S. Securities and Exchange Commission v. Steven L. Haggerty , in which Haggerty has consented to pay a $30,000 penalty. + 2 The findings herein are made pursuant to Respondent's Offer and are not binding on any other person or entity in this or any other proceeding. + + + + + + + + + + + + + + + + + + + + + + + + + + + Return to top + + + + + SEC homepage + + + + + + + + + + + + + + About the SEC + + + + + + Budget & Performance + + + Careers + + + Commission Votes + + + Contact + + + Contracts + + + + + + + + Transparency + + + + + + Accessibility & Disability + + + Super Intelligence + + + FOIA + + + Inspector General + + + No FEAR Act Data + + + Ombuds + + + SEC Excess Personal Property Guidance + + + + + + + + Websites + + + + + + Investor.gov + + + Related Sites + + + USA.gov + + + + + + + + Site Information + + + + + + Plain Writing + + + Privacy & Security + + + Site Map + + + + + + + + + + + + + + + + + + Stay connected. 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Haggerty + + + + + + + + + + + + Steven L. Haggerty + + + + + + + + + + + + + + + + + + + U.S. Securities and Exchange Commission + + Litigation Release No. 18754 / June 21, 2004 + + Accounting and Auditing Enforcement Release No. 2042 / June 21, 2004 + + June 21, 2004. SEC v. Steven L. Haggerty , Civil Action No. 04-D-1266 (MJW) (D. Colo.) + + Today, the Securities and Exchange Commission (the "Commission") filed an action for civil penalties against Steven L. Haggerty, a resident of Walnut Creek, California, and former senior vice president and officer of Qwest Communications International, Inc. ("Qwest") in the United States District Court for the District of Colorado. Without admitting or denying the allegations in the complaint, Haggerty consented to the entry of judgment by the district court requiring him to pay a civil penalty of $30,000. + + In addition, the Commission instituted, and simultaneously settled, a cease-and-desist proceeding against Haggerty. In the Order, In the Matter of Steven L. Haggerty [33-8432], the Commission found that during 2000 and 2001, as well as in other time periods, in Commission filings and in public statements, Qwest emphasized its projected revenues and earnings growth, and focused investors on the revenues and growth generated from its nationwide fiber-optic network. Qwest could not, however, meet its projected revenues and earnings growth through communications services. Therefore, Qwest senior management relied on undisclosed Indefeasible Rights of Use ("IRU") sales as a method to make up the difference between Qwest's service revenues and its projected revenue targets. An IRU is an irrevocable right to use a specific amount of fiber for a specified time period. Qwest accounted for IRUs as sales-type leases and, unlike service revenue, recognized nearly the entire amount of the IRU revenue "upfront" at the time of contract execution, rather than over the life of the IRU agreement. Qwest employees and management commonly referred to IRU sales as "gap fillers," in other words, a means to make up the shortfall between the aggressive revenue projections as publicly announced by Qwest and the service revenue earned. + + The Commission found that in June 2001, Haggerty, then a Qwest senior vice president, assisted in providing an undisclosed side agreement allowing a purchaser of fiber-optic cable to exchange (or "port") the fiber purchased for different fiber at a later date. The side agreement concealed from Qwest's accountants and outside auditors the purchaser's ability to port, since such an exchange right defeated, under generally accepted accounting principles, the upfront revenue recognition sought by Qwest. According to the Commission's findings, Qwest improperly recognized from the IRU transaction $11.5 million of revenue in the second quarter of 2001, which contributed to Qwest's ability to meet its revenue target for that quarter. As a result, Qwest's quarterly report for the second quarter of 2001, its annual report for 2001, and Qwest's earnings releases for those periods, contained materially false information. + + Without admitting or denying the findings in the Commission's Order, Haggerty has agreed to settle the Commission's claims by consenting to the entry of an administrative order requiring him to cease and desist from committing or causing any violations and any future violations of Section 17(a) of the Securities Act of 1933, and Sections 10(b) and 13(b)(5) of the Securities Exchange Act of 1934 ("Exchange Act") and Rules 10b-5 and 13b2-1 thereunder, and from causing any violations and any future violations of Sections 13(a) and 13(b)(2)(A) of the Exchange Act and Rules 12b-20, 13a-1, 13a-11 and 13a-13 thereunder. + + The Commission's complaint in the district court action alleges the same conduct referenced above. In settling for a $30,000 penalty, the Commission considered Haggerty's cooperation in connection with the Commission's ongoing investigation of this matter. + + + SEC Complaint in this matter + + + + + +  + + + + + + + + + + + + + + + + + + + + + + + + + Return to top + + + + + SEC homepage + + + + + + + + + + + + + + About the SEC + + + + + + Budget & Performance + + + Careers + + + Commission Votes + + + Contact + + + Contracts + + + + + + + + Transparency + + + + + + Accessibility & Disability + + + Super Intelligence + + + FOIA + + + Inspector General + + + No FEAR Act Data + + + Ombuds + + + SEC Excess Personal Property Guidance + + + + + + + + Websites + + + + + + Investor.gov + + + Related Sites + + + USA.gov + + + + + + + + Site Information + + + + + + Plain Writing + + + Privacy & Security + + + Site Map + + + + + + + + + + + + + + + + + + Stay connected. 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Cruciotti + + + + + + + + !function(){var e=navigator.userAgent,a=document.documentElement,n=a.className;n=n.replace("no-js","js"),/iPad|iPhone|iPod/.test(e)&&!window.MSStream&&(n+=" ua-ios"),a.className=n}(); + {"path":{"baseUrl":"\/","pathPrefix":"","currentPath":"node\/494321","currentPathIsAdmin":false,"isFront":false,"currentLanguage":"en"},"pluralDelimiter":"\u0003","suppressDeprecationErrors":true,"gtag":{"tagId":"","consentMode":false,"otherIds":[],"events":[],"additionalConfigInfo":[]},"ajaxPageState":{"libraries":"eJxdT0GOwzAI_JBdn_oei2DkeINNZLC22devlaZS2wtiBhhmcKNUTPo97jxyaXEH3GJpiZrFhQW38A4cMqgeYQGlV19JFTKpQ-kUmvQKXP7I0cO4tC2kPnbg2wVdFslM0SCHPMs3vsEPPD7J6hgOGdPCKJyoRxxqUuePHjLLAuzVjimenRJGSLW08NoBK9LUn6SHlrytVOlcpJShB63QLSpBx_WkOzHNePol4fRQo_qMPvQ36ZXsAmd99lMNr2t_GUR9n60EyX9a_wePd5ns","theme":"uswds_sec","theme_token":null},"ajaxTrustedUrl":[],"gtm":{"tagId":null,"settings":{"data_layer":"dataLayer","include_classes":false,"allowlist_classes":"","blocklist_classes":"","include_environment":false,"environment_id":"","environment_token":""},"tagIds":["GTM-TD3BKV"]},"data":{"extlink":{"extTarget":false,"extTargetAppendNewWindowDisplay":true,"extTargetAppendNewWindowLabel":"(opens in a new window)","extTargetNoOverride":false,"extNofollow":false,"extTitleNoOverride":false,"extNoreferrer":false,"extFollowNoOverride":false,"extClass":"0","extLabel":"(link is external)","extImgClass":false,"extSubdomains":true,"extExclude":".*\\.gov|http:\/\/www.xbrl.org\/utr\/2013-05-17\/utr.xml|http:\/\/www.xbrl.org\/dtr\/type\/numeric-2009-12-16.xsd|http:\/\/www.xbrl.org\/dtr\/type\/nonNumeric-2009-12-16.xsd|https:\/\/secir.secure.force.com\/ombudsman\/OMMSForm","extInclude":"","extCssExclude":".data-exempt","extCssInclude":"","extCssExplicit":"","extAlert":true,"extAlertText":"You are now leaving the SEC Website. The link you have selected is located on another server. Please click on the OK button below to proceed to the selected site. The SEC does not endorse this web site, its sponsor, or any of the policies, activities, products, or services offered on the site or by any advertiser on the site.","extHideIcons":false,"mailtoClass":"0","telClass":"","mailtoLabel":"(link sends email)","telLabel":"(link is a phone number)","extUseFontAwesome":false,"extIconPlacement":"append","extPreventOrphan":false,"extFaLinkClasses":"fa fa-external-link","extFaMailtoClasses":"fa fa-envelope-o","extAdditionalLinkClasses":"","extAdditionalMailtoClasses":"","extAdditionalTelClasses":"","extFaTelClasses":"fa fa-phone","allowedDomains":null,"extExcludeNoreferrer":""}},"user":{"uid":0,"permissionsHash":"e506dfd1572f94bd1f339f1a7483bfbded31d4a9d2bdfdca3fdbc235153380ee"}} + + + + + + + + + + + + + + Skip to search field + + + + Skip to main content + + + + + + + + + + + + + + + + + + An official website of the United States government + Here’s how you know + + + Here’s how you know + + + + + + + + + + + Official websites use .gov + + + A .gov website belongs to an official government organization in the United States. + + + + + + + + + Secure .gov websites use HTTPS + + + A lock + ( Lock A locked padlock ) + or https:// means you’ve safely connected to the .gov website. Share sensitive information only on official, secure websites. + + + + + + + + + + + + + + + + + SEC homepage + + + + + + + Menu + + + + + + + + + + + + + + Close + + + + + + + + + + + + + Search SEC.gov & EDGAR + + + + + + Search + + + + + + + + + + + + + + + + + Search Filings + + + + + + + + + Search Filings + + + + + + + + + Full Text Search + + + + + + Latest Filings + + + + + + Mutual Fund Search + + + + + + Variable Insurance Products Search + + + + + + SIC Codes + + + + + + CIK Lookup + + + + + + Public Dissemination Service (PDS) + + + + + + Search Assistance + + + + + + + + + + + + + Submit Filings + + + + + + + + + Submit Filings + + + + + + + + + EDGAR Filer Management Portal + + + + + + EDGAR Filing Portal + + + + + + Online Forms Management Portal + + + + + + EDGAR Next + + + + + + Forms Index + + + + + + Filer Support & Resources + + + + + + + + + + + + + Data & Research + + + + + + + + + Data & Research + + + + + + + + + Data Library + + + + + + Statistics & Data Visualizations + + + + + + Structured Data + + + + + + Investment Management Data + + + + + + Open Data at the SEC + + + + + + + + + + + + + Rules, Enforcement, & Compliance + + + + + + + + + + + + + + + + + + + + Rules & Regulations + + + + + + + + + Rulemaking Activity + + + + + + Submit Public Comments + + + + + + Staff Guidance + + + + + + No-Action, Interpretive, and Exemptive Letters + + + + + + Self-Regulatory Organization Rulemaking + + + + + + Public Petitions for Rulemaking + + + + + + + + + + + + + + + + + Enforcement & Litigation + + + + + + + + + Litigation Releases + + + + + + Administrative Proceedings + + + + + + Administrative Law Judge Orders and Initial Decisions + + + + + + Trading Suspensions + + + + + + Distributions to Harmed Investors + + + + + + Receiverships + + + + + + + + + + + + + + + + + Compliance + + + + + + + + + Examination Priorities + + + + + + Risk Alerts + + + + + + Compliance Outreach Program + + + + + + + + + + + + + + + + + + + + + + + Proposed Rules + + + + + + What's New + + + + + + Whistleblower Program + + + + + + + + + + + + + + + + + + + Featured Topics + + + + + + + + + Featured Topics + + + + + + + + + Crypto Task Force + + + + + + Cybersecurity + + + + + + Market Structure Analytics + + + + + + Saving and Investing for Military Personnel + + + + + + Saving and Investing for Teachers + + + + + + SEC-CFTC Harmonization Initiative + + + + + + Treasury Clearing Implementation + + + + + + + + + + + + + About + + + + + + + + + About + + + + + + + + + Mission + + + + + + Commissioners + + + + + + Divisions & Offices + + + + + + Division & Office Directors + + + + + + Advisory Committees + + + + + + Budget & Performance + + + + + + Reports & Publications + + + + + + Commission Votes + + + + + + Contact the SEC + + + + + + Careers + + + + + + + + + + + + + Submit a Tip or Complaint + + + + + + + + + + + + + + + + + Newsroom + + + | + + + Investors + + + Small Businesses + + + Whistleblowers + + + + + + + + + + + + + + + Newsroom + + + | + + + Investors + + + Small Businesses + + + Whistleblowers + + + + + + + + + + + + + + + + + Search SEC.gov & EDGAR + + + + + + Search + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + More in this Section + + + + + + + + + + + + + Enforcement & Litigation + + + + + + + Litigation Releases + + + + + Administrative Proceedings + + + + + Administrative Law Judge Orders and Initial Decisions + + + + + Trading Suspensions + + + + + Distributions to Harmed Investors + + + + + Receiverships + + + + + Electronic Filings in Administrative Proceedings (eFAP) + + + + + Rules of Practice + + + + + Applications for Reentry + + + + + Reports of Investigations + + + + + Whistleblower Program + + + + + Public Alert: Unregistered Soliciting Entities (PAUSE) + + + + + SEC Action Lookup - Individuals (SALI) + + + + + Enforcement Data Delivery Standards + + + + + Small Businesses + + + + + Appellate Briefs + + + + + Amicus / Friend of the Court Briefs + + + + + + + + + + + + + + + + + + + + + + + + + + Enforcement & Litigation + + + + + + + Litigation Releases + + + + + Administrative Proceedings + + + + + Administrative Law Judge Orders and Initial Decisions + + + + + Trading Suspensions + + + + + Distributions to Harmed Investors + + + + + Receiverships + + + + + Electronic Filings in Administrative Proceedings (eFAP) + + + + + Rules of Practice + + + + + Applications for Reentry + + + + + Reports of Investigations + + + + + Whistleblower Program + + + + + Public Alert: Unregistered Soliciting Entities (PAUSE) + + + + + SEC Action Lookup - Individuals (SALI) + + + + + Enforcement Data Delivery Standards + + + + + Small Businesses + + + + + Appellate Briefs + + + + + Amicus / Friend of the Court Briefs + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + Home + + + Enforcement and Litigation + + + Litigation Releases + + + Augustine M. Cruciotti + + + + + + + + + + + + Augustine M. Cruciotti + + + + + + + + + + + + + + + + + + + U.S. Securities and Exchange Commission + + Litigation Release No. 18755 / June 21, 2004 + + Accounting and Auditing Enforcement Release No. 2043 / June 21, 2004 + + June 21, 2004. SEC v. Augustine M. Cruciotti , Civil Action No. 04-D-1267 (MJW) (D. Colo.) + + Today, the Securities and Exchange Commission (the "Commission") filed an action for civil penalties against Augustine M. Cruciotti, a resident of Elizabeth, Colorado, and former executive vice president and officer of Qwest Communications International, Inc. ("Qwest") in the United States District Court for the District of Colorado. Without admitting or denying the allegations in the complaint, Cruciotti consented to the entry of judgment by the district court requiring him to pay a civil penalty of $150,000. + + In addition, the Commission instituted, and simultaneously settled, a cease-and-desist proceeding against Cruciotti. In the Order, In the Matter of Augustine M. Cruciotti [33-8431], the Commission found that during 2000 and 2001, as well as in other time periods, in Commission filings and in public statements, Qwest emphasized its projected revenues and earnings growth, and focused investors on the revenues and growth generated from its nationwide fiber-optic network. Qwest could not, however, meet its projected revenues and earnings growth through communications services. Therefore, Qwest senior management relied on undisclosed Indefeasible Rights of Use ("IRU") sales as a method to make up the difference between Qwest's service revenues and its projected revenue targets. An IRU is an irrevocable right to use a specific amount of fiber for a specified time period. Qwest accounted for IRUs as sales-type leases and, unlike service revenue, recognized nearly the entire amount of the IRU revenue "upfront" at the time of contract execution, rather than over the life of the IRU agreement. Qwest employees and management commonly referred to IRU sales as "gap fillers," in other words, a means to make up the shortfall between the aggressive revenue projections as publicly announced by Qwest and the service revenue earned. + + The Commission found that in three IRU transactions executed between December 2000 and June 2001, Cruciotti, then the executive vice president of Qwest's local networks, authorized subordinates to provide, or provided himself, undisclosed side agreements allowing the purchasers of fiber-optic cable to exchange (or "port") the fiber purchased for different fiber at a later date. The undisclosed side agreements concealed from Qwest's accountants and outside auditors the purchasers' ability to port, since such exchange rights defeated, under generally accepted accounting principles, the upfront revenue recognition sought by Qwest. According to the Commission's findings, Qwest improperly recognized from the three IRU transactions $26.6 million of revenue in the first and second quarters of 2001, which contributed to Qwest's ability to meet its revenue targets for those quarters. As a result, Qwest's quarterly reports for the first and second quarters of 2001, its annual report for 2001, and Qwest's earnings releases for those periods, contained materially false information. + + Without admitting or denying the findings in the Commission's Order, Cruciotti has agreed to settle the Commission's claims by consenting to the entry of an administrative order requiring him to cease and desist from committing or causing any violations and any future violations of Section 17(a) of the Securities Act of 1933, and Sections 10(b) and 13(b)(5) of the Securities Exchange Act of 1934 ("Exchange Act") and Rules 10b-5 and 13b2-1 thereunder, and from causing any violations and any future violations of Sections 13(a) and 13(b)(2)(A) of the Exchange Act and Rules 12b-20, 13a-1, 13a-11 and 13a-13 thereunder, and to pay disgorgement plus prejudgment interest thereon in the amount of $200,000. + + The Commission's complaint in the district court action alleges the same conduct referenced above. The Commission expects the penalty to be distributed pursuant to the Fair Fund provisions of Section 308(a) of the Sarbanes-Oxley Act of 2002. + + + SEC Complaint in this matter + + + + + +  + + + + + + + + + + + + + + + + + + + + + + + + + + Return to top + + + + + SEC homepage + + + + + + + + + + + + + + About the SEC + + + + + + Budget & Performance + + + Careers + + + Commission Votes + + + Contact + + + Contracts + + + + + + + + Transparency + + + + + + Accessibility & Disability + + + Super Intelligence + + + FOIA + + + Inspector General + + + No FEAR Act Data + + + Ombuds + + + SEC Excess Personal Property Guidance + + + + + + + + Websites + + + + + + Investor.gov + + + Related Sites + + + USA.gov + + + + + + + + Site Information + + + + + + Plain Writing + + + Privacy & Security + + + Site Map + + + + + + + + + + + + + + + + + + Stay connected. Sign up for email updates. + + + + + + Your email address + + Sign Up + + + + + + + + + + + + X + + + + + + + + Facebook + + + + + + + + Instagram + + + + + + + + RSS + + + + + + + + YouTube + + + + + + + + Email Updates + + + + + + + + + + + + + + + + + + + diff --git a/raw/aaer/2004/AAER-2044.txt b/raw/aaer/2004/AAER-2044.txt new file mode 100644 index 0000000000000000000000000000000000000000..0142932fd934e67f074a4e6ab77e9b156c7059b9 --- /dev/null +++ b/raw/aaer/2004/AAER-2044.txt @@ -0,0 +1,1368 @@ + + + + + + + + + + + + + + + + SEC.gov | Arthur A. Goodwin, William J. Burke and Christopher P. 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Goodwin, William J. Burke and Christopher P. Whalen + + + + + + + + + + + + Arthur A. Goodwin, William J. Burke and Christopher P. Whalen + + + + + + + + + + + + + + + + + + + U.S. SECURITIES AND EXCHANGE COMMISSION + Litigation Release No. 18758 / June 22, 2004 + + Accounting and Auditing Enforcement +Release No. 2044 / June 22, 2004 + + SECURITIES AND EXCHANGE COMMISSION v. Arthur A. Goodwin, William J. Burke and Christopher P. Whalen, (United States District Court for the District of Massachusetts) (Civil Action No. 02-11913-JTL) + + The Commission announced today the entry of a final judgment in a financial fraud case against the company executive responsible for financial reporting. On June 16, 2004, The Honorable Joseph L. Tauro, United States District Judge for the District of Massachusetts entered a judgment by consent against William J. Burke (Burke), the former chief financial officer of Interspeed, Inc. (Interspeed), a now defunct Internet hardware developer formerly located in North Andover, Massachusetts. Burke, of Andover, Massachusetts, without admitting or denying the Commission's allegations, settled the matter by consenting to the entry of an injunction against future violations of the antifraud, periodic reporting, record keeping and internal controls provisions of the federal securities laws, Section 17(a) of the Securities Act of 1933 and Sections 10(b), 13(a), 13(b)(2)(A), 13(b)(2)(B) and 13(b)(5) of the Securities Exchange Act of 1934 (Exchange Act) and Exchange Act Rules 10b-5, 12b-20, 13a-13 and 13b2-1, and Rule 13b2-2, which prohibits officers of a company from lying to auditors. In addition, Burke agreed to pay disgorgement of a performance bonus in the amount of $41,240, plus prejudgment interest in the amount of $9,804 and a civil penalty of $25,000, for a total of $76,044 and to be permanently barred from serving as an officer or director of a public company. + The Commission's complaint alleged that Burke recorded contingent sales as revenue even though he was aware of side terms which made revenue recognition improper. In addition, the complaint alleged that Burke altered accounting records to keep Interspeed's outside auditors from discovering that the sales were shams. Through the alteration, the complaint alleged, Burke made it appear that Interspeed was receiving payment for one of the sales when in fact Interspeed itself was providing funds to the customer to make the payments, a fraudulent practice known as "round-tripping." + According to the complaint, Interspeed's directors uncovered the fraudulent scheme in late September 2000, and the company restated its financial results for the first three quarters of its fiscal year ended September 30, 2000, reducing its originally reported revenue of $14 million to $5 million. Burke resigned in August 2000. + Earlier, in a related criminal case, Burke pleaded guilty and was sentenced to three years probation and a $10,000 fine in connection with criminal charges filed against him by the U.S. Attorney for the District of Massachusetts arising from the same fraudulent reporting scheme. + For further information see Litigation Releases Nos. 17758 , 18180 and 18468 . + + + + + SEC Complaint in this matter --> + + + + + + + + + + + + + + + + + + + + + + + + + + Return to top + + + + + SEC homepage + + + + + + + + + + + + + + About the SEC + + + + + + Budget & Performance + + + Careers + + + Commission Votes + + + Contact + + + Contracts + + + + + + + + Transparency + + + + + + Accessibility & Disability + + + Super Intelligence + + + FOIA + + + Inspector General + + + No FEAR Act Data + + + Ombuds + + + SEC Excess Personal Property Guidance + + + + + + + + Websites + + + + + + Investor.gov + + + Related Sites + + + USA.gov + + + + + + + + Site Information + + + + + + Plain Writing + + + Privacy & Security + + + Site Map + + + + + + + + + + + + + + + + + + Stay connected. 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Individuals (SALI) + + + + + Enforcement Data Delivery Standards + + + + + Small Businesses + + + + + Appellate Briefs + + + + + Amicus / Friend of the Court Briefs + + + + + + + + + + + + + + + + + + + + + + + + + + Enforcement & Litigation + + + + + + + Litigation Releases + + + + + Administrative Proceedings + + + + + Administrative Law Judge Orders and Initial Decisions + + + + + Trading Suspensions + + + + + Distributions to Harmed Investors + + + + + Receiverships + + + + + Electronic Filings in Administrative Proceedings (eFAP) + + + + + Rules of Practice + + + + + Applications for Reentry + + + + + Reports of Investigations + + + + + Whistleblower Program + + + + + Public Alert: Unregistered Soliciting Entities (PAUSE) + + + + + SEC Action Lookup - Individuals (SALI) + + + + + Enforcement Data Delivery Standards + + + + + Small Businesses + + + + + Appellate Briefs + + + + + Amicus / Friend of the Court Briefs + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + Home + + + Enforcement and Litigation + + + Litigation Releases + + + Gemstar-TV Guide International, Inc. + + + + + + + + + + + + Gemstar-TV Guide International, Inc. + + + + + + + + + + + + + + + + + + + + + Washington, D.C., June 23, 2004 -- The Securities and Exchange Commission today filed a complaint in federal court in Los Angeles charging Gemstar-TV Guide International, Inc. with improperly reporting its highly touted interactive program guide licensing and advertising revenues in its financial statements from 1999 through 2002. + + Gemstar agreed to settle the case by, among other things, paying a $10 million civil penalty. That money will be distributed to harmed shareholders pursuant to Section 308 of the Sarbanes-Oxley Act of 2002. In assessing the penalty amount, the Commission considered the scope and severity of Gemstar's misconduct, Gemstar's initial failure to cooperate in the Commission's investigation or undertake remedial actions, and Gemstar's significant cooperation and remediation following a change in senior management and restructuring of its corporate governance. + + Gemstar is a Los Angeles-based media and technology company that is publicly traded on the Nasdaq Stock Market. Among its business activities, Gemstar publishes TV Guide magazine and develops, licenses, and markets an interactive program guide (IPG), which is a technology that enables consumers to navigate through and select television programs. During the relevant period, Gemstar generated revenues from the IPG by licensing the technology to third parties and selling advertising space on the IPG. + + The Commission's complaint alleges that Gemstar materially overstated its revenues by nearly $250 million through the following means. + + First, Gemstar recorded revenue under expired, disputed, or non-existent agreements, and improperly reported this as IPG licensing and advertising revenue. + + Second, Gemstar recorded and reported revenue from a long-term agreement on an accelerated basis in contravention of GAAP and Gemstar's own stated and disclosed revenue recognition policy, which required the recording and reporting of such revenue ratably over the terms of the agreement. + + Third, Gemstar inflated its IPG advertising revenue by improperly recording and reporting revenue amounts from multiple-element transactions. Gemstar's recording and reporting of this revenue was improper under GAAP because Gemstar could not determine the IPG advertising's fair value. Additionally, some of those improperly reported transactions included so-called "round-trip" transactions whereby Gemstar paid money to a third party that then used those funds to buy advertising from Gemstar. Gemstar also failed to disclose that it had structured certain settlements for the purpose of creating "cookie jars" of IPG advertising revenue. + + Fourth, Gemstar improperly recorded and reported IPG advertising revenue from non-monetary and barter transactions. Gemstar's recording and reporting of this revenue was not in accordance with GAAP because it did not meet the revenue recognition requirements for such transactions and because Gemstar could not properly establish the IPG advertising's fair value. + + Finally, Gemstar improperly reported certain revenues as IPG advertising revenues when in fact those revenues were derived from the sale of print advertising. Gemstar shifted revenues by invoicing advertisers for both IPG and print advertising, but recording the revenue only as IPG revenue. + + The misstatements of revenue were reported in Forms 10-K, 10-Q, and 8-K filed with the Commission. These public statements misrepresented Gemstar's true financial performance and failed to disclose material information about that performance. The complaint further alleges that when Gemstar disclosed in its 2001 Form 10-K filed on April 1, 2002, that revenue from two transactions had been recorded under an expired licensing agreement and in a non-monetary transaction, Gemstar's stock price declined by approximately 37% the next day. + + As part of its settlement, Gemstar, without admitting or denying the allegations in the Commission's complaint, agreed to a permanent injunction against future violations of the periodic reporting provisions of Section 13(a) of the Securities Exchange Act of 1934 and Rules 12b-20, 13a-1, 13a-11, and 13a-13, recordkeeping provisions of Section 13(b)(2)(A) of the Exchange Act, and internal controls provisions of Section 13(b)(2)(B) of the Exchange Act. + + In determining to accept Gemstar's settlement offer, the Commission considered the following factors, among others, relating to the company's cooperation and remedial efforts: + + In April 2002, immediately after Gemstar filed its 2001 Form 10-K, the Commission contacted Gemstar and commenced an investigation. For nearly the next eight months, while Gemstar's former CEO and other senior officers remained in place, the company did not conduct a thorough or comprehensive internal investigation and did not take other appropriate remedial action, even when presented by the Commission with specific evidence of fraudulent conduct. + + As a result of its inadequate investigation, in August 2002 Gemstar issued a restatement reversing only approximately $20 million in revenue. Gemstar consequently continued to report overstated revenues to the investing public even after the Commission's investigation began. + + In November 2002, in connection with the restructuring of its corporate governance, Gemstar replaced its CEO, CFO, and general counsel and adopted extensive new internal controls. The company also retained a new independent auditor and a new independent outside counsel. + + Following the change in senior management, Gemstar (i) initiated a comprehensive investigation and re-audit of its financial statements; (ii) restated its financials three more times, reversing revenues by a total of $377 million; (iii) provided extensive and valuable assistance to the Commission in its investigation; and (iv) voluntarily agreed not to make certain extraordinary severance payments to its former CEO and CFO for over six months, among other things. + Additional information can be found in Litigation Release No. 18530 (January 6, 2003), No. 18199 (June 20, 2003), No. 18135 (May 13, 2003), and No. 18095 (April 18, 2003). + + + + +  + + + + + + + + + + + + + + + + + + + + + + + + + Return to top + + + + + SEC homepage + + + + + + + + + + + + + + About the SEC + + + + + + Budget & Performance + + + Careers + + + Commission Votes + + + Contact + + + Contracts + + + + + + + + Transparency + + + + + + Accessibility & Disability + + + Super Intelligence + + + FOIA + + + Inspector General + + + No FEAR Act Data + + + Ombuds + + + SEC Excess Personal Property Guidance + + + + + + + + Websites + + + + + + Investor.gov + + + Related Sites + + + USA.gov + + + + + + + + Site Information + + + + + + Plain Writing + + + Privacy & Security + + + Site Map + + + + + + + + + + + + + + + + + + Stay connected. 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Dischino + + + + + + + + + + + + Measurement Specialties, Inc., and Kirk J. Dischino + + + + + + + + + + + + + + + + + + + + + On June 28, 2004, the Commission filed a civil injunctive action in United States District Court for the District of New Jersey charging Measurement Specialties, Inc. (MSI), a New Jersey-based manufacturing company, with accounting fraud, and its former chief financial officer, Kirk J. Dischino, with accounting fraud and insider trading. Both defendants have agreed to settle the Commission's charges, without admitting or denying the allegations. MSI has agreed to pay a penalty of $1 million. Dischino has agreed to pay disgorgement and penalty totaling in excess of $450,000, and agreed to be suspended from appearing or practicing before the Commission as an accountant. + + The Commission's complaint alleges that Dischino orchestrated and carried out two separate accounting frauds at MSI. First, the complaint alleges that, from June 2000 through September 2001, at Dischino's direction, MSI materially overstated its earnings by capitalizing overhead expenses into inventory in a manner that was inconsistent with generally accepted accounting principles (GAAP) and that Dischino knew or was reckless in not knowing would mislead investors about MSI's earnings and the value of its inventory. In a manner clearly inconsistent with GAAP and over the repeated objections by MSI operating division heads and internal accounting personnel, Dischino shifted certain manufacturing and overhead costs to inventory, through accounting adjustments he termed "production credits." As a result of the production credit adjustments, MSI materially overstated its earnings and its inventory in its financial statements covering the periods ending June 30, 2000 through September 30, 2001. For the fiscal year ended March 31, 2001, largely as a resulted of the production credit adjustments, MSI overstated its pre-tax income by 435%, and for the quarters ended June 30, 2000 and June 30, 2001, the use of the production credit converted an actual loss to a reported gain. The false and misleading financial statements were contained in the company's periodic public filings and a registration statement for an offering of MSI stock that occurred on August 1, 2001 and raised $31.2 million. + + Second, the complaint alleges that, from at least October 2001 until February 2002, Dischino concealed MSI's default under its loan agreements. In connection with the preparation of the company's quarterly report for the period ended September 30, 2001 - which did not disclose the default -- Dischino allegedly falsely represented to MSI's senior management, directors, and outside auditors that the lenders had waived the default. To substantiate his claim, Dischino allegedly fabricated a written waiver by the lenders, which he provided to MSI's auditors. The complaint further alleges that Dischino engaged in insider trading by selling MSI stock in December 2001 while he was aware of the true facts of MSI's overstated earnings and inventory, and its default, thereby avoiding losses of $215,734. + + On October 28, 2002, MSI restated its previously reported financial results for the each of the reporting periods from the quarter ended June 30, 2000 through the quarter ended December 31, 2001, to correct for Dischino's erroneous inventory accounting, and other errors. The restatement reduced the value of MSI's inventory by $12.2 million, or 28%. The complaint alleges that MSI should have restated its financial results for those periods earlier, rather than simply taking a charge for the quarter ended December 31, 2001, which it announced on May 31, 2002. The complaint does not charge MSI with any violations as a consequence of its quarterly report for the December 31, 2001 quarter. + + The Commission's complaint alleges that by engaging in this conduct, the defendants violated antifraud provisions of the federal securities laws and also violated, or are secondarily liable for MSI's violations of, numerous reporting, record-keeping and internal control provisions. Specifically, the complaint alleges that: (1) MSI violated Section 17(a) of the Securities Act of 1933 ("Securities Act"), and Sections 10(b), 13(a), 13(b)(2)(A) and 13(b)(2)(B) of the Securities Exchange Act of 1934 ("Exchange Act"), and Rules 10b-5, 12b-20, 13a-1, and 13a-11 and 13a-13 thereunder; and (2) Dischino violated Section 17(a) of the Securities Act and Sections 10(b) and 13(b)(5) of the Exchange Act, and Rules 10b-5, 13b2-1 and 13b2-2 thereunder, and pursuant to Section 20(a) of the Exchange Act, as a control person, Dischino is liable for MSI's violations of Sections 13(a), 13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act and Rules 12b-20, 13a-1, 13a-11 and 13a-13 thereunder. + + Without admitting or denying the Commission's allegations, MSI and Dischino have agreed to settle the charges by consenting to permanent injunctions against further violations of the relevant antifraud, reporting, books-and-records, and internal controls provisions of the federal securities laws. In addition, MSI has agreed to pay a civil penalty in the amount of $1 million, along with nominal disgorgement of $1. Dischino has also agreed to pay disgorgement of $215,734, plus prejudgment interest of $21,932, and a civil penalty of $215,734. In addition, Dischino has also agreed to consent to the entry of an administrative order suspending him from appearing or practicing before the Commission as an accountant. + + As alleged in the complaint: + + MSI is a New Jersey corporation with its principal place of business in Fairfield, New Jersey. MSI designs, manufactures and markets a variety of sensors for electronic, automotive, military and other uses. During the relevant period, MSI had subsidiaries and facilities located in Valley Forge, Pennsylvania; Milpitas, California; Hampton, Virginia; Slough, UK; and Shenzhen, China. + + Dischino, age 45, was MSI's chief financial officer and treasurer from February 1998 until February 14, 2002, when he was fired. Dischino, a certified public accountant, resides in Waldwick, New Jersey. + The Commission acknowledges the assistance of the United States Attorney's Office for the District of New Jersey, and Special Agents of the Federal Bureau of Investigations and the United States Postal Inspection Service in the investigation of this matter. + + + SEC Complaint in this matter + + + + + +  + + + + + + + + + + + + + + + + + + + + + + + + + Return to top + + + + + SEC homepage + + + + + + + + + + + + + + About the SEC + + + + + + Budget & Performance + + + Careers + + + Commission Votes + + + Contact + + + Contracts + + + + + + + + Transparency + + + + + + Accessibility & Disability + + + Super Intelligence + + + FOIA + + + Inspector General + + + No FEAR Act Data + + + Ombuds + + + SEC Excess Personal Property Guidance + + + + + + + + Websites + + + + + + Investor.gov + + + Related Sites + + + USA.gov + + + + + + + + Site Information + + + + + + Plain Writing + + + Privacy & Security + + + Site Map + + + + + + + + + + + + + + + + + + Stay connected. 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Bakal, et al. + + + + + + + + + + + + Dennis A. Bakal, et al. + + + + + + + + + + + + + + + + + + + U.S. Securities and Exchange Commission + + Litigation Release No. 18773 / June 30, 2004 + + Accounting and Auditing Enforcement Release No. 2048 / June 30, 2004 + + Securities and Exchange Commission v. Dennis A. Bakal, et al. , United States District Court for the Northern District of Georgia, Civil Action No. 1:03-CV-2909-CC + + On June 22, 2004, the Honorable Clarence Cooper, U. S. District Judge for the Northern District of Georgia, entered a Final Judgment as to defendant Susan P. Dial (Dial), Chief Financial Officer of Professional Transportation Group, Ltd., Inc. (Professional Transportation), a trucking business headquartered in Marietta, Georgia. The judgment enjoined Dial from further violations of Section 17(a) of the Securities Act of 1933, Sections 10(b) and 13(b)(5) of the Securities Exchange Act of 1934 and Rules 10b-5, 13b2-1 and 13b2-2 thereunder, and from aiding and abetting violations of Sections 10(b), 13(a) and 13(b)(2)(A) of the Exchange Act and Rules 10b-5, 12b-20, 13a-1 and 13a-13 thereunder. Dial consented to the entry of the judgment without admitting or denying any of the allegations of the Commission's Complaint. Dial was also ordered to pay a civil penalty in the amount of $35,000, and was prohibited from acting as an officer or director of any issuer that has a class of registered securities. + + The Complaint alleges that Dial and others engaged in a scheme to inflate the company's net income by recording fictitious sales revenue and recording receivables actually earned by another trucking entity controlled by Professional Transportation's majority shareholder. This scheme caused the company to fraudulently report a net profit for each quarter of 1999, instead of a net loss and cumulative net profit of $1.4 million for the six months ended June 30, 2000, instead of a net loss of $1.7 million. + + See also: L.R. 18388 / October 2, 2003; AAER No. 1887 / October 2, 2003; Litigation Release No. 18684 / April 27, 2004; Accounting and Auditing Enforcement Release No. 1993 / April 27, 2004 + + + + + +  + + + + + + + + + + + + + + + + + + + + + + + + + Return to top + + + + + SEC homepage + + + + + + + + + + + + + + About the SEC + + + + + + Budget & Performance + + + Careers + + + Commission Votes + + + Contact + + + Contracts + + + + + + + + Transparency + + + + + + Accessibility & Disability + + + Super Intelligence + + + FOIA + + + Inspector General + + + No FEAR Act Data + + + Ombuds + + + SEC Excess Personal Property Guidance + + + + + + + + Websites + + + + + + Investor.gov + + + Related Sites + + + USA.gov + + + + + + + + Site Information + + + + + + Plain Writing + + + Privacy & Security + + + Site Map + + + + + + + + + + + + + + + + + + Stay connected. 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Individuals (SALI) + + + + + Enforcement Data Delivery Standards + + + + + Small Businesses + + + + + Appellate Briefs + + + + + Amicus / Friend of the Court Briefs + + + + + + + + + + + + + + + + + + + + + + + + + + Enforcement & Litigation + + + + + + + Litigation Releases + + + + + Administrative Proceedings + + + + + + + Information for Respondents in Administrative Proceedings  + + + + + Open Litigated Administrative Proceedings + + + + + Closed Litigated Administrative Proceedings + + + + + Commission Opinions and Adjudicatory Orders + + + + + Delinquent Filings + + + + + Stop Orders + + + + + + + + Administrative Law Judge Orders and Initial Decisions + + + + + Trading Suspensions + + + + + Distributions to Harmed Investors + + + + + Receiverships + + + + + Electronic Filings in Administrative Proceedings (eFAP) + + + + + Rules of Practice + + + + + Applications for Reentry + + + + + Reports of Investigations + + + + + Whistleblower Program + + + + + Public Alert: Unregistered Soliciting Entities (PAUSE) + + + + + SEC Action Lookup - Individuals (SALI) + + + + + Enforcement Data Delivery Standards + + + + + Small Businesses + + + + + Appellate Briefs + + + + + Amicus / Friend of the Court Briefs + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + Home + + + Enforcement and Litigation + + + Administrative Proceedings + + + Kirk J. Dischino (CPA) + + + + + + + + + + + + Kirk J. Dischino (CPA) + + + + + + + + + + + + + + + + + + + + + SECURITIES EXCHANGE ACT OF 1934 +Release No. 49984 / July 8, 2004 + + ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 2050 / July 8, 2004 + + ADMINISTRATIVE PROCEEDING +File No. 3-11539 + + + + In the Matter of + Kirk J. Dischino (CPA), + Respondent. + + : : : : : : : : : : + + ORDER INSTITUTING ADMINISTRATIVE PROCEEDINGS PURSUANT TO RULE 102(e) OF THE COMMISSION'S RULES OF PRACTICE, MAKING FINDINGS, AND IMPOSING REMEDIAL SANCTIONS I. + + The Securities and Exchange Commission ("Commission") deems it appropriate and in the public interest that public administrative proceedings be, and hereby are, instituted against Kirk J. Dischino ("Dischino" or "Respondent") pursuant to Rule 102(e)(3)(i) of the Commission's Rules of Practice. 1 + + II. + + In anticipation of the institution of these proceedings, Respondent has submitted an Offer of Settlement (the "Offer") which the Commission has determined to accept. Solely for the purpose of these proceedings and any other proceedings brought by or on behalf of the Commission, or to which the Commission is a party, and without admitting or denying the findings herein, except as to the Commission's jurisdiction over him and the subject matter of these proceedings, and the findings contained in Section III.3., below, which are admitted, Respondent consents to the entry of this Order Instituting Administrative Proceedings Pursuant to Rule 102(e) of the Commission's Rules of Practice, Making Findings, and Imposing Remedial Sanctions ("Order"), as set forth below. + + III. + + On the basis of this Order and Respondent's Offer, the Commission finds that: + + 1. At all relevant times, Dischino, age 45, was the chief financial officer of Measurement Specialties, Inc. ("MSI"), and a certified public accountant licensed to practice in the State of New Jersey. + + 2. MSI was, at all relevant times, a New Jersey corporation with its principal place of business in Fairfield, New Jersey. MSI designs, manufactures and markets a variety of sensors for electronic, automotive, military and other uses. At all relevant times, MSI's common stock was registered with the Commission pursuant to Section 12(b) of the Securities Exchange Act of 1934 ("Exchange Act"), and traded on the American Stock Exchange. + + 3. On June 30, 2004 Dischino was permanently enjoined by the United States District Court for the District of New Jersey in SEC v. Kirk J. Dischino, et al., 04 Civ. 3000 (KSH), from violating Section 17(a) of the Securities Act of 1933 and Sections 10(b) and 13(b)(5) of the Exchange Act, and Rules 10b-5, 13b2-1 and 13b2-2 thereunder, and, pursuant to Section 20(a) of the Exchange Act, from controlling any person who violates Sections 13(a), 13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act and Rules 12b-20, 13a-1, 13a-11and 13a-13 thereunder. Dischino was also ordered to pay disgorgement in the amount of $215,734, together with prejudgment interest thereon in the amount of $21,932, a civil penalty in the amount of $215,734, and was permanently barred from serving as an officer or director of a public company. + + 4. The Commission's complaint in the above-referenced action alleged, among other things, that: (a) for almost two years, Dischino fraudulently caused MSI to materially overstate its earnings in its financial reports by capitalizing overhead expenses into inventory in a manner inconsistent with generally accepted accounting principles; and (b) Dischino fraudulently caused MSI to conceal the company's September 30, 2001 default on its credit agreements. As a result of Dischino's fraudulent conduct, MSI's financial statements covering the period June 30, 2000 through September 30, 2001 were false and misleading. These financial statements were contained in MSI's periodic reports and other public filings. The Commission's complaint further alleged that Dischino engaged in insider trading, selling 40,000 shares of MSI stock between December 19 and December 26, 2001, while in possession of material, non-public information about MSI's earnings and inventory, and its default. Through this sale of MSI stock, Dischino avoided losses of $215,734. + + + IV. + + In view of the foregoing, the Commission deems it appropriate and in the public interest to impose the sanction agreed to in Respondent Dischino's Offer. + + Accordingly, it is hereby ORDERED, effective immediately, that Dischino is suspended from appearing or practicing before the Commission as an accountant. + + By the Commission. + + +Jonathan G. Katz +Secretary + + Endnotes + 1 Rule 102(e)(3)(i) provides, in relevant part, that: + + The Commission, with due regard to the public interest and without preliminary hearing, may, by order, . . . suspend from appearing or practicing before it any . . . accountant . . . who has been by name . . . permanently enjoined by any court of competent jurisdiction, by reason of his or her misconduct in an action brought by the Commission, from violating or aiding and abetting the violation of any provision of the Federal securities laws or of the rules and regulations thereunder. + + + +  + + + + + + + + + + + + + + + + + + + + + + + + + Return to top + + + + + SEC homepage + + + + + + + + + + + + + + About the SEC + + + + + + Budget & Performance + + + Careers + + + Commission Votes + + + Contact + + + Contracts + + + + + + + + Transparency + + + + + + Accessibility & Disability + + + Super Intelligence + + + FOIA + + + Inspector General + + + No FEAR Act Data + + + Ombuds + + + SEC Excess Personal Property Guidance + + + + + + + + Websites + + + + + + Investor.gov + + + Related Sites + + + USA.gov + + + + + + + + Site Information + + + + + + Plain Writing + + + Privacy & Security + + + Site Map + + + + + + + + + + + + + + + + + + Stay connected. 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Individuals (SALI) + + + + + Enforcement Data Delivery Standards + + + + + Small Businesses + + + + + Appellate Briefs + + + + + Amicus / Friend of the Court Briefs + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + Home + + + Enforcement and Litigation + + + Administrative Proceedings + + + James Dean, CPA + + + + + + + + + + + + James Dean, CPA + + + + + + + + + + + + + + + + + + + + + SECURITIES EXCHANGE ACT OF 1934 +Release No. 49992 / July 9, 2004 + + ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 2052 / July 9, 2004 + + ADMINISTRATIVE PROCEEDING +File No. 3-11540 + + + In the Matter of + JAMES DEAN, CPA + Respondent. + + : : : : : : : : : : + + ORDER INSTITUTING ADMINISTRATIVE PROCEEDINGS PURSUANT TO RULE 102(e) OF THE COMMISSION'S RULES OF PRACTICE, MAKING FINDINGS, AND IMPOSING REMEDIAL SANCTIONS I. + + The Securities and Exchange Commission ("Commission") deems it appropriate and in the public interest that public administrative proceedings be, and hereby are, instituted against James Dean ("Dean" or "Respondent") pursuant to Rule 102(e)(3)(i) of the Commission's Rules of Practice. 1 + + II. + + In anticipation of the institution of these proceedings, Respondent has submitted an Offer of Settlement (the "Offer") which the Commission has determined to accept. Solely for the purpose of these proceedings and any other proceedings brought by or on behalf of the Commission, or to which the Commission is a party, and without admitting or denying the findings herein, except as to the Commission's jurisdiction over him and the subject matter of these proceedings, and the findings contained in Section III. 3 below, which are admitted, Respondent consents to the entry of this Order Instituting Administrative Proceedings Pursuant to Rule 102(e) of the Commission's Rules of Practice, Making Findings, and Imposing Remedial Sanctions ("Order"), as set forth below. + + III. + + On the basis of this Order and Respondent's Offer, the Commission finds that: + + 1. Dean, age 34, is a certified public accountant and has been licensed by the State of New York since 1998. He was a Senior Manager and Director of Operations Finance at Symbol Technologies, Inc. ("Symbol") from November 2000 until June 2003. + + 2. Symbol, a Delaware corporation with headquarters in Holtsville, New York, is engaged in the design, manufacture, marketing and servicing of integrated mobile and wireless information management systems utilizing bar code scanners and similar devices. Symbol's common stock is, and was at all times relevant to this proceeding, registered with the Commission pursuant to Section 12(b) of the Securities Exchange Act of 1934 ("Exchange Act") and traded on the New York Stock Exchange. + + 3. On June 3, 2004, the Commission filed a complaint against Dean and others in the United States District Court for the Eastern District of New York alleging that they violated provisions of the federal securities laws. On June 9, 2004, the court entered a partial final judgment permanently enjoining Dean, by consent, from violating Sections 10(b) and 13(b)(5) of the Exchange Act and Rules 10b-5 and 13b2-1 thereunder, and from aiding and abetting violations of Sections 13(a) and 13(b)(2) and Rules 12-20, 13a-1 and 13a-13 thereunder. + + 4. The Commission's complaint alleges, among other things, that Dean and others engaged in a fraudulent scheme to manipulate Symbol's reported financial results to create the false appearance that Symbol had met or exceeded its financial projections. As a result of the scheme, Symbol restated (i) selected financial data for 1998 and 1999, including revenue and net income; (ii) the annual financial statements for 2000 and 2001; and (iii) selected quarterly data, including revenue and net income, for 2001 and the first three quarters of 2002. As part of the fraudulent scheme, Dean and others employed a number of improper accounting practices that violated generally accepted accounting principles ("GAAP"), including the manipulation of purported restructuring charges and reserves to boost earnings by reducing reported operating expenses and releasing unneeded reserves into income. Specifically, Symbol took multiple large non-recurring charges during the relevant period in connection with an acquisition and the purported relocation of its manufacturing operations. Due to the conduct of Dean and others, these charges improperly included numerous unrelated operating expenses and otherwise violated GAAP. Due to the conduct of Dean and others, Symbol also created a number of "cookie jar" reserves by overstating an inventory write-off and inflating accrued expenses when actual operating costs fell below the quarterly forecast. These excess reserves were reversed when necessary to increase earnings in future periods. + + IV. + + In view of the foregoing, the Commission deems it appropriate and in the public interest to impose the sanction agreed to in Respondent Dean's Offer. + + Accordingly, it is hereby ORDERED, effective immediately, that Dean is suspended from appearing or practicing before the Commission as an accountant. + + By the Commission. + + +Jonathan G. Katz +Secretary + + Endnotes + 1 Rule 102(e)(3)(i) provides in pertinent part as follows: + + The Commission, with due regard to the public interest and without preliminary hearing, may, by order, . . . suspend from appearing or practicing before it any . . . accountant . . . who has been by name . . . permanently enjoined by any court of competent jurisdiction, by reason of his or her misconduct in an action brought by the Commission, from violating or aiding and abetting the violation of any provision of the Federal securities laws or of the rules and regulations thereunder. + + + +  + + + + + + + + + + + + + + + + + + + + + + + + + Return to top + + + + + SEC homepage + + + + + + + + + + + + + + About the SEC + + + + + + Budget & Performance + + + Careers + + + Commission Votes + + + Contact + + + Contracts + + + + + + + + Transparency + + + + + + Accessibility & Disability + + + Super Intelligence + + + FOIA + + + Inspector General + + + No FEAR Act Data + + + Ombuds + + + SEC Excess Personal Property Guidance + + + + + + + + Websites + + + + + + Investor.gov + + + Related Sites + + + USA.gov + + + + + + + + Site Information + + + + + + Plain Writing + + + Privacy & Security + + + Site Map + + + + + + + + + + + + + + + + + + Stay connected. 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Individuals (SALI) + + + + + Enforcement Data Delivery Standards + + + + + Small Businesses + + + + + Appellate Briefs + + + + + Amicus / Friend of the Court Briefs + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + Home + + + Enforcement and Litigation + + + Administrative Proceedings + + + Levine, Hughes, and Mithuen, Inc. + + + + + + + + + + + + Levine, Hughes, and Mithuen, Inc. + + + + + + + + + + + + + + + + + + + + + SECURITIES ACT OF 1933 +Release No. 8439 / July 9, 2004 + + SECURITIES EXCHANGE ACT OF 1934 +Release No. 49993 / July 9, 2004 + + ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 2053 / July 9, 2004 + + ADMINISTRATIVE PROCEEDING +File No. 3-11541 + + + + In the Matter of + LEVINE, HUGHES, AND MITHUEN, INC., + Respondent. + + : : : : : : : : : : : + + ORDER INSTITUTING PUBLICADMINISTRATIVE AND CEASE- AND-DESIST PROCEEDINGS PURSUANT TO SECTION 8A OF THE SECURITIES ACT OF 1933, SECTION 21C OF THE SECURITIES EXCHANGE ACT OF 1934, AND RULE 102(e) OF THE COMMISSION'S RULES OF PRACTICE, MAKING FINDINGS, AND IMPOSING REMEDIAL SANCTIONS AND A CEASE-AND-DESIST ORDER I. + + The Securities and Exchange Commission ("Commission") deems it appropriate that public administrative proceedings and cease-and-desist proceedings be, and hereby are, instituted against Levine, Hughes, and Mithuen ("LHM" or "Respondent"), pursuant to Section 8A of the Securities Act of 1933 ("Securities Act"), Section 21C of the Securities Exchange Act of 1934 ("Exchange Act"), and Rule 102(e)(1)(iii) of the Commission's Rules of Practice. 1 + + + II. + + In anticipation of the institution of these proceedings, LHM has submitted an Offer of Settlement ("Offer"), which the Commission has determined to accept. Solely for the purpose of these proceedings and any other proceedings brought by or on behalf of the Commission, or to which the Commission is a party, and without admitting or denying the findings herein, except as to the Commission's jurisdiction over it and the subject matter of these proceedings, which are admitted, LHM consents to the entry of this Order Instituting Public Administrative and Cease-and-Desist Proceedings Pursuant to Section 8A of the Securities Act of 1933, Section 21C of the Securities Exchange Act of 1934, and Rule 102(e) of the Commission's Rules of Practice, Making Findings, and Imposing Remedial Sanctions and a Cease-and-Desist Order ("Order"), as set forth below. + + III. + + On the basis of this Order and Respondent's Offer, the Commission finds 2 that: + + A. Respondents + + Levine, Hughes, and Mithuen, Inc. ("LHM") is a Denver, Colorado accounting firm that served as auditors for Sport-Haley, Inc. ("Sport-Haley") from 1992 until Sport-Haley dismissed the firm in July 2000. + + B. Facts + + 1. Sport-Haley is a Denver, Colorado company that designs, markets, and contracts for the manufacture of golf apparel and outerwear. Sport-Haley's stock is registered with the Commission pursuant to Section 15(d) of the Exchange Act and is quoted on the NASDAQ National Market System. + + Improper Accounting for Work-In-Process Inventory + + 2. Beginning no later than early 1998, Sport-Haley's computerized inventory system began improperly accumulating WIP inventory. As a result of the improper accrual, Sport-Haley's WIP inventory balance ballooned to $1.7 million during its 1998 fiscal year. The 1998 WIP inventory accounted for 9.5 percent of Sport-Haley's total inventory and had increased by more than 900 percent from the prior year. Despite the fact that the 1998 WIP inventory balance was substantially higher than the expected $200,000 to $500,000 balance, Sport-Haley never physically counted the company's WIP inventory in fiscal 1998 and failed to take any reasonable steps to verify the amount of WIP inventory during the company's 1998 fiscal year. LHM did not perform sufficient audit procedures on Sport-Haley's WIP inventory. As a result, LHM recklessly allowed Sport-Haley to include materially overstated WIP inventory in its 1998 financial statements. Moreover, LHM issued an audit report containing an unqualified opinion on Sport-Haley's 1998 financial statements. + + 3. During the audit of Sport-Haley's financial statements for the fiscal year ended June 30, 1999, Sport-Haley informed LHM that WIP inventory had reached approximately $2.1 million. The LHM audit partner met with Sport-Haley's officers during the 1999 audit to determine how to properly ascertain and ultimately adjust the WIP inventory account for the company's 1999 year-end financial statements. LHM participated in creating a solution that minimized the impact on the company's gross margin, kept the 1998 financial statements intact, and ratably eliminated the overstatement during the course of the 2000 fiscal year. + + 4. With LHM's approval, Sport-Haley estimated the proper amount of WIP inventory as of June 30, 1999 to be approximately $370,000, purportedly leaving an overstated balance of approximately $1.7 million. The company then wrote off approximately $560,000 of the $1.7 million to cost of goods sold. Sport-Haley moved the remaining $1.2 million of the overstated inventory balances to a new inventory account that was to be amortized over the course of the 2000 fiscal year, at approximately $100,000 monthly. These entries lacked sufficient accounting basis. LHM failed to perform sufficient audit procedures to verify how much WIP inventory should be properly recorded in the company's 1999 year-end financial statements. Moreover, LHM knew or was reckless in not knowing that the WIP inventory adjustments made by Sport-Haley were not in accordance with generally accepted accounting principles and were misleading. + + 5. Sport-Haley did not disclose the WIP inventory error or explain the company's measures to adjust the financial statements for the WIP inventory error in its 1999 Form 10-K or Forms 10-Q for the company's first three quarters of its 2000 fiscal year. Even though LHM knew or was reckless in not knowing of the overstated WIP inventory account balance in 1999, LHM issued an audit report containing an unqualified opinion on Sport-Haley's 1999 financial statements. LHM also failed to notify Sport-Haley's audit committee that Sport-Haley's 1999 financial statements and quarterly reports for the first three quarters of its 2000 fiscal year were materially misstated. As a result of the company's improper accounting for the WIP inventory error, Sport-Haley filed its Form 10-K for the fiscal year ended June 30, 1999, including financial statements that materially overstated WIP inventory by over $1.2 million or 10 percent of total inventory. + + Improper Accounting for Period Costs + + 6. Prior to July 1, 1997, Sport-Haley began materially understating expenses related to product design, tradeshows, logo disks, property taxes and advertising by improperly deferring these costs as prepaid and fixed assets. However, Sport-Haley's capitalization of several prepaid and fixed assets was not in accordance with generally accepted accounting principles. LHM's audit workpapers contained no accounting basis for Sport-Haley's accounting treatment. LHM recklessly allowed Sport-Haley to improperly capitalize period costs and caused Sport-Haley materially to overstate its income by $164,000 or four percent of pretax income in its 1998 Form 10-K for the fiscal year ended June 30, 1998, and $159,000 or 11.5 percent in its 1999 Form 10-K for the fiscal year ended June 30, 1999. + + Improper Accounting for Discontinued Headwear Operations + + 7. In a May 28, 1999 press release, Sport-Haley announced it was discontinuing its headwear product line at the end of its 1999 fiscal year and that the sale of headwear equipment from the discontinued operations would result in an estimated $160,000 loss. After issuing the May 1999 press release, Sport-Haley revised the estimated loss on disposal of headwear equipment to $298,000 and recorded the loss in its books. Before the audit fieldwork was completed, the company reversed $206,000 of the loss without sufficient accounting support . + + 8. The LHM personnel who reviewed audit procedures on Sport-Haley's discontinued headwear operations failed to perform or direct others to perform sufficient procedures to substantiate the estimated loss on disposal of headwear equipment. Although LHM had sufficient information to know Sport-Haley anticipated significantly larger losses, it recklessly allowed Sport-Haley to record only $92,000 loss related to the headwear equipment in its 1999 Form 10-K filed with the Commission. By failing to recognize the estimated loss on disposal of headwear equipment in conformity with generally accepted accounting principles, Sport-Haley understated its 1999 pretax loss on disposal of assets by $206,000 or 69.1 percent of pretax loss. + + Document Destruction + + 9. On November 13, 2000, the Commission staff sent a letter to LHM requesting that it produce documents related to LHM's audits of Sport-Haley. At the time LHM received the staff's request for documents, LHM was in the process of conducting an internal review of the 1999 Sport-Haley audit workpapers ("November 2000 review"). As a result of this November 2000 review, LHM personnel added information to its workpapers concerning the accounting areas Sport-Haley restated including WIP inventory, discontinued operations, and prepaid expenses. Moreover, LHM partners and staff improperly altered some of the original audit workpapers during the November 2000 review by adding information to the workpapers. In addition, during the November 2000 review, an LHM staff accountant disposed of Sport-Haley documents that remained in LHM's office after the firm conducted the 1999 audit. Finally, after the November 2000 review, one of LHM's audit review partners destroyed review notes that had been created as part of LHM's review of past Sport-Haley audits. + + C. Violations + + 10. Section 17(a) of the Securities Act makes it unlawful to employ any device, scheme, or artifice to defraud in the offer or sale of any securities. Section 10(b) of the Exchange Act and Rule 10b-5 thereunder prohibit a person, in connection with the purchase or sale of a security, from making an untrue statement of a material fact or from omitting to state a material fact necessary to make statements made, in light of the circumstances under which they were made, not misleading. To establish violations of Section 17(a)(1) of the Securities Act and Section 10(b) of the Exchange Act and Rule 10b-5 thereunder ("the antifraud provisions"), a defendant must act with scienter, Aaron v. SEC , 446 U.S. 680, 695, 701-02 (1980), which the Supreme Court has defined as "a mental state embracing intent to deceive, manipulate, or defraud," Ernst & Ernst v. Hochfelder , 425 U.S. 185, 193 n.12 (1976). Scienter may be established by reckless conduct. Hackbart v. Holmes , 675 F.2d 1114, 1117 (10th Cir. 1982); Anixter v. Home-Stake Production , 77 F.3d 1215, 1225-1227 (10th Cir. 1996) (violation of antifraud provisions to prepare and certify financial statements auditor knows or is reckless in not knowing, are false). + + 11. As a result of actions taken by LHM described above, during Sport-Haley's 1998 and 1999 fiscal years, LHM caused Sport-Haley to file quarterly and annual reports with the Commission that were materially misstated and that misrepresented Sport-Haley's financial condition and results of operations. LHM knew or were reckless in not knowing that certain financial accounting and reporting practices were improper and assisted in carrying out those practices. By the conduct described above, LHM committed and caused violations of Section 17(a) of the Securities Act, Section 10(b) of the Exchange Act and Rule 10b-5 thereunder. + + 12. Section 15(d) of the Exchange Act and Rules 15d-1 and 15d-13 thereunder require issuers with securities registered under the Securities Act to file quarterly and annual reports with the Commission and to keep this information current. The obligation to file such reports embodies the requirement that they be true and correct. See, e.g., SEC v. Savoy Indus., Inc. , 587 F.2d 1149, 1165 (D.C. Cir. 1978), cert. denied , 440 U.S. 913 (1979). In addition, Rule 12b-20 requires that reports contain such further material information as may be necessary to make the required statements, in light of the circumstances under which they were made, not misleading. No showing of scienter is required to establish a violation of these provisions. Savoy Indus. , 587 F.2d at 1167. + + 13. As discussed above, during Sport-Haley's 1998 and 1999 fiscal years, Sport-Haley filed, and LHM caused Sport-Haley to file, false and misleading quarterly and annual reports with the Commission that misrepresented the financial results of Sport-Haley, materially misstating income, WIP inventory, period costs, and discontinued headwear operations. By the conduct described above, LHM caused Sport-Haley's violations of Section 15(d) of the Exchange Act and Rules 12b-20, 15d-1 and 15d-13 thereunder. + + D. Findings + + 14. Based on the foregoing, the Commission finds that LHM willfully violated and caused violations of Section 17(a) of the Securities Act and Section 10(b) of the Exchange Act and Rule 10b-5 thereunder and LHM willfully aided and abetted and caused violations of Section 15(d) of the Exchange Act and Rules 12b-20, 15d-1 and 15d-13 promulgated thereunder. + + IV. + + LHM undertakes to: + + (a) promptly establish and maintain policies and procedures to preserve working papers intact following the completion of auditing and other engagements and also during the course of, and following the conclusion of, any post-audit review, as well as enhance policies for the supervision of lower-level accountants and assistants. Within three months of the date of this Order, LHM shall certify in writing to the Commission that such policies and procedures have been established and implemented; and + + (b) after LHM certifies to the Commission that the policies and procedures set forth in paragraph (a), above, have been established and implemented, to retain, at LHM's expense, an independent consultant or consultants (the "Consultant") not unacceptable to the staff of the Commission. LHM shall require the Consultant to: (1) confirm that LHM has disseminated firm-wide, the policies and procedures referenced in paragraph (a), above; (2) conduct a review of a one-year period beginning three months from the date of this Order (the "Review Period") of LHM's compliance with the policies and procedures referenced in paragraph (a); and (3) submit a report to the Commission's staff, within 30 days of the review, detailing the results of this review. + + (c) In addition, LHM shall require the Consultant to enter into an agreement that provides that for the period of engagement and for a period of two years from completion of the engagement, the Consultant shall not enter into any employment, consultant, attorney-client, auditing or other professional relationship with LHM, or any of its present or former affiliates, directors, officers, employees, or agents acting in their capacity as such. The agreement will also provide that the Consultant will require that any firm with which he/she is affiliated or of which he/she is a member, and any person engaged to assist the Consultant in performance of his/her duties under this Order shall not, without prior written consent of the Commission's staff, enter into any employment, consultant, attorney-client, auditing or other professional relationship with LHM, or any of its present or former affiliates, directors, officers, employees, or agents acting in their capacity as such for the period of the engagement and for a period of two years after the engagement. + + (d) In determining whether to accept the Offer, the Commission has considered the undertakings set forth in paragraphs (a) through (c), above. + + V. + + In view of the foregoing, the Commission deems it appropriate to impose the sanctions agreed to in the Offers of Respondent LHM. + + Accordingly, it is hereby ORDERED, effective immediately, that: + + A. LHM shall cease and desist from committing or causing any violations and any future violations of Section 17(a) of the Securities Act, Section 10(b) of the Exchange Act and Rule 10b-5 promulgated thereunder; and from causing any violations and any future violations of Section 15(d) of the Exchange Act, and Rules 12b-20, 15d-1 and 15d-13 promulgated thereunder; + + B. LHM is denied the privilege of appearing or practicing before the Commission as an accounting firm. + + C. After three years from the date of this order, LHM may request that the Commission consider its reinstatement. + + D. LHM may request that the Commission consider its reinstatement by submitting an application (attention: Office of the Chief Accountant) to resume appearing or practicing before the Commission as an independent accounting firm. Such an application must satisfy the Commission that: + + (a) LHM is registered with the Public Company Accounting Oversight Board ("Board") in accordance with the Sarbanes-Oxley Act of 2002, and such registration continues to be effective; + + (b) LHM has been inspected by the Board and that inspection did not identify any criticisms of or potential defects in LHM's quality control system that would indicate that LHM personnel will not receive appropriate supervision or, if the Board has not conducted an inspection, has received an unqualified report relating to the firm's, most recent peer review conducted in accordance with the guidelines adopted by the former SEC Practice Section of the American Institute of Certified Public Accountants Division for CPA Firms or an organization providing equivalent oversight and quality control functions; + (c) LHM has resolved all disciplinary issues with the Board, and has complied with all terms and conditions of any sanctions imposed by the Board (other than reinstatement by the Commission); and + + (d) LHM acknowledges its responsibility, as long as LHM appears or practices before the Commission as an independent accounting firm, to comply with all requirements of the Commission and the Board, including, but not limited to, all requirements relating to registration, inspections, concurring partner reviews and quality control standards. + + E. The Commission will consider an application by Respondent to resume appearing or practicing before the Commission provided that its state CPA licenses are current and it has resolved all other disciplinary issues with the applicable state boards of accountancy. However, if state licensure is dependant on reinstatement by the Commission, the Commission will consider an application on its other merits. The Commission's review may include consideration of, in addition to the matters referenced above, any other matters relating to Respondent's character, integrity, professional conduct, or qualifications to appear or practice before the Commission. + + By the Commission. + + +Jonathan G. Katz +Secretary + + Endnotes + 1 Rule 102(e)(1)(iii) provides, in relevant part, that: + + The Commission may...deny, temporarily or permanently, the privilege of appearing or practicing before it in any way to any person who is found…to have willfully violated, or willfully aided and abetted the violation of any provision of the Federal securities laws and the rules or regulations thereunder. + + 2 The findings herein are made pursuant to Respondent's Offer of Settlement and are not binding on any other person or entity in this or any other proceeding. + + + + + +  + + + + + + + + + + + + + + + + + + + + + + + + + Return to top + + + + + SEC homepage + + + + + + + + + + + + + + About the SEC + + + + + + Budget & Performance + + + Careers + + + Commission Votes + + + Contact + + + Contracts + + + + + + + + Transparency + + + + + + Accessibility & Disability + + + Super Intelligence + + + FOIA + + + Inspector General + + + No FEAR Act Data + + + Ombuds + + + SEC Excess Personal Property Guidance + + + + + + + + Websites + + + + + + Investor.gov + + + Related Sites + + + USA.gov + + + + + + + + Site Information + + + + + + Plain Writing + + + Privacy & Security + + + Site Map + + + + + + + + + + + + + + + + + + Stay connected. 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Individuals (SALI) + + + + + Enforcement Data Delivery Standards + + + + + Small Businesses + + + + + Appellate Briefs + + + + + Amicus / Friend of the Court Briefs + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + Home + + + Enforcement and Litigation + + + Administrative Proceedings + + + Michael Karlins, CPA + + + + + + + + + + + + Michael Karlins, CPA + + + + + + + + + + + + + + + + + + + SECURITIES EXCHANGE ACT OF 1934 +Release No. 49997 / July 9, 2004 + + ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 2054 / July 9, 2004 + + ADMINISTRATIVE PROCEEDING +File No. 3-11542 + + + + + + + + In the Matter of + + Michael Karlins, CPA, + + Respondent. + + + : + : + : + : + : + : + : + : + : + : + + ORDER INSTITUTING PUBLIC ADMINISTRATIVE PROCEEDINGS PURSUANT TO RULE 102(e) OF THE COMMISSION'S RULES OF PRACTICE, MAKING FINDINGS, AND IMPOSING REMEDIAL SANCTIONS + + + + + I. + + The Securities and Exchange Commission ("Commission") deems it appropriate that public administrative proceedings be, and hereby are, instituted pursuant to Rule 102(e)(1) of the Commission's Rules of Practice [17 C.F.R. § 201.102(e)(1)] against Michael Karlins, a certified public accountant ("Karlins" or "Respondent"). 1 + + II. + + In anticipation of the institution of these proceedings, Respondent has submitted an Offer of Settlement (the "Offer"), which the Commission has determined to accept. Solely for the purpose of these proceedings and any other proceedings brought by or on behalf of the Commission, or to which the Commission is a party, and without admitting or denying the findings herein, except as to the Commission's jurisdiction over him and the subject matter of these proceedings, Respondent consents to the entry of this Order Instituting Public Administrative Proceedings Pursuant to Rule 102(e) of the Commission's Rules of Practice, Making Findings, and Imposing Remedial Sanctions ("Order"), as set forth below. + + III. + + On the basis of this Order and Respondent's Offer, the Commission finds 2 that: + + A. Michael Karlins, 45, of The Woodlands, Texas, is a certified public accountant licensed in Texas since 1983. Karlins was a partner and shareholder of Karlins, Arnold & Corbitt, P.C. ("KAC"), an accounting firm located in The Woodlands, Texas, that issued an audit report dated March 9, 1999, containing an unqualified opinion on the financial statements of Unistar Financial Service Corp. ("Unistar") for the period ended December 31, 1998. The KAC audit report was included in Unistar's Form 10-KSB filed March 31, 1999. Karlins was the engagement partner for KAC's audit of Unistar's 1998 financial statements. + + B. Unistar, a Delaware corporation headquartered in Dallas, Texas, was engaged in the insurance and financial services business. Unistar filed its 1998 annual report on Form 10-KSB with the Commission, pursuant to Section 15(d) of the Securities Exchange Act of 1934 and Rule 15d-1 thereunder. 3 + + C. In September 1998, Unistar acquired the assets and operations of U.S. Fidelity Holding Corp. ("U.S. Fidelity"), a Texas insurance holding company, from Rockford Partners, Ltd. ("Rockford"), a Bermuda-based British Virgin Islands company, in exchange for $100 million of Unistar stock. + + D. At the time of Unistar's acquisition of U.S. Fidelity, Unistar's chief executive officer, Marc A. Sparks ("Sparks"), was a controlling shareholder of Unistar and controlled Rockford. Also, Unistar's chief executive officer and its president, F. Jeffrey Nelson ("Nelson"), held executive positions in U.S. Fidelity both before and after the acquisition, and together had previously owned all of the shares of U.S. Fidelity. Sparks and Nelson transferred their U.S. Fidelity interest to Rockford in purported satisfaction of preexisting obligations. Unistar, U.S. Fidelity and Rockford were therefore under common control and were related parties. + + E. In connection with the U.S. Fidelity transaction, Unistar recorded approximately $74.5 million of goodwill, which it characterized as "customer lists" on its balance sheet. The customer lists/goodwill was materially overstated. First, since U.S. Fidelity was a related party under common control with Unistar, Unistar should not have recorded goodwill in connection with the U.S. Fidelity acquisition. 4 Second, Unistar assigned an inflated value to the assets acquired in the U.S Fidelity acquisition. Consequently, Unistar failed to comply with generally accepted accounting principles ("GAAP") and materially overstated its assets in its December 31, 1998, financial statements. + + F. Unistar's 1998 financial statements also included other significant errors. In particular, the stockholders' equity section of Unistar's balance sheet included treasury stock when, in fact, almost 85% of that treasury stock had been issued to another company. Furthermore, the financial statement footnotes reported unaudited pro forma results that incorrectly referred to gross written premiums as revenues, thus significantly overstating the company's pro forma revenues. + + G. The KAC audit report stated that the firm conducted its audit of Unistar's 1998 financial statements in accordance with generally accepted auditing standards ("GAAS") and that the financial statements presented fairly Unistar's financial position and results of operations in conformity with GAAP. In fact, however, the financial statements were not in conformity with GAAP, and Respondent did not conduct the audit of Unistar's financial statements in compliance with GAAS. Respondent failed to obtain sufficient competent evidential matter, act with due professional care, or exercise adequate professional skepticism. 5 + + H. In particular, although Respondent purportedly identified the U.S. Fidelity transaction as a major focus of the audit, he failed to give it heightened scrutiny. Respondent instead relied on oral representations from Unistar's management that the U.S. Fidelity transaction did not involve a related party, even though statements in the company's SEC filings significantly undermined those representations. Specifically, in September and October 1998 filings, Unistar disclosed that Sparks and Nelson were executive officers of U.S. Fidelity both before and after the transaction, that they had owned all of the stock of U.S. Fidelity, and that, "immediately prior" to the transaction, they transferred their shares of U.S. Fidelity to Rockford in satisfaction of preexisting obligations. Respondent, however, intentionally or recklessly ignored this information and failed to obtain sufficient competent evidential matter as to the ownership and control of Rockford. Respondent also failed to obtain sufficient competent evidential matter and to exercise adequate due professional care or professional skepticism in connection with Unistar's valuation of its customer lists/goodwill. + + I. Respondent also failed to obtain sufficient competent evidential matter to verify the September 30, 1998, asset and liability valuations for U.S. Fidelity and its subsidiaries, even though U.S. Fidelity and two of its three subsidiaries had never been audited. In addition, Respondent failed to verify that Unistar's treasury stock listed on the audited balance sheet was actually issued to and owned by the company, even though Karlins falsely noted on his audit program that he had performed this procedure. Finally, Respondent allowed Unistar to include in its financial statement footnotes unaudited pro forma results that misleadingly referred to gross written premiums as revenues, when he should have requested that Unistar show that the so-called revenues were actually gross written premiums. 6 + + J. Based on the foregoing, Respondent engaged in improper professional conduct pursuant to Rule 102(e)(1)(ii) of the Commission's Rules of Practice by: + + 1. intentional or knowing conduct, including reckless conduct, that resulted in a violation of applicable professional standards; + + 2. a single instance of highly unreasonable conduct that resulted in a violation of applicable professional standards in circumstances in which he knew, or should have known, that heightened scrutiny was warranted; and + + 3. repeated instances of unreasonable conduct, each resulting in a violation of applicable professional standards, that indicate a lack of competence to practice before the Commission. + + IV. + + In view of the foregoing, the Commission deems it appropriate to impose the sanctions agreed to in Respondent Karlin's Offer. + + Accordingly, it is hereby ORDERED, effective immediately, that: + + A. Karlins is denied the privilege of appearing or practicing before the Commission as an accountant. + + B. After three years from the date of this order, Respondent may request that the Commission consider his reinstatement by submitting an application (attention: Office of the Chief Accountant) to resume appearing and practicing before the Commission as: + + 1. a preparer or reviewer, or a person responsible for the preparation or review, of any public company's financial statements that are filed with the Commission. Such an application must satisfy the Commission that Respondent's work in his practice before the Commission will be reviewed either by the independent audit committee of the public company for which he works or in some other acceptable manner, as long as he practices before the Commission in this capacity; and/or + + 2. an independent accountant. Such an application must satisfy the Commission that: + + + + (a). Respondent, or the public accounting firm with which he is associated, is registered with the Public Company Accounting Oversight Board ("Board") in accordance with the Sarbanes-Oxley Act of 2002, and such registration continues to be effective; + + (b). Respondent, or the registered public accounting firm with which he is associated, has been inspected by the Board and that inspection did not identify any criticisms of or potential defects in the respondent's or firm's quality control system that would indicate that the respondent will not receive appropriate supervision or, if the Board has not conducted an inspection, has received an unqualified report relating to his, or the firm's, most recent peer review conducted in accordance with the guidelines adopted by the former SEC Practice Section of the American Institute of Certified Public Accountants Division for CPA Firms or an organization providing equivalent oversight and quality control functions; + + (c). Respondent has resolved all disciplinary issues with the Board, and has complied with all terms and conditions of any sanctions imposed by the Board (other than reinstatement by the Commission); and + + (d). The Respondent acknowledges his responsibility, as long as Respondent appears or practices before the Commission as an independent accountant, to comply with all requirements of the Commission and the Board, including, but not limited to, all requirements relating to registration, inspections, concurring partner reviews and quality control standards. + + + + C. The Commission will consider an application by Respondent to resume appearing or practicing before the Commission provided that his state CPA license is current and he has resolved all other disciplinary issues with the applicable state boards of accountancy. However, if state licensure is dependant on reinstatement by the Commission, the Commission will consider an application on its other merits. The Commission's review may include consideration of, in addition to the matters referenced above, any other matters relating to Respondent's character, integrity, professional conduct, or qualifications to appear or practice before the Commission. + + By the Commission. + + + Jonathan G. Katz +Secretary + + Endnotes + + + + + + + 1 Rule 102(e)(1) of the Commission's Rules of Practice provides in pertinent part that: + + + The Commission may censure a person or deny, temporarily or permanently, the privilege of appearing or practicing before it in any way to any person who is found by the Commission after notice and opportunity for hearing in the matter…: + + + (ii) to be lacking in character or integrity or to have engaged in unethical or improper professional conduct…; (iv) with respect to persons licensed to practice as accountants, "improper professional conduct: under §201.102(e)(1)(ii) means: (A) intentional or knowing conduct, including reckless conduct, that results in a violation of applicable professional standards; or (B) either of the following two types of negligent conduct: (1) a single instance of highly unreasonable conduct that results in a violation of applicable professional standards in circumstances in which an accountant knows, or should know, that heightened scrutiny is warranted. (2) repeated instances of unreasonable conduct, each resulting in a violation of applicable professional standards, that indicate a lack of competence to practice before the Commission. + + + + 2 The findings herein are made pursuant to Respondent's Offer of Settlement and are not binding on any other person or entity in this or any other proceeding. + + 3 Unistar has ceased active business operations. Its common stock was quoted on the National Association of Securities Dealers' over-the-counter Bulletin Board from August 1998 until May 1999, when it was listed on the American Stock Exchange ("AMEX"). The AMEX suspended trading in Unistar's stock in July 1999, and the company withdrew its AMEX listing in November 1999. + + 4 Unistar applied Accounting Principles Board Opinion No. 16 ("APB 16"), although that opinion does not apply to a transfer of net assets between companies under common control. APB 16, 5; see also AICPA Accounting Interpretations of APB 16, #39 (Transfers and Exchanges Between Companies Under Common Control), which provides that such transactions would be accounted for at historical cost. + + 5 GAAS requires that "[s]ufficient competent evidential matter is to be obtained through inspection, observation, inquiries, and confirmations to afford a reasonable basis for an opinion regarding the financial statements under audit." AICPA Codification of Statements on Auditing Standards ("AU") § 326.01. Moreover, "[w]hen evidential matter can be obtained from independent sources outside an entity, it provides greater assurance of reliability for the purposes of an independent audit than that secured solely within the entity." AU § 326.21a. Additionally, GAAS requires that there be "stronger grounds to sustain the independent auditor's opinion with respect to those items which are relatively more important and with respect to those in which the possibilities of material misstatement are greater…." AU § 150.04. GAAS requires auditors to exercise due professional care in performing an audit and preparing the report. AU § 230.01. Due professional care concerns what the auditor does and how well he does it. AU § 30.04. As an element of due care, GAAS requires auditors to hold an attitude of professional skepticism. AU § 230.07. + + 6 See AU § 550.04. + + + + + + + + + + + + + + + + + + + + + + + + + Return to top + + + + + SEC homepage + + + + + + + + + + + + + + About the SEC + + + + + + Budget & Performance + + + Careers + + + Commission Votes + + + Contact + + + Contracts + + + + + + + + Transparency + + + + + + Accessibility & Disability + + + Super Intelligence + + + FOIA + + + Inspector General + + + No FEAR Act Data + + + Ombuds + + + SEC Excess Personal Property Guidance + + + + + + + + Websites + + + + + + Investor.gov + + + Related Sites + + + USA.gov + + + + + + + + Site Information + + + + + + Plain Writing + + + Privacy & Security + + + Site Map + + + + + + + + + + + + + + + + + + Stay connected. 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Individuals (SALI) + + + + + Enforcement Data Delivery Standards + + + + + Small Businesses + + + + + Appellate Briefs + + + + + Amicus / Friend of the Court Briefs + + + + + + + + + + + + + + + + + + + + + + + + + + Enforcement & Litigation + + + + + + + Litigation Releases + + + + + Administrative Proceedings + + + + + Administrative Law Judge Orders and Initial Decisions + + + + + Trading Suspensions + + + + + Distributions to Harmed Investors + + + + + Receiverships + + + + + Electronic Filings in Administrative Proceedings (eFAP) + + + + + Rules of Practice + + + + + Applications for Reentry + + + + + Reports of Investigations + + + + + Whistleblower Program + + + + + Public Alert: Unregistered Soliciting Entities (PAUSE) + + + + + SEC Action Lookup - Individuals (SALI) + + + + + Enforcement Data Delivery Standards + + + + + Small Businesses + + + + + Appellate Briefs + + + + + Amicus / Friend of the Court Briefs + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + Home + + + Enforcement and Litigation + + + Litigation Releases + + + Levine, Hughes, and Mithuen, Inc. + + + + + + + + + + + + Levine, Hughes, and Mithuen, Inc. + + + + + + + + + + + + + + + + + + + U.S. SECURITIES AND EXCHANGE COMMISSION + Litigation Release No. 18778 / July 12, 2004 + + Accounting and Auditing Enforcement +Release No. 2055 / July 12, 2004 + + SEC v. Levine, Hughes, and Mithuen, Inc., Civ. Action No. 04-N-1422 (CBS) (District of Colorado) + + On Friday, July 9, 2004, the Securities and Exchange Commission ("Commission") filed a settled civil action in the United States District Court for the District of Colorado against Levine, Hughes, and Mithuen, Inc. ("LHM), former auditor of Sport-Haley, Inc., for violations of the antifraud and periodic reporting provisions of the federal securities laws. Sport-Haley, located in Denver, Colorado, designs, markets, and contracts for the manufacture of golf apparel and outerwear under the Haley-Registered Trademark label. According to the Complaint, LHM, a certified public accounting firm audited Sport-Haley's 1998 and 1999 financial statements. The Commission asserts that LHM issue audit reports containing unqualified opinions on Sport-Haley's financial statements even though the firm knew or was reckless in not knowing the company's 1998 and 1999 financial statements materially misstated work-in-process ("WIP") inventory, improperly capitalize period costs and materially misstated losses on the sale of headwear equipment. The Commission also alleged that, after LHM learned of the investigation of Sport-Haley and had received requests from the Commission for documents relating to LHM's audit of Sport-Haley's financial statements, LHM personnel added information to the audit workpapers, improperly altered some of the original audit workpapers, disposed of some Sport-Haley documents in LHM's office, and destroyed review notes that had been created as part of LHM's review of past Sport-Haley audits. + LHM agreed to settle the charges against the firm, without admitting or denying the allegations contained in the Commission's complaint. Under the terms of the settlement, LHM consented to the entry of a final judgment ordering the firm to pay civil penalties of $50,000 but not imposing a larger civil penalty based upon LHM's sworn statement of financial condition. This action was filed in combination with the Commission's release of an Order Instituting Public Administrative and Cease-and-Desist Proceedings Pursuant to Sections 8A of the Securities Act of 1933, Section 21C of the Securities Exchange Act of 1934, and Rule 102(e) of the Commission's Rules of Practice, Making Findings, and Imposing Remedial Sanctions against LHM. + + + + SEC Complaint in this matter --> + + + + + + + + + + + + + + + + + + + + + + + + + + Return to top + + + + + SEC homepage + + + + + + + + + + + + + + About the SEC + + + + + + Budget & Performance + + + Careers + + + Commission Votes + + + Contact + + + Contracts + + + + + + + + Transparency + + + + + + Accessibility & Disability + + + Super Intelligence + + + FOIA + + + Inspector General + + + No FEAR Act Data + + + Ombuds + + + SEC Excess Personal Property Guidance + + + + + + + + Websites + + + + + + Investor.gov + + + Related Sites + + + USA.gov + + + + + + + + Site Information + + + + + + Plain Writing + + + Privacy & Security + + + Site Map + + + + + + + + + + + + + + + + + + Stay connected. 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The link you have selected is located on another server. Please click on the OK button below to proceed to the selected site. The SEC does not endorse this web site, its sponsor, or any of the policies, activities, products, or services offered on the site or by any advertiser on the site.","extHideIcons":false,"mailtoClass":"0","telClass":"","mailtoLabel":"(link sends email)","telLabel":"(link is a phone number)","extUseFontAwesome":false,"extIconPlacement":"append","extPreventOrphan":false,"extFaLinkClasses":"fa fa-external-link","extFaMailtoClasses":"fa fa-envelope-o","extAdditionalLinkClasses":"","extAdditionalMailtoClasses":"","extAdditionalTelClasses":"","extFaTelClasses":"fa fa-phone","allowedDomains":null,"extExcludeNoreferrer":""}},"user":{"uid":0,"permissionsHash":"e506dfd1572f94bd1f339f1a7483bfbded31d4a9d2bdfdca3fdbc235153380ee"}} + + + + + + + + + + + + + + Skip to search field + + + + Skip to main content + + + + + + + + + + + + + + + + + + An official website of the United States government + Here’s how you know + + + Here’s how you know + + + + + + + + + + + Official websites use .gov + + + A .gov website belongs to an official government organization in the United States. + + + + + + + + + Secure .gov websites use HTTPS + + + A lock + ( Lock A locked padlock ) + or https:// means you’ve safely connected to the .gov website. Share sensitive information only on official, secure websites. + + + + + + + + + + + + + + + + + SEC homepage + + + + + + + Menu + + + + + + + + + + + + + + Close + + + + + + + + + + + + + Search SEC.gov & EDGAR + + + + + + Search + + + + + + + + + + + + + + + + + Search Filings + + + + + + + + + Search Filings + + + + + + + + + Full Text Search + + + + + + Latest Filings + + + + + + Mutual Fund Search + + + + + + Variable Insurance Products Search + + + + + + SIC Codes + + + + + + CIK Lookup + + + + + + Public Dissemination Service (PDS) + + + + + + Search Assistance + + + + + + + + + + + + + Submit Filings + + + + + + + + + Submit Filings + + + + + + + + + EDGAR Filer Management Portal + + + + + + EDGAR Filing Portal + + + + + + Online Forms Management Portal + + + + + + EDGAR Next + + + + + + Forms Index + + + + + + Filer Support & Resources + + + + + + + + + + + + + Data & Research + + + + + + + + + Data & Research + + + + + + + + + Data Library + + + + + + Statistics & Data Visualizations + + + + + + Structured Data + + + + + + Investment Management Data + + + + + + Open Data at the SEC + + + + + + + + + + + + + Rules, Enforcement, & Compliance + + + + + + + + + + + + + + + + + + + + Rules & Regulations + + + + + + + + + Rulemaking Activity + + + + + + Submit Public Comments + + + + + + Staff Guidance + + + + + + No-Action, Interpretive, and Exemptive Letters + + + + + + Self-Regulatory Organization Rulemaking + + + + + + Public Petitions for Rulemaking + + + + + + + + + + + + + + + + + Enforcement & Litigation + + + + + + + + + Litigation Releases + + + + + + Administrative Proceedings + + + + + + Administrative Law Judge Orders and Initial Decisions + + + + + + Trading Suspensions + + + + + + Distributions to Harmed Investors + + + + + + Receiverships + + + + + + + + + + + + + + + + + Compliance + + + + + + + + + Examination Priorities + + + + + + Risk Alerts + + + + + + Compliance Outreach Program + + + + + + + + + + + + + + + + + + + + + + + Proposed Rules + + + + + + What's New + + + + + + Whistleblower Program + + + + + + + + + + + + + + + + + + + Featured Topics + + + + + + + + + Featured Topics + + + + + + + + + Crypto Task Force + + + + + + Cybersecurity + + + + + + Market Structure Analytics + + + + + + Saving and Investing for Military Personnel + + + + + + Saving and Investing for Teachers + + + + + + SEC-CFTC Harmonization Initiative + + + + + + Treasury Clearing Implementation + + + + + + + + + + + + + About + + + + + + + + + About + + + + + + + + + Mission + + + + + + Commissioners + + + + + + Divisions & Offices + + + + + + Division & Office Directors + + + + + + Advisory Committees + + + + + + Budget & Performance + + + + + + Reports & Publications + + + + + + Commission Votes + + + + + + Contact the SEC + + + + + + Careers + + + + + + + + + + + + + Submit a Tip or Complaint + + + + + + + + + + + + + + + + + Newsroom + + + | + + + Investors + + + Small Businesses + + + Whistleblowers + + + + + + + + + + + + + + + Newsroom + + + | + + + Investors + + + Small Businesses + + + Whistleblowers + + + + + + + + + + + + + + + + + Search SEC.gov & EDGAR + + + + + + Search + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + More in this Section + + + + + + + + + + + + + Enforcement & Litigation + + + + + + + Litigation Releases + + + + + Administrative Proceedings + + + + + Administrative Law Judge Orders and Initial Decisions + + + + + Trading Suspensions + + + + + Distributions to Harmed Investors + + + + + Receiverships + + + + + Electronic Filings in Administrative Proceedings (eFAP) + + + + + Rules of Practice + + + + + Applications for Reentry + + + + + Reports of Investigations + + + + + Whistleblower Program + + + + + Public Alert: Unregistered Soliciting Entities (PAUSE) + + + + + SEC Action Lookup - Individuals (SALI) + + + + + Enforcement Data Delivery Standards + + + + + Small Businesses + + + + + Appellate Briefs + + + + + Amicus / Friend of the Court Briefs + + + + + + + + + + + + + + + + + + + + + + + + + + Enforcement & Litigation + + + + + + + Litigation Releases + + + + + Administrative Proceedings + + + + + Administrative Law Judge Orders and Initial Decisions + + + + + Trading Suspensions + + + + + Distributions to Harmed Investors + + + + + Receiverships + + + + + Electronic Filings in Administrative Proceedings (eFAP) + + + + + Rules of Practice + + + + + Applications for Reentry + + + + + Reports of Investigations + + + + + Whistleblower Program + + + + + Public Alert: Unregistered Soliciting Entities (PAUSE) + + + + + SEC Action Lookup - Individuals (SALI) + + + + + Enforcement Data Delivery Standards + + + + + Small Businesses + + + + + Appellate Briefs + + + + + Amicus / Friend of the Court Briefs + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + Home + + + Enforcement and Litigation + + + Litigation Releases + + + Ian Schottlaender + + + + + + + + + + + + Ian Schottlaender + + + + + + + + + + + + + + + + + + + + + The Securities and Exchange Commission today announced that on June 25, 2004, United States District Judge Lynn N. Hughes of the Southern District of Texas entered a Final Judgment against Ian Schottlaender, a former Managing Director with Canadian Imperial Bank of Commerce (CIBC) in New York City. Schottlaender consented to the Judgment. The Judgment resolves the Commission's claims against Schottlaender in the civil action filed against him, CIBC and others on December 22, 2003. As part of the Judgment, Schottlaender agreed to pay approximately $528,000 in disgorgement, penalties and prejudgment interest. + In its complaint, the Commission alleged that Schottlaender, among others, aided and abetted Enron's manipulation of its reported financial results through a series of complex structured finance transactions over a period of several years preceding Enron's bankruptcy. The 34 financings were structured as "asset sales" for accounting and financial reporting purposes, allowing Enron to hide from investors and rating agencies the true extent of its borrowings. Between June 1998 and October 2001, Enron used these disguised loans to increase reported earnings by more than $1 billion, to increase reported operating cash flows by almost $2 billion, and to avoid disclosure of more than $2.6 billion in debt on its financial statements. Enron's alternative, borrowing money using the assets as collateral, would have given Enron access to cash to meet its operating expenses, but carried with it financial reporting consequences -- increased debt, no positive effect on cash flow, and no positive effect on earnings -- that would have had a detrimental impact on Enron's credit rating and stock price. + Schottlaender consented, without admitting or denying the Commission's allegations, to the entry of a final judgment that permanently enjoins him from violating the antifraud, books and records, and internal control provisions of the federal securities laws [Sections 10(b), 13(a), 13(b)(2)(A) and (B), and 13(b)(5) of the Securities Exchange Act of 1934, and Exchange Act Rules 10b-5, 12b-20, 13a-1, 13a-13 and 13b2-1]. In addition, Schottlaender has agreed to pay a total of $528,750: disgorgement of $249,000, a penalty of $249,000 and prejudgment interest of $30,750, and has agreed to the entry of an order barring him from serving as an officer or director of a publicly traded company for a period of five years. The Commission intends to have these funds paid into a court account pursuant to the Fair Fund provisions of Section 308(a) of the Sarbanes-Oxley Act of 2002 ("Fair Fund") for ultimate distribution to victims of the fraud. + The Commission brought this action in coordination with the U.S. Department of Justice Enron Task Force, the Federal Reserve Bank of New York, and the Canadian Office of the Superintendent of Financial Institutions. + The Commission's investigation is continuing. + + + + + SEC Complaint in this matter --> + + + + + + + + + + + + + + + + + + + + + + + + + + Return to top + + + + + SEC homepage + + + + + + + + + + + + + + About the SEC + + + + + + Budget & Performance + + + Careers + + + Commission Votes + + + Contact + + + Contracts + + + + + + + + Transparency + + + + + + Accessibility & Disability + + + Super Intelligence + + + FOIA + + + Inspector General + + + No FEAR Act Data + + + Ombuds + + + SEC Excess Personal Property Guidance + + + + + + + + Websites + + + + + + Investor.gov + + + Related Sites + + + USA.gov + + + + + + + + Site Information + + + + + + Plain Writing + + + Privacy & Security + + + Site Map + + + + + + + + + + + + + + + + + + Stay connected. 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Individuals (SALI) + + + + + Enforcement Data Delivery Standards + + + + + Small Businesses + + + + + Appellate Briefs + + + + + Amicus / Friend of the Court Briefs + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + Home + + + Enforcement and Litigation + + + Administrative Proceedings + + + Mary Beth Stevens and Paul W. Oliver, Jr. + + + + + + + + + + + + Mary Beth Stevens and Paul W. Oliver, Jr. + + + + + + + + + + + + + + + + + + + + + SECURITIES EXCHANGE ACT OF 1934 +Release No. 50053 / July 21, 2004 + + ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 2057 / July 21, 2004 + + Admin. Proc. File No. 3-11554 + + + + In the Matter of + Michael H. Taber, CPA, + Respondents. + + : : : : : : : : : : + ORDER INSTITUTING ADMINISTRATIVE PROCEEDINGS PURSUANT TO RULE 102(e) OF THE COMMISSION'S RULES OF PRACTICE, MAKING FINDINGS, AND IMPOSING REMEDIAL SANCTIONS + I. + The Securities and Exchange Commission ("Commission") deems it appropriate and in the public interest to institute public administrative proceedings against Michael Taber pursuant to Rule 102(e)(3)(i) of the Commission's Rules of Practice. 1 + II. + In anticipation of the institution of these proceedings, Taber has submitted an Offer of Settlement (the "Offer"), which the Commission has determined to accept. Solely for the purpose of these proceedings and any other proceedings brought by or on behalf of the Commission, or to which the Commission is a party, and without admitting or denying the findings herein, except as to the Commission's jurisdiction over him and the subject matter of these proceedings, and the findings contained in Section III.3. below, which are admitted, Taber consents to the entry of this Order Instituting Administrative Proceedings Pursuant to Rule 102(e) of the Commission's Rules of Practice, Making Findings, and Imposing Remedial Sanctions ("Order"), as set forth below. + III. + On the basis of this Order and Taber's Offer, the Commission finds that: + 1. Taber, age 58, is and has been a certified public accountant licensed to practice in the state of New York. Taber served as Chief Financial Officer and Vice President of Finance of Del Global Technologies, Inc. ("Del") during the period relevant to the conduct described herein and continuing until his termination in January 2001. + 2. Del was, at all relevant times, a New York corporation headquartered in Valhalla, New York. Del designs, manufactures and markets medical imaging and diagnostic systems, as well as power conversion and electronic noise suppression subsystems for medical and industrial applications. At all relevant times, Del's common stock was registered with the Commission pursuant to Section 12(g) of the Securities Exchange Act of 1934 ("Exchange Act") and traded on the NASDAQ National Market. + 3. On June 7, 2004, a final judgment was entered against Taber in the civil action entitled Securities and Exchange Commission v. Del Global Technologies, Inc., et al. , No. 04 CV 4092, in the United States District Court for the Southern District of New York. The final judgment, among other things, permanently enjoined Taber from future violations of Securities Act of 1933 Section 17(a), Exchange Act Sections 10(b) and 13(b)(5) and Exchange Act Rules 10b-5, 13b2 1 and 13b2-2. + 4. The Commission's complaint in the civil action alleged, among other things, that Taber participated in a fraudulent scheme which resulted in the filing of financial statements that, in contravention of generally accepted accounting principles ("GAAP"), materially overstated Del's revenues for every fiscal quarter from fiscal year 1997 through fiscal year 2000. The complaint further alleged that Taber misled Del's outside accountants in connection with their review of Del's financial statements for the fiscal periods from 1997 through 2000 by failing to provide them with material facts concerning the company's financial statements. + IV. + In view of the foregoing, the Commission deems it appropriate and in the public interest to impose the sanction agreed to in Taber's Offer. + Accordingly, it is hereby ORDERED, effective immediately, that: + Taber is suspended from appearing or practicing before the Commission as an accountant. + By the Commission. + + + + Jonathan G. Katz + Secretary + + + Endnotes + 1 Rule 102(e)(3)(i) provides, in relevant part, that: + The Commission, with due regard to the public interest and without preliminary hearing, may, by order, . . . suspend from appearing or practicing before it any . . . accountant . . . who has been by name . . . permanently enjoined by any court of competent jurisdiction, by reason of his or her misconduct in an action brought by the Commission, from violating or aiding and abetting the violation of any provision of the Federal securities laws or of the rules and regulations thereunder. + + +See also the Order in this matter --> + + + + + + + + + + + + + + + + + + + + + + + + + + + Return to top + + + + + SEC homepage + + + + + + + + + + + + + + About the SEC + + + + + + Budget & Performance + + + Careers + + + Commission Votes + + + Contact + + + Contracts + + + + + + + + Transparency + + + + + + Accessibility & Disability + + + Super Intelligence + + + FOIA + + + Inspector General + + + No FEAR Act Data + + + Ombuds + + + SEC Excess Personal Property Guidance + + + + + + + + Websites + + + + + + Investor.gov + + + Related Sites + + + USA.gov + + + + + + + + Site Information + + + + + + Plain Writing + + + Privacy & Security + + + Site Map + + + + + + + + + + + + + + + + + + Stay connected. 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Saitta, CPA + + + + + + + + !function(){var e=navigator.userAgent,a=document.documentElement,n=a.className;n=n.replace("no-js","js"),/iPad|iPhone|iPod/.test(e)&&!window.MSStream&&(n+=" ua-ios"),a.className=n}(); + {"path":{"baseUrl":"\/","pathPrefix":"","currentPath":"node\/367521","currentPathIsAdmin":false,"isFront":false,"currentLanguage":"en"},"pluralDelimiter":"\u0003","suppressDeprecationErrors":true,"gtag":{"tagId":"","consentMode":false,"otherIds":[],"events":[],"additionalConfigInfo":[]},"ajaxPageState":{"libraries":"eJxdT0GOwzAI_JBdn_oei2DkeINNZLC22devlaZS2wtiBhhmcKNUTPo97jxyaXEH3GJpiZrFhQW38A4cMqgeYQGlV19JFTKpQ-kUmvQKXP7I0cO4tC2kPnbg2wVdFslM0SCHPMs3vsEPPD7J6hgOGdPCKJyoRxxqUuePHjLLAuzVjimenRJGSLW08NoBK9LUn6SHlrytVOlcpJShB63QLSpBx_WkOzHNePol4fRQo_qMPvQ36ZXsAmd99lMNr2t_GUR9n60EyX9a_wePd5ns","theme":"uswds_sec","theme_token":null},"ajaxTrustedUrl":[],"gtm":{"tagId":null,"settings":{"data_layer":"dataLayer","include_classes":false,"allowlist_classes":"","blocklist_classes":"","include_environment":false,"environment_id":"","environment_token":""},"tagIds":["GTM-TD3BKV"]},"data":{"extlink":{"extTarget":false,"extTargetAppendNewWindowDisplay":true,"extTargetAppendNewWindowLabel":"(opens in a new window)","extTargetNoOverride":false,"extNofollow":false,"extTitleNoOverride":false,"extNoreferrer":false,"extFollowNoOverride":false,"extClass":"0","extLabel":"(link is external)","extImgClass":false,"extSubdomains":true,"extExclude":".*\\.gov|http:\/\/www.xbrl.org\/utr\/2013-05-17\/utr.xml|http:\/\/www.xbrl.org\/dtr\/type\/numeric-2009-12-16.xsd|http:\/\/www.xbrl.org\/dtr\/type\/nonNumeric-2009-12-16.xsd|https:\/\/secir.secure.force.com\/ombudsman\/OMMSForm","extInclude":"","extCssExclude":".data-exempt","extCssInclude":"","extCssExplicit":"","extAlert":true,"extAlertText":"You are now leaving the SEC Website. 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Individuals (SALI) + + + + + Enforcement Data Delivery Standards + + + + + Small Businesses + + + + + Appellate Briefs + + + + + Amicus / Friend of the Court Briefs + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + Home + + + Enforcement and Litigation + + + Administrative Proceedings + + + Raymond A. Saitta, CPA + + + + + + + + + + + + Raymond A. Saitta, CPA + + + + + + + + + + + + + + + + + + + SECURITIES ACT OF 1933 Release No. 8450 / July 22, 2004 + + SECURITIES EXCHANGE ACT OF 1934 Release No. 50062 / July 22, 2004 + + ACCOUNTING AND AUDITING ENFORCEMENT Release No. 2058 / July 22, 2004 + + ADMINISTRATIVE PROCEEDING File No. 3-11556 + + + + + + + + In the Matter of + + RAYMOND A. SAITTA, CPA, + + Respondent. + + + : + : + : + : + : + : + : + : + : + : + + ORDER INSTITUTING PUBLICADMINISTRATIVE AND CEASE- AND-DESIST PROCEEDINGS PURSUANT TO SECTION 8A OF THE SECURITIES ACT OF 1933, SECTION 21C OF THE SECURITIES EXCHANGE ACT OF 1934, AND RULE 102(e) OF THE COMMISSION'S RULES OF PRACTICE, MAKING FINDINGS, AND IMPOSING REMEDIAL SANCTIONS AND A CEASE-AND-DESIST ORDER + + + + + I. + + The Securities and Exchange Commission ("Commission") deems it appropriate that public administrative proceedings and cease-and-desist proceedings be, and hereby are, instituted against Raymond A. Saitta ("Saitta" or "Respondent"), pursuant to Section 8A of the Securities Act of 1933 ("Securities Act"), Section 21C of the Securities Exchange Act of 1934 ("Exchange Act"), and Rule 102(e)(1)(iii) of the Commission's Rules of Practice. 1 + + II. + + In anticipation of the institution of these proceedings, Respondent has submitted an Offer of Settlement ("Offer"), which the Commission has determined to accept. Solely for the purpose of these proceedings and any other proceedings brought by or on behalf of the Commission, or to which the Commission is a party, and without admitting or denying the findings herein, except as to the Commission's jurisdiction over him and the subject matter of these proceedings, which are admitted, Respondent consents to the entry of this Order Instituting Public Administrative and Cease-and-Desist Proceedings Pursuant to Section 8A of the Securities Act of 1933, Section 21C of the Securities Exchange Act of 1934, and Rule 102(e) of the Commission's Rules of Practice, Making Findings, and Imposing Remedial Sanctions and a Cease-and-Desist Order ("Order"), as set forth below. + + III. + + On the basis of this Order and Respondent's Offer, the Commission finds 2 that: + + A. Respondent + + Saitta, age 54, has been a certified public accountant ("CPA") licensed to practice in Colorado since 1981. Saitta was vice president, director of accounting and auditing services, and was a 19 percent shareholder of Levine, Hughes, and Mithuen, Inc. ("LHM"), a Denver, Colorado accounting firm. LHM served as auditors for Sport-Haley, Inc. ("Sport-Haley") from 1992 until July 2000. Saitta was the audit partner responsible for all LHM's audits and quarterly reviews of Sport-Haley's financial statements from 1992 until LHM was dismissed in July 2000. + + B. Facts + + 1. Sport-Haley is a Denver, Colorado company that designs, markets, and contracts for the manufacture of golf apparel and outerwear. Sport-Haley's stock is registered with the Commission pursuant to Section 15(d) of the Exchange Act and is quoted on the NASDAQ National Market System. + + Improper Accounting for Work-In-Process Inventory + + 2. Beginning no later than early 1998, Sport-Haley's computerized inventory system began improperly accumulating WIP inventory. As a result of the improper accrual, Sport-Haley's WIP inventory balance ballooned to $1.7 million during its 1998 fiscal year. The 1998 WIP inventory accounted for 9.5 percent of Sport-Haley's total inventory and had increased by more than 900 percent from the prior year. Despite the fact that the 1998 WIP inventory balance was substantially higher than the expected $200,000 to $500,000 balance, Sport-Haley never physically counted the company's WIP inventory in fiscal 1998 and failed to take any reasonable steps to verify the amount of WIP inventory during the company's 1998 fiscal year. Saitta, the audit partner responsible for LHM's audit of Sport-Haley's 1998 financial statements, did not perform, or direct others to perform, sufficient audit procedures on Sport-Haley's WIP inventory. As a result, Saitta recklessly allowed Sport-Haley to include materially overstated WIP inventory in its 1998 financial statements. Moreover, Saitta caused LHM to issue an audit report containing an unqualified opinion on Sport-Haley's 1998 financial statements. + + 3. During the audit of Sport-Haley's financial statements for the fiscal year ended June 30, 1999, Sport-Haley informed Saitta that WIP inventory had reached approximately $2.1 million. Saitta met with Sport-Haley's officers during the 1999 audit to determine how to properly ascertain and ultimately adjust the WIP inventory account for the company's 1999 year-end financial statements. Saitta participated in creating a solution that minimized the impact on the company's gross margin, kept the 1998 financial statements intact, and ratably eliminated the overstatement during the course of the 2000 fiscal year. + + 4. With Saitta's approval, Sport-Haley estimated the proper amount of WIP inventory as of June 30, 1999 to be approximately $370,000, purportedly leaving an overstated balance of approximately $1.7 million. The company then wrote off approximately $560,000 of the $1.7 million to cost of goods sold. Sport-Haley moved the remaining $1.2 million of the overstated inventory balances to a new inventory account that was to be amortized over the course of the 2000 fiscal year, at approximately $100,000 monthly. These entries lacked sufficient accounting basis. Saitta, as the audit partner responsible for LHM's audit of Sport-Haley's 1999 financial statements, failed to perform sufficient audit procedures to verify how much WIP inventory should be properly recorded in the company's 1999 year-end financial statements. Moreover, Saitta knew or was reckless in not knowing that the WIP inventory adjustments made by Sport-Haley were not in accordance with generally accepted accounting principles and were misleading. + + 5. Sport-Haley did not disclose the WIP inventory error or explain the company's measures to adjust the financial statements for the WIP inventory error in its 1999 Form 10-K or Forms 10-Q for the company's first three quarters of its 2000 fiscal year. Even though LHM and Saitta knew or were reckless in not knowing of the overstated WIP inventory account balance in 1999, LHM issued, and Saitta caused LHM to issue, an audit report containing an unqualified opinion on Sport-Haley's 1999 financial statements. Saitta also failed to notify Sport-Haley's audit committee that Sport-Haley's 1999 financial statements and quarterly reports for the first three quarters of its 2000 fiscal year were materially misstated. As a result of the company's improper accounting for the WIP inventory error, Sport-Haley filed its Form 10-K for the fiscal year ended June 30, 1999, including financial statements that materially overstated WIP inventory by over $1.2 million or 10 percent of total inventory. + + Improper Accounting for Period Costs + + 6. Prior to July 1, 1997, Sport-Haley began materially understating expenses related to product design, tradeshows, logo disks, property taxes and advertising by improperly deferring these costs as prepaid and fixed assets. However, Sport-Haley's capitalization of several prepaid and fixed assets was not in accordance with generally accepted accounting principles. Since as early as 1997, Saitta reviewed workpapers relating to Sport-Haley's period costs. In addition, during Sport-Haley's 1998 and 1999 fiscal years, Saitta supervised the audit relating to period costs. However, LHM's audit workpapers contained no accounting basis for Sport-Haley's accounting treatment and Saitta failed adequately to review 1999 audit workpapers relating to period costs. Moreover, during the 1999 audit, Saitta failed to review the work performed by the audit manager and ensure that all work performed by junior personnel regarding many of the period costs was reviewed adequately as required by generally accepted auditing standards. Saitta recklessly allowed Sport-Haley to improperly capitalize period costs and caused Sport-Haley materially to overstate its income by $164,000 or four percent of pretax income in its 1998 Form 10-K for the fiscal year ended June 30, 1998, and $159,000 or 11.5 percent in its 1999 Form 10-K for the fiscal year ended June 30, 1999. + + Improper Accounting for Discontinued Headwear Operations + + 7. In a May 28, 1999 press release, Sport-Haley announced it was discontinuing its headwear product line at the end of its 1999 fiscal year and that the sale of headwear equipment from the discontinued operations would result in an estimated $160,000 loss. After issuing the May 1999 press release, Sport-Haley revised the estimated loss on disposal of headwear equipment to $298,000 and recorded the loss in its books. Before the audit fieldwork was completed, the company reversed $206,000 of the loss without sufficient accounting support. + + 8. Saitta, who reviewed audit procedures on Sport-Haley's discontinued headwear operations, failed to perform or direct others to perform sufficient procedures to substantiate the estimated loss on disposal of headwear equipment. Although Saitta had sufficient information to know Sport-Haley anticipated significantly larger losses, he recklessly allowed Sport-Haley to record only $92,000 loss related to the headwear equipment in its 1999 Form 10-K filed with the Commission. By failing to recognize the estimated loss on disposal of headwear equipment in conformity with generally accepted accounting principles, Sport-Haley understated its 1999 pretax loss on disposal of assets by $206,000 or 69.1 percent of pretax loss. + + Document Destruction + + 9. On November 13, 2000, the Commission staff sent a letter to Saitta requesting that he produce documents related to LHM's audits of Sport-Haley. At the time Saitta received the staff's request for documents, LHM was in the process of conducting an internal review of the 1999 Sport-Haley audit workpapers ("November 2000 review"). As a result of this November 2000 review, Saitta added information to its workpapers concerning the accounting areas Sport-Haley restated including WIP inventory, discontinued operations, and prepaid expenses. Moreover, Saitta improperly altered some of the original audit workpapers during the November 2000 review by adding information to the workpapers. + + C. Violations + + 10. Section 17(a) of the Securities Act makes it unlawful to employ any device, scheme, or artifice to defraud in the offer or sale of any securities. Section 10(b) of the Exchange Act and Rule 10b-5 thereunder prohibit a person, in connection with the purchase or sale of a security, from making an untrue statement of a material fact or from omitting to state a material fact necessary to make statements made, in light of the circumstances under which they were made, not misleading. To establish violations of Section 17(a)(1) of the Securities Act and Section 10(b) of the Exchange Act and Rule 10b-5 thereunder ("the antifraud provisions"), a defendant must act with scienter, Aaron v. SEC , 446 U.S. 680, 695, 701-02 (1980), which the Supreme Court has defined as "a mental state embracing intent to deceive, manipulate, or defraud," Ernst & Ernst v. Hochfelder , 425 U.S. 185, 193 n.12 (1976). Scienter may be established by reckless conduct. Hackbart v. Holmes , 675 F.2d 1114, 1117 (10th Cir. 1982); Anixter v. Home-Stake Production , 77 F.3d 1215, 1225-1227 (10th Cir. 1996) (violation of antifraud provisions to prepare and certify financial statements auditor knows or is reckless in not knowing, are false). + + 11. As a result of actions taken by Saitta, described above, during Sport-Haley's 1998 and 1999 fiscal years, Saitta caused Sport-Haley to file quarterly and annual reports with the Commission that were materially misstated and that misrepresented Sport-Haley's financial condition and results of operations. Saitta knew or was reckless in not knowing that certain financial accounting and reporting practices were improper and assisted in carrying out those practices. By his conduct described above, Saitta committed and caused violations of Section 17(a) of the Securities Act, Section 10(b) of the Exchange Act and Rule 10b-5 thereunder. + + 12. Section 15(d) of the Exchange Act and Rules 15d-1 and 15d-13 thereunder require issuers with securities registered under the Securities Act to file quarterly and annual reports with the Commission and to keep this information current. The obligation to file such reports embodies the requirement that they be true and correct. See, e.g., SEC v. Savoy Indus., Inc. , 587 F.2d 1149, 1165 (D.C. Cir. 1978), cert. denied, 440 U.S. 913 (1979). In addition, Rule 12b-20 requires that reports contain such further material information as may be necessary to make the required statements, in light of the circumstances under which they were made, not misleading. No showing of scienter is required to establish a violation of these provisions. Savoy Indus. , 587 F.2d at 1167. + + 13. As discussed above, during Sport-Haley's 1998 and 1999 fiscal years, Sport-Haley filed, and Saitta caused Sport-Haley to file, false and misleading quarterly and annual reports with the Commission that misrepresented the financial results of Sport-Haley, materially misstating income, WIP inventory, period costs, and discontinued headwear operations. By his conduct described above, Saitta caused Sport-Haley's violations of Section 15(d) of the Exchange Act and Rules 12b-20, 15d-1 and 15d-13 thereunder. + + D. Findings + + 14. Based on the foregoing, the Commission finds that Saitta willfully violated and caused violations of Section 17(a) of the Securities Act and Section 10(b) of the Exchange Act and Rule 10b-5 thereunder and that he willfully aided and abetted and caused violations of Section 15(d) of the Exchange Act and Rules 12b-20, 15d-1 and 15d-13 thereunder. + + IV. + + In view of the foregoing, the Commission deems it appropriate to impose the sanctions agreed to in Saitta's Offer. + + Accordingly, it is hereby ORDERED, effective immediately, that: + + A. Saitta shall cease and desist from committing or causing any violations and any future violations of Section 17(a) of the Securities Act, Section 10(b) of the Exchange Act and Rule 10b-5 thereunder; and from causing any violations and any future violations of Section 15(d) of the Exchange Act, and Rules 12b-20, 15d-1 and 15d-13 thereunder. + + B. Saitta is denied the privilege of appearing or practicing before the Commission as an accountant. + + C. After five years from the date of this order, Saitta may request that the Commission consider his reinstatement by submitting an application (attention: Office of the Chief Accountant) to resume appearing or practicing before the Commission as: + + 1. a preparer or reviewer, or a person responsible for the preparation or review, of any public company's financial statements that are filed with the Commission. Such an application must satisfy the Commission that Saitta's work in his practice before the Commission will be reviewed either by the independent audit committee of the public company for which he works or in some other acceptable manner, as long as he practices before the Commission in this capacity; and/or + + 2. an independent accountant. Such an application must satisfy the Commission that: + + + + (a) Saitta, or the public accounting firm with which he is associated, is registered with the Public Company Accounting Oversight Board ("Board") in accordance with the Sarbanes-Oxley Act of 2002, and such registration continues to be effective; + + (b) Saitta, or the registered public accounting firm with which he is associated, has been inspected by the Board and that inspection did not identify any criticisms of or potential defects in the Respondent's or the firm's quality control system that would indicate that the respondent will not receive appropriate supervision or, if the Board has not conducted an inspection, has received an unqualified report relating to his, or the firm's, most recent peer review conducted in accordance with the guidelines adopted by the former SEC Practice Section of the American Institute of Certified Public Accountants Division for CPA Firms or an organization providing equivalent oversight and quality control functions; (c) Saitta has resolved all disciplinary issues with the Board, and has complied with all terms and conditions of any sanctions imposed by the Board (other than reinstatement by the Commission); and + + (d) Saitta acknowledges his responsibility, as long as he appears or practices before the Commission as an independent accountant, to comply with all requirements of the Commission and the Board, including, but not limited to, all requirements relating to registration, inspections, concurring partner reviews and quality control standards. + + + + D. The Commission will consider an application by Saitta to resume appearing or practicing before the Commission provided that his state CPA license is current and he has resolved all other disciplinary issues with the applicable state boards of accountancy. However, if state licensure is dependant on reinstatement by the Commission, the Commission will consider an application on its other merits. The Commission's review may include consideration of, in addition to the matters referenced above, any other matters relating to Respondent's character, integrity, professional conduct, or qualifications to appear or practice before the Commission. + + By the Commission. + + + Jonathan G. Katz +Secretary + + Endnotes + + + + + + + 1 Rule 102(e)(1)(iii) provides, in relevant part, that: + + The Commission may. . .deny, temporarily or permanently, the privilege of appearing or practicing before it in any way to any person who is found…to have willfully violated, or willfully aided and abetted the violation of any provision of the Federal securities laws and the rules or regulations thereunder. + + 2 The findings herein are made pursuant to Respondent's Offer of Settlement and are not binding on any other person or entity in this or any other proceeding. + + + + + + + + + + + + + + + + + + + + + + + + + Return to top + + + + + SEC homepage + + + + + + + + + + + + + + About the SEC + + + + + + Budget & Performance + + + Careers + + + Commission Votes + + + Contact + + + Contracts + + + + + + + + Transparency + + + + + + Accessibility & Disability + + + Super Intelligence + + + FOIA + + + Inspector General + + + No FEAR Act Data + + + Ombuds + + + SEC Excess Personal Property Guidance + + + + + + + + Websites + + + + + + Investor.gov + + + Related Sites + + + USA.gov + + + + + + + + Site Information + + + + + + Plain Writing + + + Privacy & Security + + + Site Map + + + + + + + + + + + + + + + + + + Stay connected. 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WorldCom, Inc. , Civil Action No. 02-CV-4963 (SDNY) (JSR) + + On July 19, 2004, United States District Judge Jed S. Rakoff issued an order approving the SEC's proposed plan for distributing to defrauded investors the penalty paid by WorldCom (now known as MCI) in the SEC's civil action against the company. The SEC obtained the civil penalty judgment pursuant to a settlement with WorldCom that was approved by Judge Rakoff on July 7, 2003. ( Litigation Release No. 18219 ). WorldCom satisfied the penalty judgment in May 2004 by transferring $500 million in cash and 10 million shares of new MCI common stock to accounts set up pursuant to court order. The assets in these accounts will be distributed to investor victims of the company's fraud pursuant to the plan approved by the court and Section 308 (Fair Funds for Investors) of the Sarbanes-Oxley Act of 2002. + + As previously announced, Richard C. Breeden, the court-appointed Distribution Agent and a former SEC Chairman, will supervise the distribution of the civil penalty, and J. Carter Beese, Jr., a former SEC Commissioner, will oversee the stock portion of the distribution fund. + + The distribution plan and other information regarding the WorldCom matter are available on the Commission's website at www.sec.gov/spotlight.shtml. + + Information about filing a claim under the distribution plan will be posted at a later date on the SEC's website at www.sec.gov as well as on MCI's website at www.MCI.com. + + + + +  + + + + + + + + + + + + + + + + + + + + + + + + + Return to top + + + + + SEC homepage + + + + + + + + + + + + + + About the SEC + + + + + + Budget & Performance + + + Careers + + + Commission Votes + + + Contact + + + Contracts + + + + + + + + Transparency + + + + + + Accessibility & Disability + + + Super Intelligence + + + FOIA + + + Inspector General + + + No FEAR Act Data + + + Ombuds + + + SEC Excess Personal Property Guidance + + + + + + + + Websites + + + + + + Investor.gov + + + Related Sites + + + USA.gov + + + + + + + + Site Information + + + + + + Plain Writing + + + Privacy & Security + + + Site Map + + + + + + + + + + + + + + + + + + Stay connected. 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Individuals (SALI) + + + + + Enforcement Data Delivery Standards + + + + + Small Businesses + + + + + Appellate Briefs + + + + + Amicus / Friend of the Court Briefs + + + + + + + + + + + + + + + + + + + + + + + + + + Enforcement & Litigation + + + + + + + Litigation Releases + + + + + Administrative Proceedings + + + + + Administrative Law Judge Orders and Initial Decisions + + + + + Trading Suspensions + + + + + Distributions to Harmed Investors + + + + + Receiverships + + + + + Electronic Filings in Administrative Proceedings (eFAP) + + + + + Rules of Practice + + + + + Applications for Reentry + + + + + Reports of Investigations + + + + + Whistleblower Program + + + + + Public Alert: Unregistered Soliciting Entities (PAUSE) + + + + + SEC Action Lookup - Individuals (SALI) + + + + + Enforcement Data Delivery Standards + + + + + Small Businesses + + + + + Appellate Briefs + + + + + Amicus / Friend of the Court Briefs + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + Home + + + Enforcement and Litigation + + + Litigation Releases + + + Church Extension of the Church of God, Inc., United Management Services, Inc., James Perry Grubbs and Shearon Louis Jackson + + + + + + + + + + + + Church Extension of the Church of God, Inc., United Management Services, Inc., James Perry Grubbs and Shearon Louis Jackson + + + + + + + + + + + + + + + + + + + + + The U.S. Securities and Exchange Commission (Commission) today announced that on July 15, 2004, a federal jury found James Perry Grubbs (Grubbs) and Shearon Louis Jackson (Jackson) liable for violating the antifraud provisions of the federal securities laws. The jury found that Grubbs and Jackson each, directly or indirectly, caused Church Extension of the Church of God, Inc. (Church Extension) offering circulars distributed to investors to contain false or misleading information and acted with fraudulent intent and negligence in doing so. + + The verdicts were returned after a seven and a half day trial in federal court in the Southern District of Indiana, presided over by the Honorable David F. Hamilton. The trial resulted from a complaint the Commission filed on July 22, 2002 charging Church Extension and United Management Services, Inc. (UMS) and the former presidents of those entities, Grubbs and Jackson with fraudulently raising $85 million from the sale of investment notes to thousands of investors nationwide. Church Extension and UMS previously settled the Commission's charges on July 31, 2002. + + In its complaint, the Commission alleged that in connection with the offer and sale of investment notes, defendants repeatedly made material misrepresentations and omitted to state material facts in Church Extension's solicitation and offering circulars, concerning, among other things, the primary use of investment note proceeds and the financial conditions of Church Extension and UMS. Specifically, the complaint alleged that Grubbs and Jackson, through Church Extension and UMS, embarked on a fraudulent scheme to cover up financial difficulties suffered by Church Extension and UMS from investors. The complaint also alleged that instead of using investment note proceeds primarily to fund church loans as stated in the offering circulars, investor proceeds were used to fund speculative real estate transactions and to make interest and principal payments to prior investors. + + At trial, the jury determined that Grubbs and Jackson each violated Section 17(a) of the Securities Act of 1933 (Securities Act), Section 10(b) of the Securities Exchange Act of 1934 (Exchange Act) and Rule 10b-5 thereunder. The Court will determine at a later date the appropriate sanctions against Grubb and Jackson. The Commission is seeking orders of permanent injunction, disgorgement plus prejudgment interest and civil monetary penalties against Grubbs and Jackson. + + + + +  + + + + + + + + + + + + + + + + + + + + + + + + + Return to top + + + + + SEC homepage + + + + + + + + + + + + + + About the SEC + + + + + + Budget & Performance + + + Careers + + + Commission Votes + + + Contact + + + Contracts + + + + + + + + Transparency + + + + + + Accessibility & Disability + + + Super Intelligence + + + FOIA + + + Inspector General + + + No FEAR Act Data + + + Ombuds + + + SEC Excess Personal Property Guidance + + + + + + + + Websites + + + + + + Investor.gov + + + Related Sites + + + USA.gov + + + + + + + + Site Information + + + + + + Plain Writing + + + Privacy & Security + + + Site Map + + + + + + + + + + + + + + + + + + Stay connected. 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Individuals (SALI) + + + + + Enforcement Data Delivery Standards + + + + + Small Businesses + + + + + Appellate Briefs + + + + + Amicus / Friend of the Court Briefs + + + + + + + + + + + + + + + + + + + + + + + + + + Enforcement & Litigation + + + + + + + Litigation Releases + + + + + Administrative Proceedings + + + + + + + Information for Respondents in Administrative Proceedings  + + + + + Open Litigated Administrative Proceedings + + + + + Closed Litigated Administrative Proceedings + + + + + Commission Opinions and Adjudicatory Orders + + + + + Delinquent Filings + + + + + Stop Orders + + + + + + + + Administrative Law Judge Orders and Initial Decisions + + + + + Trading Suspensions + + + + + Distributions to Harmed Investors + + + + + Receiverships + + + + + Electronic Filings in Administrative Proceedings (eFAP) + + + + + Rules of Practice + + + + + Applications for Reentry + + + + + Reports of Investigations + + + + + Whistleblower Program + + + + + Public Alert: Unregistered Soliciting Entities (PAUSE) + + + + + SEC Action Lookup - Individuals (SALI) + + + + + Enforcement Data Delivery Standards + + + + + Small Businesses + + + + + Appellate Briefs + + + + + Amicus / Friend of the Court Briefs + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + Home + + + Enforcement and Litigation + + + Administrative Proceedings + + + Leslie Wasser, CPA + + + + + + + + + + + + Leslie Wasser, CPA + + + + + + + + + + + + + + + + + + + UNITED STATES OF AMERICA +Before the +SECURITIES AND EXCHANGE COMMISSION + + SECURITIES EXCHANGE ACT OF 1934 +Release No. 50096 / July 27, 2004 + + ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 2062 / July 27, 2004 + + Admin. Proc. File No. 3-11562 + + + + In the Matter of + Leslie Wasser, CPA, + Respondent. + + : : : : : : : : + ORDER INSTITUTING PUBLIC ADMINISTRATIVE AND CEASE-AND-DESIST PROCEEDINGS PURSUANT TO SECTION 21C OF THE SECURITIES EXCHANGE ACT OF 1934 AND RULE 102(e) OF THE COMMISSION'S RULES OF PRACTICE, MAKING FINDINGS, AND IMPOSING REMEDIAL SANCTIONS AND A CEASE-AND-DESIST ORDER + I. + The Securities and Exchange Commission ("Commission") deems it appropriate that public administrative and cease-and-desist proceedings be, and hereby are, instituted against Leslie Wasser, CPA ("Wasser" or "Respondent") pursuant to Section 21C of the Securities Exchange Act of 1934 ("Exchange Act") and Rule 102(e)(1)(iii) of the Commission's Rules of Practice. 1 + + II. + In anticipation of the institution of these proceedings, Wasser has submitted an Offer of Settlement ("Offer") which the Commission has determined to accept. Solely for the purpose of these proceedings and any other proceedings brought by or on behalf of the Commission, or to which the Commission is a party, and without admitting or denying the findings herein, except as to the Commission's jurisdiction over Respondent and the subject matter of these proceedings, which Wasser admits, Wasser consents to the entry of this Order Instituting Public Administrative and Cease-and-Desist Proceedings Pursuant to Section 21C of the Securities Exchange Act of 1934 and Rule 102(e) of the Commission's Rules of Practice, Making Findings, and Imposing Remedial Sanctions and a Cease-and-Desist Order ("Order"), as set forth below. + + III. + On the basis of this Order and Respondent's Offer, the Commission finds 2 that: + + A. RESPONDENT + Wasser at all relevant times was the secretary, chief financial officer and a director of Vicon Fiber Optics Corporation ("Vicon"). Wasser is, and during the relevant period was, a certified public accountant licensed in the State of New York. + + B. FACTS + + 1. Scheme to Inflate Vicon's Inventories + Vicon is a Delaware corporation headquartered in Pelham Manor, New York. Vicon began operations in 1969. Vicon manufactures and sells fiber optic illuminating systems and components for use in conjunction with dental equipment and instruments utilizing fiber optic elements. Vicon's common stock was quoted on the Over-the-Counter Bulletin Board during the relevant period.   + Wasser participated in a scheme to inflate Vicon's inventories as reported in Vicon's Form 10-K for the fiscal year ended December 31, 1999 ("1999 Form 10-K"), which Vicon provided to auditors and filed with the Commission. Wasser conspired with other members of Vicon's management who prepared fictitious inventory reports, false shipping documents, and forged faxes reflecting fiber optic glass sprays valued at $100,000. These documents created the false appearance that the raw material had been shipped to Vicon's offsite facility in China to undergo manufacturing processes that increased its value to approximately $190,000. The inflated inventories made it appear as if Vicon had incurred a lower cost of goods sold expense, which in turn decreased the 1999 fiscal year reported loss. This caused the company to report a 1999 net loss of $628,890, when it should have actually reported a net loss of $803,067. Thus, Vicon's 1999 net loss was understated in its annual report by 22%. Wasser knowingly incorporated the fictitious inventory amounts into Vicon's financial statements as reported in its 1999 Form 10-K.   + Wasser provided falsified financial statements and documentation to Vicon's independent auditor, which, based on the false information supplied by Wasser, rendered an audit report containing an unqualified opinion on Vicon's 1999 financial statements.   + In June 2000, Wasser participated in a scheme to reverse the inflated inventory by reporting the inventory as defective and scrapped. Wasser conspired with other members of Vicon's management who prepared fictitious inventory reports and correspondence reflecting $190,000 of defective and scrapped inventory. Wasser knowingly included a description of the purportedly defective and scrapped inventory in Vicon's Form 10-Q for the period ended June 30, 2000, which was filed with the Commission.   + Wasser also assisted in overstating the inventory in Vicon's 1998 Form 10-K. Wasser, along with other members of Vicon's management, increased Vicon's inventory amounts to present a better profit picture to assist the company in raising venture capital. Wasser knowingly overvalued various inventory pieces, many of which were obsolete and therefore had little or no value to Vicon. The company's inventory at December 31, 1998 was overvalued by $103,000. Wasser included this overvalued inventory in Vicon's 1998 Form 10-K which was filed with the Commission. The bottom-line effect of this overvaluation was that Vicon's 1998 net income was overstated by 19%.   + 3. Violations + Section 10(b) of the Exchange Act and Rule 10b-5 thereunder proscribe, among other things, misstatements and omissions of material fact made in connection with the purchase or sale of securities. Information is material if there is a substantial likelihood that its disclosure would be viewed by a reasonable investor as having significantly altered the total mix of information available. Basic Inc. v. Levinson , 485 U.S. 224, 331-32 (1988). Information concerning the financial condition of a company is presumptively material. SEC v. Murphy , 626 F.2d 633, 653 (9th Cir. 1980); SEC v. Blavin , 557 F. Supp. 1304, 1313 (E.D. Mich. 1983), aff'd , 760 F.2d 706 (6th Cir. 1985) (materiality of information relating to financial condition, solvency and profitability not subject to serious challenge).   + Material errors in annual and quarterly reports satisfy the "in connection with" requirement of Section 10(b) of the Exchange Act because they are clearly documents that a reasonable investor would rely on in deciding whether to purchase securities. SEC v. Benson , 657 F. Supp. 1122, 1131 (S.D.N.Y. 1987).   + Violations of Section 10(b) of the Exchange Act and Rule 10b-5 thereunder require a showing of scienter. Aaron v. SEC , 446 U.S. 680, 696 (1980). The Supreme Court has defined scienter as the "intent to deceive, manipulate, or defraud." Ernst & Ernst v. Hochfelder , 425 U.S. 185, 193 (1976). Reckless conduct also satisfies the scienter requirement of Section 10(b) of the Exchange Act and Rule 10b-5 thereunder. IIT v. Cornfeld , 619 F.2d 909, 923 (2d Cir. 1980); Rolf v. Blyth Eastman Dillon & Co. , 570 F.2d 38, 46 (2d Cir.), cert. denied , 439 U.S. 1039 (1978).   + Information about current and past earnings is highly likely to be material because it is often used to predict what future earnings might be. In re Burlington Coat Factory Sec Litig. , 114 F.3d 1410, 1421 n. 9 (3d Cir. 1997). Wasser's inclusion of fictitious inventory reports had a material impact on Vicon's financial statements. Vicon's annual reports were significantly altered by the inclusion of fictitious inventory. Vicon's 1999 loss was understated by 22% and its 1998 net income was overstated by 19%. An inaccurate financial statement in Vicon's annual report is exactly the type of information that a reasonable investor would have considered as altering the "total mix" of information available. See TSC Indus., Inc. , 426 U.S. at 449.   + In 1998, Wasser intentionally overvalued Vicon's inventory in order to inflate artificially Vicon's net profits as reported in its Form 10-K. In 1999, Wasser prepared a financial statement that contained inventory items that did not exist. Finally, Wasser prepared Vicon's second quarter 2000 Form 10-Q, which falsely stated that the inventory had been scrapped when he knew it never existed. By knowingly engaging in this wrongful conduct, Wasser willfully violated Section 10(b) of the Exchange Act and Rule 10b-5 thereunder.   + Section 13(a) of the Exchange Act and Rules 12b-20, 13a-1, and 13a-13 thereunder require issuers to file with the Commission Form 10-K annual reports and Form 10-Q quarterly reports. The requirement that an issuer file reports under Section 13(a) embodies the requirement that such reports be true and correct. SEC v. Kalvex, Inc. , 425 F. Supp. 310, 316 (S.D.N.Y. 1975); SEC v. IMC Int'l, Inc. , 384 F. Supp. 889, 893 (N.D. Texas), aff'd , 505 F.2d 733 (5th Cir. 1974). No showing of scienter is necessary to establish a violation of Section 13(a) and Rule 13a-1. See SEC v. Wills , 472 F. Supp. 1250, 1268 (D.D.C. 1978).   + As Vicon's director and chief financial officer, Wasser was directly responsible for misrepresenting Vicon's inventory in its 1998 and 1999 Forms 10-K and its Form 10-Q for the second quarter of 2000. The fictitious inventory was material because it caused Vicon's net income to be misstated by 19% in 1998, and by 22% in 1999. Wasser prepared all of these false filings. Wasser therefore willfully aided and abetted and caused Vicon's violations of Section 13(a) of the Exchange Act and Rules 12b-20, 13a-1, and 13a-13 thereunder.   + Section 13(b)(2)(A) of the Exchange Act requires that every issuer of securities registered pursuant to Section 12 of the Exchange Act, such as Vicon, keep books and records which, in reasonable detail, accurately and fairly reflect its transactions and disposition of assets. Section 13(b)(2)(B) requires such issuers to devise and maintain a system of internal accounting controls sufficient to provide reasonable assurances that transactions are recorded as necessary to permit preparation of financial statements in conformity with generally accepted accounting principles.   + Vicon's books and records did not accurately and fairly reflect its transactions and disposition of assets. Vicon also failed to implement a reasonable system of internal accounting controls. Accordingly, Wasser by his conduct willfully aided and abetted and caused Vicon's violations of Sections 13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act   + Section 13(b)(5) of the Exchange Act prohibits any person from knowingly circumventing or knowingly failing to implement a system of internal accounting controls or knowingly falsifying any book, record, or account described in Section 13(b)(2). Rule 13b2-1 prohibits any person from falsifying or causing to be falsified any book or record subject to Section 13(b)(2)(A). Rule 13b2-2 of the Exchange Act makes it unlawful for an officer or director of an issuer to make or cause to be made a materially false or misleading statement, or omit or cause the omission of any material fact necessary to make the statements made not misleading in light of the circumstances, to an accountant in connection with an audit or examination of financial statements, or the preparation of any documents required to be filed with the Commission. See SEC v. Benson , 657 F. Supp. 1122, 1132 (S.D.N.Y. 1987).   + As Vicon's CFO, Wasser was responsible for implementing a reasonable system of internal accounting controls at Vicon. Wasser not only knowingly failed to implement such internal controls, he also participated in a scheme to falsify Vicon's accounting records. Wasser, while an officer and director of Vicon, also made material misrepresentations about Vicon's inventory and other financial information to Vicon's outside auditors in connection with their 1998 and 1999 audits. Wasser therefore willfully violated Section 13(b)(5) of the Exchange Act and Rules 13b2-1 and 13b2-2 thereunder.   + 4. Findings + Based on the foregoing, the Commission finds that Wasser, a CPA and Vicon's former CFO, willfully violated Sections 10(b) and 13(b)(5) of the Exchange Act and Rules 10b-5, 13b2-1, and 13b2-2 thereunder and willfully aided and abetted and caused Vicon's violations of Sections 13(a), 13(b)(2)(A), and 13(b)(2)(B) of the Exchange Act and Rules 12b-20, 13a-1, and 13a-13 thereunder.   + In determining to accept the Offer, the Commission considered cooperation afforded the Commission staff.   + IV. + In view of the foregoing, the Commission deems it appropriate to impose the sanctions agreed to in Respondent Wasser's Offer. + Accordingly, it is hereby ORDERED, effective immediately, that: + A. Wasser shall cease and desist from committing or causing any violations and any future violations of Sections 10(b) and 13(b)(5) of the Exchange Act and Rules 10b-5, 13b2-1, and 13b2-2 thereunder and from causing any violations and any future violations of Sections 13(a), 13(b)(2)(A), and 13(b)(2)(B) of the Exchange Act and Rules 12b-20, 13a-1, and 13a-13 thereunder. + B. Wasser is denied the privilege of appearing or practicing before the Commission as an accountant. + + By the Commission. + + + + + Jonathan G. Katz + Secretary + + + Endnotes + 1 Rule 102(e)(1)(iii) provides, in pertinent part, that: + The Commission may deny, temporarily or permanently, the privilege of appearing or practicing before it to any person who is found . . . to have willfully violated, or willfully aided and abetted the violation of any provision of the Federal securities laws or the rules and regulations thereunder. + 2 The findings herein are made pursuant to Respondent's Offer of Settlement and are not binding on any other person or entity in this or any other proceeding. + + + + +See also the Order in this matter --> + + + + + + + + + + + + + + + + + + + + + + + + + + + Return to top + + + + + SEC homepage + + + + + + + + + + + + + + About the SEC + + + + + + Budget & Performance + + + Careers + + + Commission Votes + + + Contact + + + Contracts + + + + + + + + Transparency + + + + + + Accessibility & Disability + + + Super Intelligence + + + FOIA + + + Inspector General + + + No FEAR Act Data + + + Ombuds + + + SEC Excess Personal Property Guidance + + + + + + + + Websites + + + + + + Investor.gov + + + Related Sites + + + USA.gov + + + + + + + + Site Information + + + + + + Plain Writing + + + Privacy & Security + + + Site Map + + + + + + + + + + + + + + + + + + Stay connected. 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Individuals (SALI) + + + + + Enforcement Data Delivery Standards + + + + + Small Businesses + + + + + Appellate Briefs + + + + + Amicus / Friend of the Court Briefs + + + + + + + + + + + + + + + + + + + + + + + + + + Enforcement & Litigation + + + + + + + Litigation Releases + + + + + Administrative Proceedings + + + + + Administrative Law Judge Orders and Initial Decisions + + + + + Trading Suspensions + + + + + Distributions to Harmed Investors + + + + + Receiverships + + + + + Electronic Filings in Administrative Proceedings (eFAP) + + + + + Rules of Practice + + + + + Applications for Reentry + + + + + Reports of Investigations + + + + + Whistleblower Program + + + + + Public Alert: Unregistered Soliciting Entities (PAUSE) + + + + + SEC Action Lookup - Individuals (SALI) + + + + + Enforcement Data Delivery Standards + + + + + Small Businesses + + + + + Appellate Briefs + + + + + Amicus / Friend of the Court Briefs + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + Home + + + Enforcement and Litigation + + + Litigation Releases + + + Michael Scrivo + + + + + + + + + + + + Michael Scrivo + + + + + + + + + + + + + + + + + + + + + The Commission today announced that it filed a complaint in the United States District Court for the Southern District of New York against Vicon Fiber Optics Corporation's former vice president of operations, Michael Scrivo. Vicon, headquartered in Pelham Manor, New York, manufactures and sells fiber optic illuminating systems. The case involves a scheme to inflate Vicon's inventory in Vicon's 1999 annual report and quarterly report for the second quarter of 2000. In its complaint, the Commission charged Scrivo with violations of the antifraud, reporting, books and records, and internal controls provisions of the Securities Exchange Act of 1934 ("Exchange Act"). The Commission also announced that it instituted settled cease-and-desist proceedings and proceedings pursuant to Rule 102(e) of the Commission's Rules of Practice against Vicon's former CFO Leslie Wasser. In the cease-and-desist proceeding, the Commission made findings that Wasser violated those same sections. + + In its complaint, the Commission alleged that Scrivo engaged in a fraudulent scheme to inflate Vicon's inventories in its 1999 year-end financial statements by including inventory, which did not exist. In furtherance of the scheme, Scrivo fabricated documents that reflected non-existent inventory and as a result, Vicon's reported net loss was decreased by 22% in its 1999 financial statement. Scrivo subsequently attempted to conceal and to reverse the overstated inventory by falsely reporting in Vicon's second quarter 2000 Form 10-Q that the inventory was defective and had been scrapped. + + Without admitting or denying the allegations of the complaint, Scrivo consented to the entry of a final judgment enjoining him from violations of Sections 10(b), 13(a), 13(b)(2), and 13(b)(5) of the Exchange Act and Rules 10b-5, 12b-20, 13a-1, 13a-13, 13b2-1, and 13b2-2 thereunder. Scrivo also consented to be barred from acting as an officer or director of a public company and agreed to pay $20,000 in civil penalties. + + In its administrative Order, the Commission found that Wasser, a certified public accountant, committed or caused the same violations of the Exchange Act. Wasser consented to the entry of an administrative Order requiring him to cease and desist from committing or causing and violations and any future violations of the same provisions and denying him the privilege of appearing or practicing before the Commission as an accountant. + + + + +  + + + + + + + + + + + + + + + + + + + + + + + + + Return to top + + + + + SEC homepage + + + + + + + + + + + + + + About the SEC + + + + + + Budget & Performance + + + Careers + + + Commission Votes + + + Contact + + + Contracts + + + + + + + + Transparency + + + + + + Accessibility & Disability + + + Super Intelligence + + + FOIA + + + Inspector General + + + No FEAR Act Data + + + Ombuds + + + SEC Excess Personal Property Guidance + + + + + + + + Websites + + + + + + Investor.gov + + + Related Sites + + + USA.gov + + + + + + + + Site Information + + + + + + Plain Writing + + + Privacy & Security + + + Site Map + + + + + + + + + + + + + + + + + + Stay connected. 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Proc. File No. 3-11563 + + + + In the Matter of + Charter Communications, Inc. + Respondent. + + : : : : : : : : : + ORDER INSTITUTING CEASE-AND-DESIST PROCEEDINGS, MAKING FINDINGS, AND IMPOSING A CEASE-AND-DESIST ORDER PURSUANT TO SECTION 21C OF THE SECURITIES EXCHANGE ACT OF 1934 + I. + The Securities and Exchange Commission ("Commission") deems it appropriate that cease-and-desist proceedings be, and hereby are, instituted pursuant to Section 21C of the Securities Exchange Act of 1934 ("Exchange Act") against Charter Communications, Inc. ("Charter" or "Respondent"). + + II. + In anticipation of the institution of these proceedings, Respondent has submitted an Offer of Settlement (the "Offer") which the Commission has determined to accept. Solely for the purpose of these proceedings and any other proceedings brought by or on behalf of the Commission, or to which the Commission is a party, and without admitting or denying the findings herein, except as to the Commission's jurisdiction over it and the subject matter of these proceedings, which are admitted, Respondent consents to the entry of this Order Instituting Cease-and-Desist Proceedings, Making Findings, and Imposing a Cease-and-Desist Order Pursuant to Section 21C of the Securities Exchange Act of 1934 ("Order"), as set forth below. + + III. + On the basis of this Order and Respondent's Offer, the Commission finds that: + + Respondent + 1. Charter is a Delaware Corporation with its principal executive office located in St. Louis, Missouri. Charter is the third largest cable television operator in the United States serving approximately 6.2 million customers in 37 states. Through its subsidiaries, Charter provides basic cable, digital cable, high speed internet and telephone services to its customers. Charter's common stock is registered with the Commission pursuant to Section 12(g) of the Exchange Act and is listed on the NASDAQ National Market. + + Summary + 2. From the first through the fourth quarters of 2001, Charter inflated the number of customers who subscribed to its services in an attempt to meet analysts' expectations for subscriber growth and depict itself as a growing company. To inflate its subscriber numbers, Charter employees stopped its usual practice of disconnecting the services of delinquent paying customers and customers who had requested the termination of their services. As a result of this conduct, Charter artificially inflated its number of subscribers and subscriber growth that it reported to the Commission and to the public from the first through the fourth quarters of 2001 in its Forms 8-K, Forms 10-Q and Form 10-K. + 3. In the fourth quarter of 2000, Charter also inflated its year-end revenue and operating cash flow by $17 million when it realized its year-end revenue and operating cash flow for 2000 was going to be short of analysts' expectations. To do so, Charter entered into one contract under which it agreed to pay two of its digital set-top box suppliers an additional $20 for each set-top box it purchased and simultaneously entered into another contract under which its set-top box suppliers agreed to purchase $20 in advertising services from Charter for each set-top box Charter purchased. In reality, no real revenue was generated from these transactions because Charter provided the suppliers with the money they used to purchase the advertising services from Charter. Charter overpaid approximately $17 million to the two set-top box suppliers and received the same amount back from the two suppliers as advertising revenue in the fourth quarter of 2000. Consequently, Charter improperly inflated its 2000 year-end revenue and operating cash flow that it reported to the Commission and to the public in its Form 10-K for 2000. + + + Charter's Inflation of Subscriber Numbers + 4. Subscriber numbers are an important measure used to rank cable companies and used to predict future cash flow, revenue and company growth. Specifically, Charter's rank as the third largest cable company is dependent on its total number of subscribers. Charter published its subscriber numbers and subscriber growth rate in press releases and reported these figures in quarterly and annual reports filed with the Commission. Further, investment analysts routinely focused on subscriber numbers in their reports and conference calls, among other factors, to make their recommendations and value a cable company's stock. + 5. Charter held itself out as an industry leader in subscriber growth. Specifically, in 1999 Charter reported that its basic customer growth of 3.1% exceeded the national average of 1.8%. In 2000, Charter held itself out as an industry leader in subscriber growth by reporting basic subscriber growth of 2.5% for the year. Similarly, in 2001, Charter reported that it continued to pace the industry with customer growth of 1.1%. + 6. At the end of each prior year, Charter set its subscriber growth targets for the upcoming year through the company budget process. As part of the budget process, Charter assigned subscriber growth targets to each of its divisions. In turn, the divisions assigned the responsibility of meeting the division's subscriber growth targets to its region and system levels that set subscriber growth targets on a monthly and quarterly basis. + 7. Beginning in the first quarter of 2001, Charter began experiencing an increase in the number of customers switching to satellite television service and customers who, at the end of a special price promotion period, either became delinquent in paying their account balances or requested that their service be terminated. As the competition from satellite providers and the number of delinquent paying subscribers increased throughout 2001, some of Charter's regions stopped disconnecting some of its subscribers who Charter would have ordinarily disconnected in order to meet subscriber growth targets. At Charter this process was known as "managing disconnects" or "holding disconnects." By managing or holding disconnects, customers remained in Charter's subscriber count and enabled it to meet subscriber growth targets for the company. + 8. Charter had no company-wide policy as to when to disconnect delinquent paying or "non-pay" customers. Some systems at Charter historically disconnected customers when their accounts became 60 to 75 days past due, but during the first through the fourth quarters of 2001 were told not to disconnect these customers in order to inflate subscriber numbers. To this end, Charter allowed accounts for customers' who otherwise would have been disconnected to age well past 60 days to meet subscriber growth targets. Many non-pay customers' accounts were held for more than 90 days and some well over 120 days before being disconnected. By not disconnecting these customers' service, Charter was able to include these customers in its subscriber count. + 9. Charter's usual business practice was to disconnect a customer's service within seven to ten days after a customer voluntarily requested termination of their service. To meet subscriber growth targets, however, Charter occasionally ignored this practice by delaying the disconnect of customers' services to beyond seven to ten days. By not timely disconnecting these customers' services, Charter was able to include these customers in its subscriber count. + 10. By improperly managing disconnects, Charter was able to tell the public that for the first through fourth quarters of 2001 it was meeting and, at times, exceeding analysts' expectations for subscriber growth when, in fact, Charter actually experienced flat to negative growth for those periods. If, however, Charter employees had followed usual disconnect practices and removed subscribers who should have been disconnected from active subscriber rolls, it would have reported materially lower subscriber totals. + 11. As a result of managing disconnects, Charter included materially inflated subscriber numbers in its Forms 8-K containing the press releases on its financial results for the first quarter through fourth quarter of 2001, its Forms 10-Q for the first quarter through the third quarters of 2001 and its Form 10-K for 2001. Thus, by inflating subscriber numbers Charter misstated the number of subscribers and subscriber growth figures it reported to the Commission and falsely depicted itself to the public and analysts as a growing company. + + Charter's Inflation of Revenue and Operating Cash Flow + 12. In the fourth quarter of 2000, Charter realized that its 2000 year-end revenue and operating cash flow was going to be approximately $17 million short of Charter's budget targets and analysts' expectations. Analysts use these numbers to assess the company's stock value and Charter reports them in its quarterly and annual reports, analyst's conference calls and press releases. + 13. To generate additional revenue and operating cash flow in order to overcome the fiscal year 2000 shortfall, Charter devised a scheme to get advertising business from its digital set-top box suppliers. To carry out the scheme, Charter entered into one agreement under which it paid two of its set-top box providers an additional $20 for each set-top box it purchased and simultaneously entered into another agreement under which the two set-top box providers purchased $20 in advertising from Charter for each set-top box Charter purchased. Charter increased its revenue and operating cash flow with the $20 Charter was paid by the suppliers as advertising revenue. In effect, however, no real revenue was generated by these transactions because by paying an additional $20 per set-top box, Charter gave the suppliers the money to purchase the advertising services from Charter. + 14. Charter improperly recognized revenue from these transactions because they were barter transactions. According to the principals set forth in SAB 101 and EITF 99-17, revenue cannot be recognized from barter transactions unless there is a determinable fair value. In addition, Charter was advised at the time by its auditor that in order to properly recognize revenue from these transactions and avoid these transactions from being considered barter transactions, the transactions had to be: 1) unrelated to each other; 2) negotiated at least one month apart; and 3) set at fair market value. Instead, Charter negotiated both the set-top box and advertising contracts at the same time in September 2000 and tried to conceal the fact that the contracts were negotiated simultaneously by backdating the set-top box contracts to August 2000. Additionally, the contracts were related given that both contracts were executed to carry out the scheme to raise additional revenue and operating cash flow. Finally, these transactions were not undertaken at the fair value of the time slots purchased because these set-top box suppliers paid four to five times more for their advertisement time slots than other parties had paid Charter for advertisement time slots during 2000. + 15. As a result of this scheme, Charter improperly recognized approximately $17 million in advertising revenue and was able to meet analysts' expectations as to revenue and operating cash flow in the fourth quarter of 2000. Consequently, Charter overstated its 2000 year-end revenue and operating cash flow by approximately $17 million in its Form 10-K for 2000. + + Charter's Violations of the Exchange Act + 16. As a result of the conduct described above, Charter violated Section 13(a) of the Exchange Act and Rules 12b-20, 13a-1, 13a-11 and 13a-13 thereunder, which require issuers of securities registered pursuant to Section 12 of the Exchange Act to file accurate reports on Forms 10-K, 10-Q and 8-K. These reports must contain any material information necessary to make statements made in the reports not misleading. No showing of scienter is necessary to establish an issuer's violation of the corporate reporting provisions. See SEC v. McNulty, 137 F.3d 732, 740-41 (2d Cir. 1998). As discussed above, Charter violated these provisions by filing periodic reports that misstated its total number of basic subscribers and subscriber growth numbers for the first through fourth quarters of 2001 in its Forms 8-K containing press releases on its financial results from the first quarter through fourth quarter of 2001, its Forms 10-Q from the first quarter of 2001 through the third quarter of 2001 and its Forms 10-K for 2001. In addition, Charter overstated its operating cash flow and revenue for the year-end 2000 in its Form 10-K for 2000. + 17. As a result of the conduct described above, Charter also violated Section 13(b)(2)(A) of the Exchange Act and Rule 13b2-1 thereunder. Section 13(b)(2)(A) requires reporting companies registered under Section 12 of the Exchange Act to make and keep books, records and accounts which, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the issuer's assets. In addition, Rule 13b2-1 of the Exchange Act prohibits any person from directly or indirectly falsifying any book, record or account required to be kept pursuant to Section 13(b)(2)(A) of the Exchange Act. Charter misstated the number of subscribers it reported in books, records and accounts for the first through fourth quarters of 2001 and overstated its 2000 year-end operating cash flow and revenue by approximately $17 million by improperly recognizing revenue from its set-top box suppliers. Charter violated Rule 13b2-1 when it falsified its books and records by reporting subscribers in its total subscriber count that should have been disconnected, improperly recognizing revenue and operating cash flow from barter transactions and backdating contracts. + 18. Further, as a result of the conduct described above, Charter violated Sections 13(b)(2)(B) and 13(b)(5) of the Exchange Act. Section 13(b)(2)(B) requires reporting companies to devise and maintain a system of internal accounting controls sufficient to reasonably assure that transactions are recorded and financial statements are prepared in conformity with GAAP. Additionally, Section 13(b)(5) of the Exchange Act provides that, among other things, no person shall knowingly circumvent or fail to implement a system of internal accounting controls or falsify any book, record or account described in Section 13(b)(2). Charter had no formal policies or procedures sufficient to assure that systems were not managing or holding disconnects in order to artificially inflate subscriber numbers and that employees had properly accounted for revenue and cash flow from barter transactions. Moreover, Charter violated Section 13(b)(5) by instructing systems not to follow the disconnect procedures they did have and allowing employees to backdate the set-top box contracts with its suppliers. + + Undertakings + Respondent undertakes to: + + A. Assure that public disclosures made by Charter to its shareholders and Commission are accurate and complete, that such disclosures fairly present Charter's financial condition and results of operations, and that such disclosures are made on a timely basis, as required by applicable laws and regulations. + B. Assure that it reports accurate subscriber numbers and subscriber growth, stops the practice of holding disconnects to meet budget targets and complies with the company's new disconnect policies. + C. Assure that internal controls are in place to prevent recurrences of the improper accounting treatment in the fourth quarter of 2000 resulting in Charter overstating its revenue by $17 million. To this end, Charter will undertake certain actions, including, but not limited to, the following: a) assure that barter transactions are afforded the correct accounting treatment under GAAP; and b) develop a system of accounting oversight to assure that contracts are dated properly. + D. Adopt a zero tolerance policy on holding or managing disconnects in order to inflate subscriber numbers and terminate any employee found to be managing or holding disconnects for this purpose. In addition, Charter's Chief Executive Officer will issue quarterly written reminders to all employees regarding Charter's zero tolerance policy for holding or managing disconnects in order to inflate subscriber numbers. + E. Institute a formal written policy that details disconnect procedures for terminating the service of delinquent paying subscribers. This policy will require that delinquent paying customers' service be terminated 60 to 75 days after their account balance becomes past due ("termination date") and that their balances be written off to bad debt 90 to 110 days after their account balances become past due ("write off date"). Charter may specifically identify a few categories of subscribers that, for historical business reasons, Charter permits to remain as active subscribers for more than 75 days after a bill becomes past due. Any exceptions Charter makes to allow a delinquent paying customer to remain an active subscriber after 75 days of non-payment shall be documented, reviewed and approved by Key Market Area management personnel at or before the close of each billing cycle. Division level management shall also review and approve these documented exceptions to Charter's formal written disconnect policy at or before the close of each billing cycle. In its formal written disconnect policy, Charter shall identify these categories of subscribers and describe for each the reasons for making an exception to its formal written disconnect policy as well as termination dates and write off dates applicable to each exception. Charter may periodically add, subtract or change the categories of customers excepted from its formal written disconnect policy with an appropriate disclosure in its public filings with the Commission. In the cases of any exceptions made to Charter's formal written disconnect policy, Charter may not keep any delinquent paying subscribers on its subscriber rolls for the purpose of increasing reported subscriber numbers. + F. Establish a Corporate Director of Credit and Collections who is responsible for monitoring Charter's credits and collections and developing reports that monitor bad debt on a monthly basis. These reports will be distributed to Charter's Chief Operating Officer and to the Legal Department who will investigate and remedy instances when bad debt may be rising and ensure that employees are promptly disconnecting non-paying subscribers. + G. Reform its Corporate Compliance Program by, among other things, establishing a web site and toll-free telephone number managed by an independent third party through which employees can report suspected violations of its accounting procedures and code of ethics. In addition, Charter will establish a Compliance Committee to evaluate suspected violations, conduct investigations and make disciplinary recommendations. + H. Cease considering the achievement of subscriber growth targets as a component of employee bonuses. + I. Replace its top-down budget process with a bottom-up budget process that eliminates industry analysts' projections as a component of setting Charter's budget goals. + J. Include a disclosure in its quarterly and annual filings with the Commission as to the number of active subscribers whose accounts are more than 60 days, 90 days and 120 days past due. + K. Instruct its internal auditors to review compliance with Charter's formal disconnect procedures on a quarterly basis and report the findings to its public auditors in connection with its annual audit. + L. Any undertakings set forth in Section III above which were implemented prior to the date of this Order shall be maintained. + + Remedial Efforts by Charter Communications + 19. In determining to accept the Offer, the Commission considered remedial acts promptly undertaken by Respondent and cooperation Respondent afforded the Commission staff. + + IV. + In view of the foregoing, the Commission deems it appropriate to impose the sanctions agreed to in Charter's Offer. + Accordingly, it is hereby ORDERED: + A. Pursuant to Section 21C of the Exchange Act, that Charter cease and desist from committing or causing any violations and any future violations of Sections 13(a), 13(b)(2)(A), 13(b)(2)(B), and 13(b)(5) of the Exchange Act and Rules 12b-20, 13a-1, 13a-11, 13a-13 and 13b2-1 thereunder; and + B. Charter shall comply with the undertakings enumerated in Section III above. + By the Commission. + + + + Jonathan G. 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Parmalat Finanziaria, S.p.A., Case No. 03 CV 10266 (PKC) (S.D.N.Y.) + + SEC ALLEGES ADDITIONAL VIOLATIONS BY PARMALAT FINANZIARIA, S.p.A., AND SIMULTANEOUSLY SETTLES CIVIL ACTION + + Parmalat Finanziaria Agrees to Entry of Permanent Injunction and Corporate Undertakings + + The Securities and Exchange Commission ("Commission") today filed an amended complaint in its lawsuit against Parmalat Finanziaria S.p.A. in U.S. District Court in the Southern District of New York. The amended complaint alleges that the company engaged in one of the largest financial frauds in history and defrauded U.S. institutional investors when it sold them more than $1 billion in debt securities in a series of private placements between 1997 and 2002. Simultaneously with the filing of the amended complaint, Parmalat Finanziaria consented to the entry of a final judgment settling the Commission's action against it. The settlement is subject to the Court's entry of the proposed judgment. + The complaint the Commission filed today alleges the following, among other things: + Parmalat Finanziaria consistently overstated its level of cash and marketable securities. For example, at year-end 2002, Parmalat Finanziaria overstated its cash and marketable securities by at least 2.4 billion Euros ("€"). As of year-end 2003, Parmalat Finanziaria had overstated its assets by at least €3.95 billion (approximately $4.9 billion).   + As of September 30, 2003, Parmalat Finanziaria had understated its reported debt of €6.4 billion by at least €7.9 billion. Parmalat Finanziaria used various tactics to understate its debt, including: (a) eliminating approximately €3.3 billion of debt held by one of its nominee entities; (b) recording approximately €1 billion of debt as equity through fictitious loan participation agreements; (c) removing approximately €500 million of liabilities by falsely describing the sale of certain receivables as non-recourse, when in fact the company retained an obligation to ensure that the receivables were ultimately paid; (d) improperly eliminating approximately €300 million of debt associated with a Brazilian subsidiary during the sale of the subsidiary; (e) mischaracterizing approximately €300 million of bank debt as intercompany debt, thereby inappropriately eliminating it in consolidation; (f) eliminating approximately €200 million of Parmalat S.p.A. payables as though they had been paid when, in fact, they had not; and (g) not recording a liability of approximately €400 million associated with a put option.   + Between 1997 and 2003, Parmalat S.p.A. transferred approximately €350 million to various businesses owned and operated by Tanzi family members.   + Parmalat Finanziaria transferred uncollectible and impaired receivables to "nominee" entities, where their diminished or nonexistent value was hidden. As a result, Parmalat Finanziaria carried assets at inflated values and avoided the negative impact on its income statement that would have been associated with a proper reserve or write-off of bad debt.   + Parmalat Finanziaria used these same nominee entities to fabricate non-existent financial operations intended to offset losses of its operating subsidiaries. For example, if a subsidiary experienced losses due to exchange rate fluctuations, the nominee entity would fabricate foreign exchange contracts to offset the losses. Similarly, if a subsidiary had exposure due to interest rate fluctuations, the nominee entity would fabricate interest rate swaps to curb the exposure.   + Parmalat Finanziaria used the nominee entities to disguise intercompany loans from one subsidiary to another subsidiary that was experiencing operating losses. Specifically, a loan from one subsidiary would be made to another subsidiary operating at a loss. The recipient then improperly applied the loan proceeds to offset its expenses and thereby increase the appearance of profitability. As a result, rather than have a neutral effect on the consolidated financials, the loan transaction served to inflate both assets and net income.   + Parmalat Finanziaria recorded fictional revenue through sales by its subsidiaries to controlled nominee entities at inflated or entirely fictitious amounts. In order to avoid unwanted scrutiny due to the aging of the receivables associated with these fictitious or overstated sales, the related receivables would be transferred or sold to nominee entities.   + In its consent, Parmalat Finanziaria has agreed, without admitting or denying the allegations of the amended complaint, to be permanently enjoined from violating Section 10(b) of the Securities Exchange Act of 1934 and Exchange Act Rule 10b-5, as well as Section 17(a) of the Securities Act of 1993. In addition, Parmalat Finanziaria has agreed to adopt changes to its corporate governance to promote future compliance with the federal securities laws, including adopting by-laws providing for governance by a shareholder-elected board of directors, the majority of whom will be independent and serve finite terms; specifically delineating in the by-laws the duties of the board of directors; adopting a Code of Conduct governing the duties and activities of the board of directors; adopting an Insider Dealing Code of Conduct; and adopting a Code of Ethics. The by-laws will also require that the positions of chairman of the board of directors and managing director be held by two separate individuals. Parmalat Finanziaria's consent also provides for the continuing jurisdiction of the U.S. District Court to enforce its provisions. + The Commission's investigation into federal securities law violations related to the fraud at Parmalat Finanziaria is continuing. + + + + + SEC Complaint in this matter + + + + + + + + + + + + + + + + + + + + + + + + + + Return to top + + + + + SEC homepage + + + + + + + + + + + + + + About the SEC + + + + + + Budget & Performance + + + Careers + + + Commission Votes + + + Contact + + + Contracts + + + + + + + + Transparency + + + + + + Accessibility & Disability + + + Super Intelligence + + + FOIA + + + Inspector General + + + No FEAR Act Data + + + Ombuds + + + SEC Excess Personal Property Guidance + + + + + + + + Websites + + + + + + Investor.gov + + + Related Sites + + + USA.gov + + + + + + + + Site Information + + + + + + Plain Writing + + + Privacy & Security + + + Site Map + + + + + + + + + + + + + + + + + + Stay connected. 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Berryman + + + + + + + + !function(){var e=navigator.userAgent,a=document.documentElement,n=a.className;n=n.replace("no-js","js"),/iPad|iPhone|iPod/.test(e)&&!window.MSStream&&(n+=" ua-ios"),a.className=n}(); + {"path":{"baseUrl":"\/","pathPrefix":"","currentPath":"node\/494596","currentPathIsAdmin":false,"isFront":false,"currentLanguage":"en"},"pluralDelimiter":"\u0003","suppressDeprecationErrors":true,"gtag":{"tagId":"","consentMode":false,"otherIds":[],"events":[],"additionalConfigInfo":[]},"ajaxPageState":{"libraries":"eJxdT0GOwzAI_JBdn_oei2DkeINNZLC22devlaZS2wtiBhhmcKNUTPo97jxyaXEH3GJpiZrFhQW38A4cMqgeYQGlV19JFTKpQ-kUmvQKXP7I0cO4tC2kPnbg2wVdFslM0SCHPMs3vsEPPD7J6hgOGdPCKJyoRxxqUuePHjLLAuzVjimenRJGSLW08NoBK9LUn6SHlrytVOlcpJShB63QLSpBx_WkOzHNePol4fRQo_qMPvQ36ZXsAmd99lMNr2t_GUR9n60EyX9a_wePd5ns","theme":"uswds_sec","theme_token":null},"ajaxTrustedUrl":[],"gtm":{"tagId":null,"settings":{"data_layer":"dataLayer","include_classes":false,"allowlist_classes":"","blocklist_classes":"","include_environment":false,"environment_id":"","environment_token":""},"tagIds":["GTM-TD3BKV"]},"data":{"extlink":{"extTarget":false,"extTargetAppendNewWindowDisplay":true,"extTargetAppendNewWindowLabel":"(opens in a new window)","extTargetNoOverride":false,"extNofollow":false,"extTitleNoOverride":false,"extNoreferrer":false,"extFollowNoOverride":false,"extClass":"0","extLabel":"(link is external)","extImgClass":false,"extSubdomains":true,"extExclude":".*\\.gov|http:\/\/www.xbrl.org\/utr\/2013-05-17\/utr.xml|http:\/\/www.xbrl.org\/dtr\/type\/numeric-2009-12-16.xsd|http:\/\/www.xbrl.org\/dtr\/type\/nonNumeric-2009-12-16.xsd|https:\/\/secir.secure.force.com\/ombudsman\/OMMSForm","extInclude":"","extCssExclude":".data-exempt","extCssInclude":"","extCssExplicit":"","extAlert":true,"extAlertText":"You are now leaving the SEC Website. The link you have selected is located on another server. Please click on the OK button below to proceed to the selected site. The SEC does not endorse this web site, its sponsor, or any of the policies, activities, products, or services offered on the site or by any advertiser on the site.","extHideIcons":false,"mailtoClass":"0","telClass":"","mailtoLabel":"(link sends email)","telLabel":"(link is a phone number)","extUseFontAwesome":false,"extIconPlacement":"append","extPreventOrphan":false,"extFaLinkClasses":"fa fa-external-link","extFaMailtoClasses":"fa fa-envelope-o","extAdditionalLinkClasses":"","extAdditionalMailtoClasses":"","extAdditionalTelClasses":"","extFaTelClasses":"fa fa-phone","allowedDomains":null,"extExcludeNoreferrer":""}},"user":{"uid":0,"permissionsHash":"e506dfd1572f94bd1f339f1a7483bfbded31d4a9d2bdfdca3fdbc235153380ee"}} + + + + + + + + + + + + + + Skip to search field + + + + Skip to main content + + + + + + + + + + + + + + + + + + An official website of the United States government + Here’s how you know + + + Here’s how you know + + + + + + + + + + + Official websites use .gov + + + A .gov website belongs to an official government organization in the United States. + + + + + + + + + Secure .gov websites use HTTPS + + + A lock + ( Lock A locked padlock ) + or https:// means you’ve safely connected to the .gov website. Share sensitive information only on official, secure websites. + + + + + + + + + + + + + + + + + SEC homepage + + + + + + + Menu + + + + + + + + + + + + + + Close + + + + + + + + + + + + + Search SEC.gov & EDGAR + + + + + + Search + + + + + + + + + + + + + + + + + Search Filings + + + + + + + + + Search Filings + + + + + + + + + Full Text Search + + + + + + Latest Filings + + + + + + Mutual Fund Search + + + + + + Variable Insurance Products Search + + + + + + SIC Codes + + + + + + CIK Lookup + + + + + + Public Dissemination Service (PDS) + + + + + + Search Assistance + + + + + + + + + + + + + Submit Filings + + + + + + + + + Submit Filings + + + + + + + + + EDGAR Filer Management Portal + + + + + + EDGAR Filing Portal + + + + + + Online Forms Management Portal + + + + + + EDGAR Next + + + + + + Forms Index + + + + + + Filer Support & Resources + + + + + + + + + + + + + Data & Research + + + + + + + + + Data & Research + + + + + + + + + Data Library + + + + + + Statistics & Data Visualizations + + + + + + Structured Data + + + + + + Investment Management Data + + + + + + Open Data at the SEC + + + + + + + + + + + + + Rules, Enforcement, & Compliance + + + + + + + + + + + + + + + + + + + + Rules & Regulations + + + + + + + + + Rulemaking Activity + + + + + + Submit Public Comments + + + + + + Staff Guidance + + + + + + No-Action, Interpretive, and Exemptive Letters + + + + + + Self-Regulatory Organization Rulemaking + + + + + + Public Petitions for Rulemaking + + + + + + + + + + + + + + + + + Enforcement & Litigation + + + + + + + + + Litigation Releases + + + + + + Administrative Proceedings + + + + + + Administrative Law Judge Orders and Initial Decisions + + + + + + Trading Suspensions + + + + + + Distributions to Harmed Investors + + + + + + Receiverships + + + + + + + + + + + + + + + + + Compliance + + + + + + + + + Examination Priorities + + + + + + Risk Alerts + + + + + + Compliance Outreach Program + + + + + + + + + + + + + + + + + + + + + + + Proposed Rules + + + + + + What's New + + + + + + Whistleblower Program + + + + + + + + + + + + + + + + + + + Featured Topics + + + + + + + + + Featured Topics + + + + + + + + + Crypto Task Force + + + + + + Cybersecurity + + + + + + Market Structure Analytics + + + + + + Saving and Investing for Military Personnel + + + + + + Saving and Investing for Teachers + + + + + + SEC-CFTC Harmonization Initiative + + + + + + Treasury Clearing Implementation + + + + + + + + + + + + + About + + + + + + + + + About + + + + + + + + + Mission + + + + + + Commissioners + + + + + + Divisions & Offices + + + + + + Division & Office Directors + + + + + + Advisory Committees + + + + + + Budget & Performance + + + + + + Reports & Publications + + + + + + Commission Votes + + + + + + Contact the SEC + + + + + + Careers + + + + + + + + + + + + + Submit a Tip or Complaint + + + + + + + + + + + + + + + + + Newsroom + + + | + + + Investors + + + Small Businesses + + + Whistleblowers + + + + + + + + + + + + + + + Newsroom + + + | + + + Investors + + + Small Businesses + + + Whistleblowers + + + + + + + + + + + + + + + + + Search SEC.gov & EDGAR + + + + + + Search + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + More in this Section + + + + + + + + + + + + + Enforcement & Litigation + + + + + + + Litigation Releases + + + + + Administrative Proceedings + + + + + Administrative Law Judge Orders and Initial Decisions + + + + + Trading Suspensions + + + + + Distributions to Harmed Investors + + + + + Receiverships + + + + + Electronic Filings in Administrative Proceedings (eFAP) + + + + + Rules of Practice + + + + + Applications for Reentry + + + + + Reports of Investigations + + + + + Whistleblower Program + + + + + Public Alert: Unregistered Soliciting Entities (PAUSE) + + + + + SEC Action Lookup - Individuals (SALI) + + + + + Enforcement Data Delivery Standards + + + + + Small Businesses + + + + + Appellate Briefs + + + + + Amicus / Friend of the Court Briefs + + + + + + + + + + + + + + + + + + + + + + + + + + Enforcement & Litigation + + + + + + + Litigation Releases + + + + + Administrative Proceedings + + + + + Administrative Law Judge Orders and Initial Decisions + + + + + Trading Suspensions + + + + + Distributions to Harmed Investors + + + + + Receiverships + + + + + Electronic Filings in Administrative Proceedings (eFAP) + + + + + Rules of Practice + + + + + Applications for Reentry + + + + + Reports of Investigations + + + + + Whistleblower Program + + + + + Public Alert: Unregistered Soliciting Entities (PAUSE) + + + + + SEC Action Lookup - Individuals (SALI) + + + + + Enforcement Data Delivery Standards + + + + + Small Businesses + + + + + Appellate Briefs + + + + + Amicus / Friend of the Court Briefs + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + Home + + + Enforcement and Litigation + + + Litigation Releases + + + Andrew J. Zahn, Philip J. Sexauer, and Cynthia K. Berryman + + + + + + + + + + + + Andrew J. Zahn, Philip J. Sexauer, and Cynthia K. Berryman + + + + + + + + + + + + + + + + + + + U.S. Securities and Exchange Commission + + LITIGATION RELEASE NO. 18809 / July 29, 2004 + + ACCOUNTING AND AUDITING ENFORCEMENT RELEASE NO. 2066 / July 29, 2004 + + Securities and Exchange Commission v. Andrew J. Zahn, Philip J. Sexauer, and Cynthia K. Berryman , Case No. 04C4948 (N.D. Ill.). + + The Securities and Exhange Commission (the "Commission") announced today that it filed a civil injunctive action in the United States District Court for the Northern District of Illinois against Andrew J. Zahn, Philip J. Sexauer, and Cynthia K. Berryman, all of whom reside in the Chicago area. Each of these individuals is a former officer of DFG, L.L.C. ("DFG"), a Chicago-based company that was a subsidiary of a subsidiary of IBP, Inc. ("IBP"). At the time of the relevant conduct, IBP was a public company based in Dakota Dunes, South Dakota, and was one of the nation's largest producers of fresh beef and pork. + + The Commission alleges that Zahn (DFG's former president), Sexauer (DFG's chief financial officer in 1999), and Berryman (DFG's controller in 1999 and chief financial officer in 2000) engaged in an array of accounting improprieties to inflate DFG's earnings. These misstatements caused IBP to materially misstate its own financial results for the fourth quarter of 1999 and the first three quarters of 2000. Specifically, the Commission alleges that Zahn, Sexauer, and Berryman directed that DFG not charge certain expense items in the period they were incurred, but instead improperly included these amounts in inventory, prepaid expense, and accounts receivable asset accounts to overstate DFG's earnings. The Commission alleges that each of the defendants was motivated by personal compensation tied to DFG's financial performance. + + In its complaint, the Commission claims that, through these actions, each of the defendants violated Section 13(b)(5) of the Securities Exchange Act of 1934 ("Exchange Act") and Rule 13b2-1 thereunder, and aided and abetted IBP's violations of Sections 13(a), 13(b)(2)(A), and 13(b)(2)(B) of the Exchange Act and Rules 12b-20 and 13a-1 thereunder. It further claims that Zahn and Berryman violated Section 10(b) of the Exchange Act and Rules 10b-5 and 13a-13 thereunder. The Commission seeks a final judgment enjoining all of the defendants from future violations of the federal securities laws, ordering the defendants to disgorge ill-gotten gains, and imposing civil monetary penalties. The Commission also seeks an order barring Zahn and Berryman from serving as an officer or director of a public company. + + Simultaneously with the filing of the complaint, Sexauer consented to the entry of an injunction against him prohibiting him from future violations of all of the provisions the Commission claims he violated. Sexauer also agreed to pay full disgorgement of his ill-gotten gains, prejudgment interest, and a civil penalty of $35,000. + + + + +  + + + + + + + + + + + + + + + + + + + + + + + + + Return to top + + + + + SEC homepage + + + + + + + + + + + + + + About the SEC + + + + + + Budget & Performance + + + Careers + + + Commission Votes + + + Contact + + + Contracts + + + + + + + + Transparency + + + + + + Accessibility & Disability + + + Super Intelligence + + + FOIA + + + Inspector General + + + No FEAR Act Data + + + Ombuds + + + SEC Excess Personal Property Guidance + + + + + + + + Websites + + + + + + Investor.gov + + + Related Sites + + + USA.gov + + + + + + + + Site Information + + + + + + Plain Writing + + + Privacy & Security + + + Site Map + + + + + + + + + + + + + + + + + + Stay connected. 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Buzzelli + + + + + + + + + + + + Timothy J. Buzzelli + + + + + + + + + + + + + + + + + + + + + SECURITIES EXCHANGE ACT OF 1934 +Release No. 50121 / July 29, 2004 + + ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 2067 / July 29, 2004 + + Admin. Proc. File No. 3-11568 + + + + In the Matter of + TIMOTHY J. BUZZELLI (CPA), + Respondent. + + : : : : : : : : : + ORDER INSTITUTING PUBLIC ADMINISTRATIVE PROCEEDINGS PURSUANT TO RULE 102(e) OF THE COMMISSION'S RULES OF PRACTICE, MAKING FINDINGS, AND IMPOSING REMEDIAL SANCTIONS + I. + The Securities and Exchange Commission ("Commission") deems it appropriate and in the public interest that public administrative proceedings be, and hereby are, instituted against Timothy J. Buzzelli ("Respondent" or "Buzzelli") pursuant to Rule 102(e)(3) of the Commission's Rules of Practice. 1 + II. + In anticipation of the institution of these proceedings, Respondent has submitted an Offer of Settlement (the "Offer") which the Commission has determined to accept. Solely for the purpose of these proceedings and any other proceedings brought by or on behalf of the Commission, or to which the Commission is a party, and without admitting or denying the findings herein, except as to the Commission's jurisdiction over him and the subject matter of these proceedings, and the findings contained in Section III. Paragraph 3. below, which are admitted, Respondent consents to the entry of this Order Instituting Public Administrative Proceedings Pursuant to Rule 102(e) of the Commission's Rules of Practice, Making Findings, and Imposing Remedial Sanctions ("Order"), as set forth below. + + III. + On the basis of this Order and Respondent's Offer, the Commission finds that: + 1. Buzzelli, age 47, is a certified public accountant, formerly licensed by the Texas State Board of Public Accounting. He served as president of NorthStar Network, Inc. ("NorthStar") from October 1999 through May 2000. + 2. NorthStar was a Washington corporation headquartered in Dallas, Texas. From 1999 through 2001, the company was engaged in the Internet and related technology business. During the fourth quarter of 1999, NorthStar's securities were publicly traded on the Over the Counter Bulletin Board ("OTC-BB"). The company currently has no business activities; its securities are no longer traded. + 3. On August 21, 2002, the Commission filed a complaint against Buzzelli in SEC v. NorthStar Network, Inc., et al. , No. 3:02-CV-1788M (N.D. TX). On July 19, 2004, the court entered an order permanently enjoining Buzzelli, by consent, from future violations of Sections 5(a), 5(c) and 17(a) of the Securities Act of 1933 ("Securities Act") and Section 10(b) and 13(b)(5) of the Securities Exchange Act of 1934 ("Exchange Act") and Rule 10b-5 thereunder, from and aiding and abetting violations of Sections 13(a) and 13(b)(2)(A) of the Exchange Act and Rules 13a-1 and 13a-13 thereunder. Buzzelli was also ordered to pay $63,000 in disgorgement of ill-gotten gains, and $15,351.77 in prejudgment interest, however the payment of those amounts was waived, as was the imposition of a civil money penalty, based upon Buzzelli's sworn statements in his Statement of Financial Condition and other materials provided to the staff. The Court permanently barred Buzzelli from serving as an officer or director of a public company. + 4. The Commission's complaint alleged, among other things, that between October 1999 and June 2000, NorthStar and its two principal officers, Buzzelli and David Dutton ("Dutton"), fraudulently raised over $1 million from approximately 250 investors through the offer and sale of NorthStar's common stock. In sales presentations and through the dissemination of promotional materials, Buzzelli and Dutton falsely represented to investors, among other things, that NorthStar had over $10 million in assets, and that the company had multi-million dollar contracts with large, publicly traded telecommunications companies. In addition to the fraudulent representations made to investors, Buzzelli aided and abetted NorthStar's filing of a false Form 10-SB in November 1999, as well as its failure to file any periodic reports subsequent to that date. + + IV. + In view of the foregoing, the Commission deems it appropriate and in the public interest to impose the sanction agreed to in Respondent Buzzelli's Offer. + Accordingly, it is hereby ORDERED, effective immediately, that: + Buzzelli is suspended from appearing or practicing before the Commission as an accountant. + By the Commission. + + + + Jonathan G. Katz + Secretary + + + Endnotes + 1 Rule 102(e)(3)(i) provides, in relevant part, that: + The Commission, with due regard to the public interest and without preliminary hearing, may, by order, . . . suspend from appearing or practicing before it any . . . accountant . . . who has been by name . . . permanently enjoined by any court of competent jurisdiction, by reason of his or her misconduct in an action brought by the Commission, from violating or aiding and abetting the violation of any provision of the Federal securities laws or of the rules and regulations thereunder. + + + +See also the Order in this matter --> + + + + + + + + + + + + + + + + + + + + + + + + + + + Return to top + + + + + SEC homepage + + + + + + + + + + + + + + About the SEC + + + + + + Budget & Performance + + + Careers + + + Commission Votes + + + Contact + + + Contracts + + + + + + + + Transparency + + + + + + Accessibility & Disability + + + Super Intelligence + + + FOIA + + + Inspector General + + + No FEAR Act Data + + + Ombuds + + + SEC Excess Personal Property Guidance + + + + + + + + Websites + + + + + + Investor.gov + + + Related Sites + + + USA.gov + + + + + + + + Site Information + + + + + + Plain Writing + + + Privacy & Security + + + Site Map + + + + + + + + + + + + + + + + + + Stay connected. 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Buettner, CPA + + + + + + + + !function(){var e=navigator.userAgent,a=document.documentElement,n=a.className;n=n.replace("no-js","js"),/iPad|iPhone|iPod/.test(e)&&!window.MSStream&&(n+=" ua-ios"),a.className=n}(); + {"path":{"baseUrl":"\/","pathPrefix":"","currentPath":"node\/367431","currentPathIsAdmin":false,"isFront":false,"currentLanguage":"en"},"pluralDelimiter":"\u0003","suppressDeprecationErrors":true,"gtag":{"tagId":"","consentMode":false,"otherIds":[],"events":[],"additionalConfigInfo":[]},"ajaxPageState":{"libraries":"eJxdT0GOwzAI_JBdn_oei2DkeINNZLC22devlaZS2wtiBhhmcKNUTPo97jxyaXEH3GJpiZrFhQW38A4cMqgeYQGlV19JFTKpQ-kUmvQKXP7I0cO4tC2kPnbg2wVdFslM0SCHPMs3vsEPPD7J6hgOGdPCKJyoRxxqUuePHjLLAuzVjimenRJGSLW08NoBK9LUn6SHlrytVOlcpJShB63QLSpBx_WkOzHNePol4fRQo_qMPvQ36ZXsAmd99lMNr2t_GUR9n60EyX9a_wePd5ns","theme":"uswds_sec","theme_token":null},"ajaxTrustedUrl":[],"gtm":{"tagId":null,"settings":{"data_layer":"dataLayer","include_classes":false,"allowlist_classes":"","blocklist_classes":"","include_environment":false,"environment_id":"","environment_token":""},"tagIds":["GTM-TD3BKV"]},"data":{"extlink":{"extTarget":false,"extTargetAppendNewWindowDisplay":true,"extTargetAppendNewWindowLabel":"(opens in a new window)","extTargetNoOverride":false,"extNofollow":false,"extTitleNoOverride":false,"extNoreferrer":false,"extFollowNoOverride":false,"extClass":"0","extLabel":"(link is external)","extImgClass":false,"extSubdomains":true,"extExclude":".*\\.gov|http:\/\/www.xbrl.org\/utr\/2013-05-17\/utr.xml|http:\/\/www.xbrl.org\/dtr\/type\/numeric-2009-12-16.xsd|http:\/\/www.xbrl.org\/dtr\/type\/nonNumeric-2009-12-16.xsd|https:\/\/secir.secure.force.com\/ombudsman\/OMMSForm","extInclude":"","extCssExclude":".data-exempt","extCssInclude":"","extCssExplicit":"","extAlert":true,"extAlertText":"You are now leaving the SEC Website. 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Buettner, CPA + + + + + + + + + + + + William F. Buettner, CPA + + + + + + + + + + + + + + + + + + + + + SECURITIES EXCHANGE ACT OF 1934 +Release No. 50134 / August 2, 2004 + + ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 2070 / August 2, 2004 + + Admin. Proc. File No. 3-11571 + + + + In the Matter of + WILLIAM F. BUETTNER, CPA, + Respondent. + + : : : : : : : : : : + ORDER INSTITUTING ADMINISTRATIVE PROCEEDINGS PURSUANT TO RULE 102(e) OF THE COMMISSION'S RULES OF PRACTICE, MAKING FINDINGS, AND IMPOSING REMEDIAL SANCTIONS + I. + The Securities and Exchange Commission ("Commission") deems it appropriate and in the public interest that public administrative proceedings be, and hereby are, instituted against William F. Buettner ("Respondent" or "Buettner") pursuant to Rule 102(e)(3)(i) of the Commission's Rules of Practice. 1 + + II. + In anticipation of the institution of these proceedings, Respondent has submitted an Offer of Settlement (the "Offer") that the Commission has determined to accept. Solely for the purpose of these proceedings and any other proceedings brought by or on behalf of the Commission, or to which the Commission is a party, and without admitting or denying the findings herein, except as to the Commission's jurisdiction over him and the subject matter of these proceedings, and the entry of the injunction set forth in Section III.E. below, which are admitted, Respondent consents to the entry of this Order Instituting Administrative Proceedings Pursuant to Rule 102(e) of the Commission's Rules of Practice, Making Findings, and Imposing Remedial Sanctions ("Order"), as set forth below. + + III. + On the basis of this Order and Respondent's Offer, the Commission finds that: + + A. Buettner, age 53, is an inactive certified public accountant licensed in the Commonwealth of Pennsylvania. Buettner was an engagement partner on Coopers & Lybrand, L.L.P.'s ("Coopers") independent audits of Allegheny Health, Education and Research Foundation ("AHERF") for fiscal years 1989 through 1992 and sole engagement partner from 1992 through 1997. Buettner retired from Coopers, now PricewaterhouseCoopers, L.L.P. in 2000. + B. AHERF was a Pennsylvania non-profit healthcare organization formed in 1983. Through, at least, July 1998, AHERF was the parent holding company and sole member or owner of numerous subsidiaries. 2 On July 21, 1998, AHERF instituted bankruptcy proceedings under Chapter 11 of the United States Bankruptcy Code on behalf of itself and four of these subsidiaries in the U.S. District Court for the Western District of Pennsylvania. + C. As an umbrella holding company, AHERF managed and provided centralized corporate support services for subsidiaries that it acquired, but did not assume liability for their pre-existing debt. The obligation to repay debt within AHERF was the responsibility of one or more of its non-profit subsidiaries known as "obligated groups." By 1997, AHERF had five obligated groups. By the time of the bankruptcy in July 1998, AHERF's obligated groups were responsible for, at least, thirteen bond issues, with outstanding debt of more than $900 million. + D. On November 5, 2002, the Commission filed a Second Amended Complaint (the "Complaint") against Buettner and others in the United States District Court for the Eastern District of Pennsylvania. SEC v. William F. Buettner, et al., Civil Action No. 01-CV-3898 (E.D. Pa.). The Commission's Complaint alleges that, during 1997, AHERF had engaged in a scheme to conceal its deteriorating financial condition by fraudulently transferring $99.6 million of reserves from the books of one AHERF-related entity to the books of a group of AHERF-related entities collectively known as the Delaware Valley Obligated Group. The Complaint also alleges that Buettner knew or should have known that AHERF had improperly created and/or transferred certain reserves and that he knowingly or recklessly failed to conclude that 1997 income was overstated on both the 1997 AHERF consolidated financial statements and the 1997 Delaware Valley consolidating schedules. The Complaint alleges that Buettner participated in the creation and issuance of, and failed to correct the unqualified audit report on AHERF's 1997 consolidated financial statements and the report on AHERF's 1997 supplementary consolidating and combining financial information. The Complaint alleges that these reports materially misstated that the 1997 audit was conducted in accordance with Generally Accepted Auditing Standards ("GAAS") and that the financial statements fairly presented AHERF's financial condition in conformity with Generally Accepted Accounting Principles ("GAAP"). The Complaint also alleges that the reports misrepresented that the supplementary consolidating and combining financial information was fairly stated in all material respects in relation to the consolidated financial statements taken as a whole. The Complaint further alleges that, for its fiscal year 1997, AHERF reported net income when, in reality, it was operating at a substantial net loss. + E. On July 28, 2004, the United States District Court for the Eastern District of Pennsylvania entered a final judgment permanently enjoining Buettner from violating Section 10(b) of the Exchange Act and Rule 10b-5 thereunder. Buettner consented to the entry of the final judgment without admitting or denying the allegations in the Commission's Second Amended Complaint. + + IV. + + In view of the foregoing, the Commission deems it appropriate and in the public interest to impose the sanction agreed to in Respondent Buettner's Offer. + Accordingly, it is hereby ORDERED, effective immediately, that: + A. Buettner is suspended from appearing or practicing before the Commission as an accountant. + B. After four (4) years from the date of this Order, Respondent may request that the Commission consider his reinstatement by submitting an application (attention: Office of the Chief Accountant) to resume appearing or practicing before the Commission as: + + 1. a preparer or reviewer, or a person responsible for the preparation or review, of any public company's financial statements that are filed with the Commission. Such an application must satisfy the Commission that Respondent's work in his practice before the Commission will be reviewed either by the independent audit committee of the public company for which he works or in some other acceptable manner, as long as he practices before the Commission in this capacity; and/or + 2. an independent accountant. Such an application must satisfy the Commission that: + + + Respondent, or the public accounting firm with which he is associated, is registered with the Public Company Accounting Oversight Board ("Board") in accordance with the Sarbanes-Oxley Act of 2002, and such registration continues to be effective;   + Respondent, or the registered public accounting firm with which he is associated, has been inspected by the Board and that inspection did not identify any criticisms of or potential defects in the Respondent's or the firm's quality control system that would indicate that the Respondent will not receive appropriate supervision or, if the Board has not conducted an inspection, has received an unqualified report relating to his, or the firm's, most recent peer review conducted in accordance with the guidelines adopted by the former SEC Practice Section of the American Institute of Certified Public Accountants Division for CPA Firms or an organization providing equivalent oversight and quality control functions;   + Respondent has resolved all disciplinary issues with the Board, and has complied with all terms and conditions of any sanctions imposed by the Board (other than reinstatement by the Commission); and   + Respondent acknowledges his responsibility, as long as Respondent appears or practices before the Commission as an independent accountant, to comply with all requirements of the Commission and the Board, including, but not limited to, all requirements relating to registration, inspections, concurring partner reviews and quality control standards.   + + C. The Commission will consider an application by Respondent to resume appearing or practicing before the Commission provided that his state CPA license is current and he has resolved all other disciplinary issues with the applicable state boards of accountancy. However, if state licensure is dependant on reinstatement by the Commission, the Commission will consider an application on its other merits. The Commission's review may include consideration of, in addition to the matters referenced above, any other matters relating to Respondent's character, integrity, professional conduct, or qualifications to appear or practice before the Commission. + By the Commission. + + + + Jonathan G. Katz + Secretary + + + Endnotes + 1 Rule 102(e)(3)(i)(A) provides, in relevant part, that: + The Commission, with due regard to the public interest and without preliminary hearing, may, by order, . . . suspend from appearing or practicing before it any . . . accountant . . . who has been by name . . . permanently enjoined by any court of competent jurisdiction, by reason of his or her misconduct in an action brought by the Commission, from violating or aiding and abetting the violation of any provision of the Federal securities laws or of the rules and regulations thereunder. + 2 AHERF's underlying entities are referred to as "subsidiaries," although technically AHERF was their sole "member," not a shareholder. + + + + +See also the Order in this matter --> + + + + + + + + + + + + + + + + + + + + + + + + + + + Return to top + + + + + SEC homepage + + + + + + + + + + + + + + About the SEC + + + + + + Budget & Performance + + + Careers + + + Commission Votes + + + Contact + + + Contracts + + + + + + + + Transparency + + + + + + Accessibility & Disability + + + Super Intelligence + + + FOIA + + + Inspector General + + + No FEAR Act Data + + + Ombuds + + + SEC Excess Personal Property Guidance + + + + + + + + Websites + + + + + + Investor.gov + + + Related Sites + + + USA.gov + + + + + + + + Site Information + + + + + + Plain Writing + + + Privacy & Security + + + Site Map + + + + + + + + + + + + + + + + + + Stay connected. 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Individuals (SALI) + + + + + Enforcement Data Delivery Standards + + + + + Small Businesses + + + + + Appellate Briefs + + + + + Amicus / Friend of the Court Briefs + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + Home + + + Enforcement and Litigation + + + Administrative Proceedings + + + Ronald H. Hoffman + + + + + + + + + + + + Ronald H. Hoffman + + + + + + + + + + + + + + + + + + + + + SECURITIES EXCHANGE ACT OF 1934 +Release No. 50135 / August 3, 2004 + + ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 2071 / August 3, 2004 + + ADMINISTRATIVE PROCEEDING +File No. 3-9304 + + + + In the Matter of + Ronald H. Hoffman, CPA + + : : : : : : : + + ORDER GRANTING APPLICATION FOR REINSTATEMENT TO APPEAR AND PRACTICE BEFORE THE COMMISSION AS AN ACCOUNTANT RESPONSIBLE FOR THE PREPARATION OR REVIEW OF FINANCIAL STATEMENTS REQUIRED TO BE FILED WITH THE COMMISSION On April 30, 1997, Ronald H. Hoffman ("Hoffman") was suspended from appearing or practicing as an accountant before the Commission as a result of settled public administrative proceedings instituted by the Commission against Hoffman pursuant to Rule 102(e) of the Commission's Rules of Practice. 1 On April 10, 1997, the Commission filed a complaint against Hoffman and others in SEC v. Structural Dynamics Research Corporation, et al., Civil Action No. C-1-97-0352.3. On April 10, 1997, Hoffman consented to the entry of a Final Judgment of Permanent Injunction and Other Equitable Relief ("Final Judgment"), without admitting or denying the allegations in the complaint. On April 16, 1997, the United States District Court for the Southern District of Ohio entered the Final Judgment, which permanently enjoins Hoffman from violating Section 17(a) of the Securities Act of 1933 and Section 10(b) of the Securities Exchange Act of 1934 and Rules 10b-5, 13b2-1 and 13b2-2 promulgated thereunder, and orders him to pay disgorgement of $150,000 and a $50,000 civil penalty. + + Hoffman served in the capacity of Chief Financial Officer for Structural Dynamics Research Corporation ("SDRC"). From at least 1992 and continuing through the middle of September 1994, the complaint alleges that SDRC inflated revenue and earnings by recognizing both premature and fictitious revenue, and that Hoffman knew or was reckless in not knowing that SDRC improperly recognized revenue based upon purchase orders containing conditional language. The complaint further alleges that Hoffman was aware that material amounts of accounts receivable were written off during 1993 and 1994, and that Hoffman, directly or indirectly, omitted to state certain material information to SDRC's auditors in connection with their 1993 audit. Furthermore, the complaint alleges that Hoffman sold SDRC stock while in possession of material, non-public information about the accuracy of SDRC's financial statements. + + This order is issued in response to Hoffman's application for reinstatement to practice before the Commission as an accountant responsible for the preparation or review of financial statements required to be filed with the Commission. + + In his capacity as a preparer or reviewer, or as a person responsible for the preparation or review, of financial statements of a public company to be filed with the Commission, Hoffman attests that he will undertake to have his work reviewed by the independent audit committee of any company for which he works, or in some other manner acceptable to the Commission, while practicing before the Commission in this capacity. Hoffman is not, at this time, seeking to appear or practice before the Commission as an independent accountant. If he should wish to resume appearing and practicing before the Commission as an independent accountant, he will be required to submit an application to the Commission showing that he has complied and will comply with the terms of the original suspension order in this regard. Therefore, Hoffman's suspension from practice before the Commission as an independent accountant continues in effect until the Commission determines that a sufficient showing has been made in this regard in accordance with the terms of the original suspension order. + + Rule 102(e)(5) of the Commission's Rules of Practice governs applications for reinstatement, and provides that the Commission may reinstate the privilege to appear and practice before the Commission "for good cause shown." This "good cause" determination is necessarily highly fact specific. + + On the basis of information supplied, representations made, and undertakings agreed to by Hoffman, it appears that he has complied with the terms of the April 30, 1997 order suspending him from practice before the Commission as an accountant, that no information has come to the attention of the Commission relating to his character, integrity, professional conduct or qualifications to practice before the Commission that would be a basis for adverse action against him pursuant to Rule 102(e) of the Commission's Rules of Practice, and that Hoffman, by undertaking to have his work reviewed by the independent audit committee of any company for which he works, or in some other manner acceptable to the Commission, in his practice before the Commission as a preparer or reviewer of financial statements required to be filed with the Commission, has shown good cause for reinstatement. Therefore, it is accordingly, + + ORDERED pursuant to Rule 102(e)(5)(i) of the Commission's Rules of Practice that Ronald H. Hoffman, CPA is hereby reinstated to appear and practice before the Commission as an accountant responsible for the preparation or review of financial statements required to be filed with the Commission. + + + By the Commission. + + +Jonathan G. Katz +Secretary + + Endnotes + 1 See Accounting and Auditing Enforcement Release No. 911, dated April 30, 1997. Hoffman was permitted, pursuant to the order, to apply for reinstatement after five years upon making certain showings. + + Rule 102(e)(5)(i) provides: + + "An application for reinstatement of a person permanently suspended or disqualified under paragraph (e)(1) or (e)(3) of this section may be made at any time, and the applicant may, in the Commission's discretion, be afforded a hearing; however, the suspension or disqualification shall continue unless and until the applicant has been reinstated by the Commission for good cause shown." 17 C.FR § 201.102(e)(5)(i). + + + + +  + + + + + + + + + + + + + + + + + + + + + + + + + Return to top + + + + + SEC homepage + + + + + + + + + + + + + + About the SEC + + + + + + Budget & Performance + + + Careers + + + Commission Votes + + + Contact + + + Contracts + + + + + + + + Transparency + + + + + + Accessibility & Disability + + + Super Intelligence + + + FOIA + + + Inspector General + + + No FEAR Act Data + + + Ombuds + + + SEC Excess Personal Property Guidance + + + + + + + + Websites + + + + + + Investor.gov + + + Related Sites + + + USA.gov + + + + + + + + Site Information + + + + + + Plain Writing + + + Privacy & Security + + + Site Map + + + + + + + + + + + + + + + + + + Stay connected. 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Individuals (SALI) + + + + + Enforcement Data Delivery Standards + + + + + Small Businesses + + + + + Appellate Briefs + + + + + Amicus / Friend of the Court Briefs + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + Home + + + Enforcement and Litigation + + + Administrative Proceedings + + + Halliburton Company, and Robert Charles Muchmore, Jr. + + + + + + + + + + + + Halliburton Company, and Robert Charles Muchmore, Jr. + + + + + + + + + + + + + + + + + + + + + SECURITIES ACT OF 1933 +Release No. 8452 / August 3, 2004 + + SECURITIES EXCHANGE ACT OF 1934 +Release No. 50137 / August 3, 2004 + + ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 2072 / August 3, 2004 + + Admin. Proc. File No. 3-11574 + + + + In the Matter of + Halliburton Company, and Robert Charles Muchmore, Jr., + Respondents. + + : : : : : : : : : : + ORDER INSTITUTING CEASE-AND-DESIST PROCEEDINGS PURSUANT TO SECTION 8A OF THE SECURITIES ACT OF 1933 AND SECTION 21C OF THE SECURITIES EXCHANGE ACT OF 1934, MAKING FINDINGS AND IMPOSING A CEASE-AND-DESIST ORDER + I. + The Securities and Exchange Commission ("Commission") deems it appropriate and in the public interest that cease-and-desist proceedings be, and hereby are, instituted pursuant to Section 8A of the Securities Act of 1933 (the "Securities Act") and Section 21C of the Securities Exchange Act of 1934 (the "Exchange Act") against Halliburton Company ("Halliburton" or "the company") and Robert Charles Muchmore, Jr. ("Muchmore") (collectively, "Respondents"). + + II. + In anticipation of the institution of these proceedings, Halliburton and Muchmore have submitted Offers of Settlement (collectively, "Offers") that the Commission has determined to accept. Solely for the purpose of these proceedings and any other proceedings brought by or on behalf of the Commission, or to which the Commission is a party, and without admitting or denying the findings contained herein, except that Halliburton and Muchmore admit the Commission's jurisdiction over them and over the subject matter of these proceedings, Halliburton and Muchmore consent to the entry of this Order Instituting Cease-and-Desist Proceedings Pursuant to Section 8A of the Securities Act of 1933 and Section 21C of the Securities Exchange Act of 1934, Making Findings and Imposing a Cease-and-Desist Order, as set forth below. + + III. +FINDINGS + + On the basis of this Order and Respondents' Offers, the Commission finds that: 1 + + A. Respondents + Halliburton is a Delaware corporation headquartered in Houston, Texas. Halliburton's shares are registered with the Commission under Section 12(b) of the Exchange Act and trade on the New York Stock Exchange. During the relevant period Halliburton had two primary reporting segments, the Energy Services Group and the Engineering and Construction Group ("E&C"). The Energy Services Group provides exploration and logistical solutions for the exploration, development and production of oil and gas. Brown and Root Energy Services ("BRES") was a business unit of the Energy Services Group. E&C provides a wide range of industrial construction services to energy, industrial and government customers. + Muchmore , age 50, is a resident of Houston, Texas. During the relevant period, Muchmore was the controller of Halliburton. As controller, Muchmore's principal duties included responsibility for Halliburton's accounting and financial reporting. Although no longer Halliburton's controller, Muchmore remains a Halliburton employee. + B. Facts + + 1. The Evolution of Halliburton's Engineering and Construction Business + Prior to mid-1997, the business unit, BRES, and reporting segment, E&C, generally conducted business under two types of contracts: "fixed fee" and "cost-plus." Cost plus contracts provide for reimbursement to the contractor of all reasonable costs, plus an agreed upon profit payable to the contractor. Under fixed fee contracts, contractors perform for a fixed, agreed-upon fee intended by the parties to encompass all reasonable costs foreseen at the time of the contract's execution. The contractor's profit equals the margin by which the fee exceeds the contractor's costs; if those costs exceed the fee, the contractor incurs a loss on the contract. Fixed fee contracts offer, therefore, an opportunity to make larger profits - assuming the contractor can control its costs; conversely, fixed fee contracts expose the contractor to greater risk of losses in the event that the contractor cannot control costs or incurs unforeseen costs. Under either type of contract, the contractor may incur costs that were not envisioned when the contract was executed; however, under a cost plus contract, the contractor is more likely to recoup from the customer those unforeseen costs. + In mid-1997, BRES commenced several large scale fixed fee Engineering, Procurement and Construction ("EPC") projects that, according to the company, were greater in scope and complexity than the company's previous fixed-fee contracts. The earliest of these projects involved the construction of a gas production plant in the Middle East; the company's customer was a joint venture between a national oil company and a multinational oil company. 2 The contract called for completion of the project by mid 1999, at a cost of approximately $169 million. By the fourth quarter of 1997, BRES' estimated cost overruns had placed the project in an approximate $20 million loss position, as a result of which Halliburton recorded $20 million of losses in the fourth quarter of 1997. The $20 million loss gave rise to a corresponding $20 million reduction in Halliburton's fourth quarter 1997 operating income. BRES continued to estimate cost overruns on certain EPC contracts throughout 1998 and 1999. + + 2. Halliburton Changed its Accounting for Cost Reimbursement Claims, but Failed to Disclose the Change over a Six-Quarter Period + For at least five consecutive years, dating back to 1993, Halliburton disclosed in its Forms 10-K filed with the Commission that "claims for additional compensation are recognized during the period such claims are resolved." This statement of practice, regarding the company's recognition of revenue from claims for costs, never varied during that period. Pursuant to the practice, before the claim was resolved, the company generally recorded losses caused by project cost overruns; only after the claim was resolved would the company recognize the claim as an offset against the project's cost overruns. + Commencing in the second quarter of 1998, shortly after BRES commenced its EPC projects, the company changed its accounting practice, by offsetting cost overruns on the BRES EPC contracts with estimated recoveries on claims that had not been resolved with customers. Although permitted under GAAP in appropriate circumstances, this practice was a departure from Halliburton's longstanding stated practice of recognizing income only from "resolved" (i.e., "approved") claims. Under this new practice, the company began offsetting project cost overruns with revenue from unapproved claims in instances in which the company believed that the claims were probable of collection, and reliably estimable, pursuant to SOP 81-1 (.65)("unapproved claims"). 3 As a result of the change in accounting practice, cost overruns and resulting losses on several EPC contracts in the BRES business unit were reduced or eliminated. By reducing or eliminating the losses, Halliburton increased its income. 4 + The company's change in its claims recognition practice resulted in a material increase in Halliburton's publicly disclosed income, as set forth in its second and third quarter 1998 Forms 10-Q, its 1998 Form 10-K, and its first, second and third quarter 1999 Forms 10-Q; the change also resulted in materially more favorable publicly disclosed 1997-1998 quarter to quarter income comparisons. Although the accounting change is permitted under GAAP in appropriate circumstances, Halliburton failed to inform investors, until March 2000, when the company filed its 1999 Form 10-K/A, that the unapproved claims on the BRES EPC contracts were a component of the company's earnings. In the interim - spanning six quarters - none of Halliburton's periodic Commission filings disclosed the change in the company's claims recognition practice or the impact of that change on the company's financial presentation. 5 + 3. The Amounts Attributable to Halliburton's Undisclosed Change in Accounting were Material to the Company's Income as Reported in its 1998 and 1999 Commission Filings + Halliburton's recording in 1998 and 1999 of unapproved claims on the BRES EPC contracts resulted in a material increase in the income the company reported in its Forms 10-Q for the second and third quarters of 1998, its Forms 10-Q for the first, second and third quarters of 1999, and in the company's 1998 Form 10-K. 6 That impact is set forth in the table, below. Respondent Muchmore signed all of the filings as Halliburton's controller. + + + Impact on Pre-tax Income (in millions) Year + Filing + Reported Pre-Tax Income + Reported Pre-Tax Income - Without Component of Unapproved Claim Revenue + $ Difference + % Difference + 1998 +   +   +   +   +   +   + Form 10-Q [Q2] + $228.70 + $183.30 + $45.40 + 24.8% +   + Form 10-Q [Q3] + ($609.50) + ($646.20) + $36.70 + 5.7% +   + Form 10-K + $278.80 + $190.90 + $87.90 + 46.1% + 1999 +   +   +   +   +   +   + Form 10-Q [Q1] + $149.00 + $129.80 + $19.20 + 14.8% +   + Form 10-Q [Q2] + $146.00 + $135.80 + $10.20 + 7.5% +   + Form 10-Q [Q3] + $103.00 + $92.30 + $10.70 + 11.6% + 4. Halliburton's Public Disclosures regarding its Income in the Second and Third Quarters of 1998 Omitted Information regarding the Unapproved Claims Component of Income and were, therefore, Materially Misleading + + The references to Halliburton's income, and the 1997-1998 income comparisons contained in Halliburton's second and third quarter 1998 Forms 10-Q, earnings releases, and analyst teleconferences, were materially misleading. The references were misleading for two reasons: First, for at least five consecutive years, Halliburton publicly presented in its Commission filings a statement of claims recognition practice that never varied in content: "Claims for additional compensation are recognized during the period such claims are resolved." Despite changing the accounting practice in mid-1998, the company did not disclose the change in that quarter. In fact, it was not until the passage of six quarters that Halliburton disclosed the change in its 1999 Form 10-K, filed in March 2000. 7 Second, Halliburton's statement of its historical claims recognition practice was not expunged from the mix of public information, because Halliburton incorporated the statement by reference in its Forms 10-Q for the second and third quarters of 1998. 8 + Thus, the only statement of Halliburton's claims recognition practice in the public domain during the second and third quarters of 1998 was that the company recognizes claims "during the period such claims are resolved." This statement of accounting practice, out-of-date with respect to the BRES EPC contracts, was incorporated by reference in, and rendered materially misleading, the public information Halliburton issued regarding its income in the second and third quarters of 1998, including information in its second and third quarter 1998 Forms 10-Q, earnings releases and analysts' teleconferences. + One of Muchmore's chief responsibilities was to ensure the accuracy of the Forms 10-Q, which he reviewed and signed. In addition, Muchmore, with the assistance of Halliburton finance personnel under his supervision, prepared Halliburton's quarterly earnings releases, together with the scripts that were used by several Halliburton senior officers in the company's quarterly analysts' teleconferences - that Muchmore attended. + a. The Second Quarter of 1998 + i. Form 10-Q + Halliburton's Form 10-Q for the second quarter of 1998 did not disclose that the offset of cost overruns by unapproved claims resulted in income to the company in the second quarter 24.7% greater than without the offset. In addition, the Income Statement in the filing reflected a 34% 1997-1998 quarter-to-quarter increase in Halliburton's net income; without taking into account unapproved claims, the quarter-to-quarter increase would have been only 6.7%. The company also stated in the filing's MD&A "Results of Operations" that Energy Services Group's (the division encompassing BRES) operating income in 1998 was 24% greater than in 1997. Without taking into account unapproved claims, Energy Services Group's operating income would have actually decreased 4.5%. + ii. Earnings Release + + The second quarter earnings release omitted the same information. The company's second quarter 1998 earnings release, issued July 22, 1998, is entitled: "Halliburton 1998 Second Quarter Net Income Up 34 Percent." As previously mentioned, without unapproved claims, Halliburton's net income increased only 6.7%. The company also stated in the release: "The Energy Group's 1998 second quarter operating income increased 24 percent to $198.3 million compared to the prior year period." The release contained no clarification that, without unapproved claims, the Energy Group's operating income actually decreased 4.5%. Finally, the company stated in the release, "For the six-month period ending June 30, 1998, net income increased 38% to $254.3 million." The release contained no clarification that without unapproved claims, net income over the six-month period would have increased only 22.4% in 1998, as compared to 1997, not 38%. + The company also stated in its second quarter earnings release: "Halliburton Company reports 1998 second quarter net income of $136.5 million ($.51 per share diluted), an increase of 34 percent compared to $101.9 million ($.40 per share diluted) earned in the 1997 second quarter." The earnings release contained no clarification that, without unapproved claims, Halliburton's EPS would have been $.41, not $.51, which was the analysts' consensus EPS estimate. + iii. Analysts' Teleconference + The company's statements in the second quarter analyst teleconference conducted on July 22, 1998, and based on a prepared script, also omitted material information regarding unapproved claims as an offset against cost overruns. The company stated that its net income "was up 34%" as compared to the second quarter of 1997. As previously mentioned, without unapproved claims, Halliburton's net income in the quarter increased only 6.7%. The company also indicated in the teleconference that the Energy Group's second quarter 1998 operating income increased 24% to $198.3 million, compared to the second quarter of 1997. Investors were not told that without unapproved claims, the Energy Group's operating income would have actually decreased 4.5%, as compared to the second quarter of 1997. Finally, the company said, again based on the script, that the company's EPS for the quarter was $.51. The company failed to clarify that without unapproved claims, Halliburton's EPS would have been only $.41. + The company also reported in the teleconference BRES' operating results. The company stated that BRES' operating income had increased 40% over the second quarter of 1997. There was no clarification that without unapproved claims, BRES' operating income would have actually decreased approximately 148%. Moreover, the company failed to clarify that the 5.5% operating income margin for BRES would have been -2% without unapproved claims. + b. The Third Quarter of 1998 + i. Form 10-Q + Halliburton's Form 10-Q for the third quarter of 1998 did not disclose that the offset of cost overruns by unapproved claims resulted in income to the company in the third quarter 5.7% greater than without the offset. In addition, the company included in the MD&A section of the filing, entitled "Results of Operations," a statement that "Energy Services Group's operating income decreased 8% to $262.7 million in the third quarter of 1998 compared with $287 million in the same quarter of the prior year." There was no clarification in the Form 10-Q that without the unapproved claims, the Energy Services Group's operating income would have actually decreased 21% in 1998, as compared to its operating income in the third quarter of 1997. + ii. Earnings Release + The third quarter earnings release omitted the same information. In the company's third quarter 1998 earnings release, issued on October 29, 1998, the company stated: "The Energy Services Group's 1998 third quarter operating income was $263 million, off eight percent from the 1997 quarter." The release contained no clarification that without unapproved claims, Energy Services Group's operating income would have decreased 21% to $226 million. The company also stated in the release: "Halliburton Company announces that the company earned $195 million ($.44 per diluted share) in the 1998 third quarter, compared to $218 million ($.50 per diluted share) in the 1997 third quarter, before recognition of special charges." The company did not mention in the release that without unapproved claims, Halliburton would have earned only $172 million - a difference of 13.3%. Finally, the earnings release contained no clarification that, without unapproved claims, Halliburton's EPS for the quarter would have been $.39, not $.44, which was the analysts' consensus estimate. + iii. Analysts' Teleconference + + The company's statements in the third quarter analyst teleconference, conducted on October 29, 1998, and again based on the prepared script, also omitted material information regarding the unapproved claims component of Halliburton's earnings. The company stated: "From an operating income standpoint for the Energy Services Group, operating income declined 9% to $263 million for the quarter." Investors were not told that without unapproved claims, the Energy Services Group's operating income would have declined 21%. The company reported: "Our [Halliburton's] earnings per share were $.44." The company failed to clarify that, without unapproved claims, Halliburton's EPS would have been only $.39. + The company also stated at the teleconference: "[R]evenues for this group [BRES] are up 33%. We continue to be very, very pleased with the direction and growth of this aspect of our business even in a down market. And I think it [BRES] continues to be one of the real hidden stars within the Halliburton portfolio of businesses that we have." The company omitted mention that unapproved claims, which offset cost overruns, were a positive component of Halliburton's earnings. The script continues: "For [BRES], operating income increased 17% over the prior year. Margins are now starting to get back into the territory that we thought they would toward the end of the year with its [BRES'] margins for the third quarter being 8.6%." There was no clarification that, without unapproved claims, BRES' operating income would have actually decreased approximately 54% (from $52.7 million to $24 million), not increased 17% (from $52.7 million to $60 million). Moreover, without unapproved claims, BRES' operating margins would have been only 3.6%. + 5. Halliburton's Ultimate Disclosure of its Accounting Change was Misleading + In the 1999 Form 10-K Halliburton filed with the Commission on March 14, 2000, Halliburton disclosed for the first time the change it made, six quarters earlier, in its accounting for unapproved claims. In the filing, the company stated that, in 1998, the company accrued $89 million in unapproved claims, and in 1999, $98 million in unapproved claims. The company did not disclose in the 1999 Form 10-K, however, $34 million of unapproved claims that the company recognized in 1999 in connection with joint venture projects. The omission flattened the ascending curve of unapproved claims recognized by the company: instead of reporting $132 million in unapproved claims in 1999, the company reported $98 million - a $9 million, as opposed to $43 million increase over the 1998 figure. + IV. +LEGAL DISCUSSION + + A. Halliburton's Violations of Section 17(a)(2) of the Securities Act + Section 17(a)(2) of the Securities Act prohibits making untrue statements of fact and misleading omissions of facts in the offer or sale of a security. 9 To constitute a violation of Section 17(a)(2), the alleged untrue statements or omitted facts must be material. Information is deemed material upon a showing of a substantial likelihood that the misrepresented or omitted facts would have assumed significance in the investment deliberations of a reasonable investor. Basic, Inc. v. Levinson, 485 U.S. 224 (1988). Establishing violations of Section 17(a)(2) does not require a showing of scienter. Aaron v. SEC, 446 U.S. 680 (1980). + Halliburton violated Section 17(a)(2) of the Securities Act in connection with its second and third quarter 1998 Forms 10-Q, earnings releases, and analysts' teleconferences. For at least five consecutive years, Halliburton publicly presented in its Commission filings a statement of claims recognition practice that never varied in content: "Claims for additional compensation are recognized during the period such claims are resolved." Despite making a significant change to its practice in mid-1998 with respect to the BRES EPC contracts, the company (1) eliminated its historical statement of practice without explanation in 1998 and (2) did not disclose the change until the passage of six quarters. There was no way for the investing public, or for analysts following Halliburton, to discern the fact that, over the relevant six-quarter period, the company had offset cost overruns through the application of SOP 81-1 (.65), and that the offsets materially increased Halliburton's reported income. A reasonable investor, or potential investor, would have wanted to know this information in making a decision regarding an investment in Halliburton. + In fact, Halliburton incorporated by reference in its second and third quarter 1998 Forms 10-Q the discontinued claims recognition practice set forth in its 1997 Form 10-K/A. The representation resulting from the incorporated reference - that Halliburton was still following its stated unapproved claims recognition practice - was materially misleading. A reasonable investor would have erroneously inferred that the income figures and 1997-1998 quarter-to-quarter income comparisons contained in the filings and earnings releases, and discussed at the analysts' teleconferences, were in no way impacted by unapproved claims. In fact, they were materially impacted by such claims. + In addition, the company's incomplete disclosure of the amount of unapproved claims it recognized in 1999 was materially misleading. The omitted amount, $34 million, was material. The omission flattened the ascending curve of unapproved claim amounts: instead of reporting the actual $132 million in unapproved claims it used in 1999, the company reported only $98 million - a $9 million, as opposed to $43 million increase over the 1998 figure. + B. Halliburton's Reporting Violations: Section 13(a) of the Exchange Act and Rules 12b-20, 13a-1 and 13a-13 thereunder + Section 13(a) of the Exchange Act requires issuers such as Halliburton to file periodic reports with the Commission containing such information as the Commission prescribes by rule. Exchange Act Rule 13a-1 requires issuers to file annual reports, and Exchange Act Rule 13a-13 requires issuers to file quarterly reports. Under Exchange Act Rule 12b-20, the reports must contain, in addition to disclosures expressly required by statute and rules, such other information as is necessary to ensure that the statements made are not, under the circumstances, materially misleading. 10 The obligation to file reports includes the requirement that the reports be true and correct. United States v. Bilzerian, 926 F.2d 1285, 1298 (2d Cir.), cert. denied, 502 U.S. 813 (1991). The reporting provisions are violated if false and misleading reports are filed. SEC v. Falstaff Brewing Corp., 629 F.2d 62, 67 (D.C. Cir. 1980). Scienter is not an element of a Section 13(a) violation. SEC v. Savoy Indus., Inc., 587 F.2d 1149,1167 (D.C. Cir. 1978). + Halliburton violated these provisions by failing to disclose in periodic reports it filed with the Commission its change in claims accounting. Specifically, Halliburton omitted the disclosure in its Forms 10-Q for the second and third quarters of 1998, and first, second and third quarters of 1999, and in the company's 1998 Form 10-K. Moreover, for the reasons stated in the preceding section, Halliburton's second and third quarter 1998 Forms 10-Q were materially misleading. Consequently, the company violated Exchange Act Rule 12b-20, in addition to Section 13(a) and Rules 13a-1 and 13a-13. Finally, the company's 1999 Form 10-K was materially misleading, due to the company's material omission of any reference to the $34 million of unapproved claims it recognized in 1999, in connection with joint venture projects. + C. Muchmore Caused Halliburton's Violations + By preparing and signing Halliburton's Forms 10-Q for the relevant quarters, and the 1998 and 1999 Forms 10-K, by assisting in the preparation and review of the relevant quarterly earnings releases and analysts' teleconference scripts, and by attending the analysts' teleconferences, Muchmore caused Halliburton's violations. Muchmore should have known that his failure to cause the company to disclose in timely fashion the change in its claims accounting would result in the public dissemination of materially misleading information and violations of the federal securities laws. Consequently, Muchmore caused Halliburton's violations of Section 17(a)(2) of the Securities Act, and Section 13(a) of the Exchange Act and Rules 12b-20, 13a-1 and 13a-13 thereunder. + V. + The Commission finds that Halliburton violated, and that Muchmore caused Halliburton's violations of Section 17(a)(2) of the Securities Act, and Section 13(a) of the Exchange Act and Rules 12b-20, 13a-1 and 13a-13 thereunder. + VI. + In view of the foregoing, the Commission deems it appropriate to impose the sanctions agreed to in the Respondents' Offers. 11 + Accordingly, it is hereby ORDERED that: + A. Respondent Halliburton cease and desist from committing or causing any violation and any future violation of Section 17(a)(2) of the Securities Act, and Section 13(a) of the Exchange Act and Rules 12b-20, 13a-1 and 13a-13 thereunder; and that + B. Respondent Muchmore cease and desist from committing or causing any violation and any future violation of Section 17(a)(2) of the Securities Act, and from causing any violation and any future violation of Section 13(a) of the Exchange Act and Rules 12b-20, 13a-1 and 13a-13 thereunder. + By the Commission. + + + + + Jonathan G. Katz + Secretary + + + Endnotes + 1 The findings herein are made pursuant to Respondents' Offers and are not binding on any other person or entity in these or any other proceedings. + 2 The other projects involved the construction of pipelines in South America. + 3 In changing its accounting practice, Halliburton relied on Paragraph 65 of the American Institute of Certified Public Accountants' Statement of Position 81-1 ("SOP 81-1"). Paragraph 65 applies to "claims" in excess of the agreed contract price (or amounts not included in the original contract price) that a contractor seeks to collect from customers. Under Paragraph 65, the recognition of amounts of additional contract revenue relating to claims is appropriate only if it is probable that the claim will result in additional contract revenue (i.e., is probable of collection), and if the amount can be reliably estimated. + These two requirements are satisfied by the existence of all the following conditions: (a) the contract or other evidence provides a legal basis for the claim; (b) additional costs are caused by circumstances that were unforeseen at the contract date and are not the result of deficiencies in the contractor's performance; (c) costs associated with the claim are identifiable or otherwise determinable and are reasonable in view of the work performed; and (d) the evidence supporting the claim is objective and verifiable, not based on management's "feel" for the situation or on unsupported representations. Paragraph 65 also contains the admonition, "The amounts recorded, if material, should be disclosed in the notes to the financial statements." + 4 The Commission does not find in this Order that Halliburton's application of Paragraph 65 of SOP 81-1, or that the amounts reported throughout the relevant period, were not in accordance with GAAP. + 5 In Halliburton's 1998 Form 10-K, the company removed the claims recognition statement that had appeared in earlier Halliburton Forms 10-K. Halliburton did not explain in the filing, or in any other form of public statement, the reason for its removal. Moreover, Halliburton did not, in its 1998 Form 10-K, replace the removed accounting statement with an affirmative statement disclosing the company's new accounting practice. + 6 The change in accounting had a negligible effect on Halliburton's revenues, typically less than 1% in each of the relevant quarters. + 7 Accounting Principles Board Opinion #20 ("APB # 20"), "Accounting Changes," prescribes that if a company changes its accounting principles, the company should disclose the nature of, and the justification for, the change and its effect upon income in the financial statements for the period in which the change is made. The justification for the change should explain clearly why the newly adopted accounting principle is preferable. The phrase "accounting principle" includes not only accounting principles and practices, but also the methods of applying them. + 8 Halliburton incorporated by reference its discontinued claims recognition practice in Note 1, entitled "Management Representations," included in the financial statements appended to its second quarter and third quarter 1998 Forms 10-Q. + 9 Because Halliburton offered and sold quantities of its securities in a registered offering during 1998, Halliburton's materially misleading omissions were committed in offers and sales of securities, in violation of Section 17(a)(2). Specifically, Halliburton conducted a debt security offering pursuant to a Section 424B3 prospectus ("prospectus"), filed on September 30, 1998. The prospectus incorporates by reference Halliburton's 1997 Form 10-K, and Halliburton's Forms 10-Q for the second and third quarters of 1998. + 10 In addition to the provisions of APB #20 set forth in note 7, supra, APB #20 also prescribes that the effect on income resulting from a material change in estimate be disclosed. Moreover, Paragraph 65 of SOP 81-1 expressly provides that the amounts recorded pursuant to the paragraph should be disclosed, if material, in the notes to the financial statements. Halliburton failed to conform to these provisions. + 11 In connection with a settled parallel civil action filed by the Commission, Halliburton has agreed to pay a $7.5 million civil penalty. 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Buettner, Mark D. Kirstein and Amy S. Frazier + + + + + + + + + + + + William F. Buettner, Mark D. Kirstein and Amy S. Frazier + + + + + + + + + + + + + + + + + + + U.S. SECURITIES AND EXCHANGE COMMISSION + Litigation Release No. 18818 / August 3, 2004 + + Accounting and Auditing Enforcement +Release No. 2073 / August 3, 2004 + + SECURITIES AND EXCHANGE COMMISSION v. WILLIAM F. BUETTNER, MARK D. KIRSTEIN AND AMY S. FRAZIER , (US District Court for the Eastern District of Pennsylvania, 01-CV-3898) + + The Commission today announced that on July 28, 2004, the Honorable Norma L. Shapiro, United States District Court Judge, Eastern District of Pennsylvania, entered Final Judgments against defendants William F. Buettner, Mark D. Kirstein, and Amy S. Frazier -- members of the Coopers & Lybrand, LLP (now PricewaterhouseCoopers, LLP) engagement team that audited the consolidated financial statements of Allegheny Health, Education and Research Foundation ("AHERF") for the year ending June 30, 1997: + The Final Judgment as to defendant Buettner permanently enjoins him from violating section 10(b) of the Securities Exchange Act of 1934 ("Exchange Act") and Rule 10b-5 thereunder, and requires him to pay a civil money penalty of $40,000.00.   + The Final Judgments as to defendants Kirstein and Frazier enjoin them from participating as a member of the engagement team of any independent auditing firm that issues audit reports in connection with the financial statements of any public or private entity for a two-year period.   + The defendants consented to the entry of the final judgments without admitting or denying the allegations of the Second Amended Complaint ("complaint"). + According to the allegations of complaint, Buettner, Kirstein, and Frazier, certified public accountants, served respectively as the engagement partner, the senior manager, and the manager on the failed audit of AHERF -- at its height the largest nonprofit healthcare organization in the Commonwealth of Pennsylvania. The Commission's complaint also alleged that each of them actively participated in a fraudulent scheme to mask AHERF's deteriorating financial condition. In so doing, the defendants participated in the creation and issuance of, and failed to correct, audit reports that contained unqualified opinions concerning AHERF's 1997 consolidated financial statements and AHERF's 1997 supplementary consolidating and combining financial information. For its fiscal year 1997, AHERF reported net income when, in reality, it was operating at substantial net loss. + The scheme, as alleged in the complaint, involved the fraudulent transfer of $99.6 million of reserves from the books of a recently-acquired entity to the books of a group of AHERF-related entities collectively known as the Delaware Valley Obligated Group ("Delaware Valley"). The transferred reserves were used by Delaware Valley to either increase its own reserves or to reduce expenses related to the write-off of uncollectible accounts receivable. According to the complaint, Buettner, Kirstein and Frazier played an active role in the fraud by, among other things, helping AHERF plan fraudulent transfers of reserves and subsequently conducting the 1997 audit in a manner intended to hide both the fraud and their involvement in it. Furthermore, they failed to expand their audit to address the improper transfers, or to investigate evidence of other transfers that violated Generally Accepted Accounting Principles ("GAAP"), as required by Generally Accepted Auditing Standards ("GAAS"). + Ultimately, the complaint charged that the defendants knowingly or recklessly caused Coopers and Lybrand to issue false and misleading audit reports containing unqualified opinions that enhanced the credibility of AHERF's reported financial statements. The audited financial statements with attached consolidating schedules were made available to, among others, investors in AHERF-related bonds. The audit reports falsely state, among other things, that the audit was conducted in accordance with GAAS and that the financial statements were in accordance with GAAP and fairly presented AHERF's financial condition. The financial statements, issued by AHERF in February 1997, materially misrepresented that AHERF and Delaware Valley had net income of $21.9 million and $23.7 million, respectively, for fiscal year 1997. Absent the fraud, AHERF and Delaware Valley would have posted substantial net losses of approximately $37.7 million and $35.9 million respectively. + On July 21, 1998, AHERF filed for bankruptcy protection under Chapter 11 of the United States Bankruptcy Code on behalf of itself and four of its subsidiaries in the U.S. District Court for the Western District of Pennsylvania. By the time of the bankruptcy filing, one or more of the obligated groups were responsible for repaying a total of more than $900 million of outstanding AHERF Bonds. Subsequently, on September 2, 1998, AHERF issued a press release in which it acknowledged that its audits consolidated financial statement for 1997 were inaccurate. In the release, AHERF stated that "[n]o further reliance should be placed on the financial statements or the [Coopers] report thereon." + The Commission also announced that, based upon the District Court injunction, it had instituted and simultaneously settled a Rule 102(e)(3) proceeding against Buettner. With Buettner's consent, the Commission suspended him from appearing or practicing before the Commission as an accountant with the right to apply for reinstatement after a period of four years. + See SEC v. William F. Buettner, Mark D. Kirstein and Amy S. Frazier, Litigation Rel. No. 17708 ; Accounting and Auditing Enforcement Release No. 1624 (Sept. 4, 2002); SEC v. William F. Buettner, Mark D. Kirstein and Amy S. Frazier, Litigation Rel. No. 17083 ; Accounting and Auditing Enforcement Release No. 1431 (Aug. 1, 2001); In the Matter of Charles P. Morrison, CPA, SEC Litigation Rel. No. 16885 , Accounting and Auditing Enforcement Rel. No. 1365 (Jan. 1, 2001); In the Matter of Allegheny Health, Education and Research Foundation, Exchange Act Rel. No.42992 (June 30, 2000); SEC v. David W. McConnell and Charles P. Morrison, SEC Litigation Rel. No. 16534 , Accounting and Auditing Enforcement Rel No. 1254 (May 2, 2000); In the Matter of Albert Adamczak, CPA, Exchange Act Rel. No. 42743 (May 2, 2000); In the Matter of Stephen H. Spargo, CPA, Exchange Act Rel. No. 42742 (May 2, 2000). + + + + SEC Complaint in this matter --> + + + + + + + + + + + + + + + + + + + + + + + + + + Return to top + + + + + SEC homepage + + + + + + + + + + + + + + About the SEC + + + + + + Budget & Performance + + + Careers + + + Commission Votes + + + Contact + + + Contracts + + + + + + + + Transparency + + + + + + Accessibility & Disability + + + Super Intelligence + + + FOIA + + + Inspector General + + + No FEAR Act Data + + + Ombuds + + + SEC Excess Personal Property Guidance + + + + + + + + Websites + + + + + + Investor.gov + + + Related Sites + + + USA.gov + + + + + + + + Site Information + + + + + + Plain Writing + + + Privacy & Security + + + Site Map + + + + + + + + + + + + + + + + + + Stay connected. 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Morris, Halliburton Company and Robert Charles Muchmore, Jr. + + + + + + + + + + + + Gary V. Morris, Halliburton Company and Robert Charles Muchmore, Jr. + + + + + + + + + + + + + + + + + + + U.S. SECURITIES AND EXCHANGE COMMISSION + Litigation Release No. 18817 / August 3, 2004 + Accounting and Enforcement Release No. 2074 / August 3, 2004 + + SEC Files Suit against Halliburton's Former Chief Financial Officer for Failing to Disclose Accounting Change that Materially Increased Halliburton's Reported Income + + In the Matter of Halliburton Company and Robert Charles Muchmore, Jr., +Securities Exchange Act of 1934 Release Number 50137 +Securities Act of 1933 Release Number 8452 + + Securities and Exchange Commission v. Gary V. Morris, Civil Action No. H-04-3096, U.S.D.C./Southern District of Texas (Houston Division) + + Securities and Exchange Commission v. Halliburton Company and Robert Charles Muchmore, Civil Action No. H- , U.S.D.C./Southern District of Texas (Houston Division) + + On August 3, 2004, the Commission announced that it filed a civil action in federal district court against Gary V. Morris, the former chief financial officer of Halliburton Company (Halliburton or the company). Halliburton is a Texas-based provider of products and services to the petroleum and energy industries. The Commission alleges in its complaint that Morris, at the time Halliburton's highest-ranking financial officer, improperly failed to ensure that Halliburton disclosed a change in its accounting that had the effect of materially increasing the company's reported income in 1998 and 1999. The Commission also alleges that Morris participated in the preparation of earnings releases and in analyst teleconferences in which the company, improperly, touted its quarterly income results without clarifying that those results were materially affected by the accounting change. In its lawsuit, the Commission is seeking a permanent injunction and a civil money penalty against Morris. + The Commission alleges in its complaint that, commencing in the second quarter of 1998, Halliburton changed its accounting in connection with several large projects to enable it to begin offsetting cost overruns with estimated recoveries on claims the company had not yet resolved with its customers. According to the complaint, although permitted under Generally Accepted Accounting Principles in appropriate circumstances, this practice was a significant departure from Halliburton's longstanding public disclosure regarding its recognition of claims revenue. As alleged in the complaint, in the previous five consecutive years, dating back to 1993, Halliburton disclosed in its Forms 10-K that it recognized revenue from such claims only after the claim was resolved with the customer; pursuant to that practice, until the claim was resolved the company recorded losses caused by cost overruns. + According to the Commission's complaint, as a result of Halliburton's undisclosed change in accounting practice, cost overruns and resulting losses on several projects were reduced or eliminated, triggering material increases to Halliburton's income: in its 1998 Form 10-K, by 46.1%, and in its Forms 10-Q for the second and third quarters of 1998, by 24.8% and 5.7%, respectively, and in its Forms 10-Q for the first, second and third quarters of 1999, by 14.8%, 7.5% and 11.6%, respectively. Additionally, the Commission alleges that the change in claims recognition policy materially enhanced Halliburton's publicly disclosed 1997-1998 quarter-to-quarter income comparisons. According to the complaint, despite the material impact of the accounting change on Halliburton's reported income, the company did not disclose the change until March 2000, in its 1999 Form 10-K - almost two years after the change went into effect. In its civil suit, the Commission alleges that Morris violated Sections 17(a)(2) and 17(a)(3) of the Securities Act of 1933 (Securities Act) and aided and abetted Halliburton's violations of the reporting provisions of the Securities Exchange Act of 1934 (Exchange Act): Section 13(a) of the Exchange Act and Rules 12b-20, 13a-1 and 13a-13 thereunder. + On August 3, 2004, the Commission issued a cease-and-desist order (Order) relating to Halliburton's disclosure failures and to the role of Halliburton's former controller, Robert Charles Muchmore, in those failures. The settled Order requires that Halliburton and Muchmore cease and desist from committing or causing violations and future violations of Section 17(a)(2) of the Securities Act and that Halliburton cease and desist from committing or causing, and Muchmore cease and desist from causing, violations and future violations of Section 13(a) of the Exchange Act and Rules 12b-20, 13a-1 and 13a-13 thereunder. Halliburton and Muchmore consented to the Order without admitting or denying the findings contained in the Order. Halliburton and Muchmore also agreed to pay civil penalties of $7.5 million and $50,000, respectively. The Commission's Order noted that the penalty, in part, reflects the Commission's view that there were unacceptable lapses in the company's conduct during the course of the investigation, which had the effect of delaying the production of information and documentation necessary to the staff's expeditious completion of its investigation. + + + + SEC Complaint in this matter (Halliburton Company and Robert Charles Muchmore, Jr.) + + SEC Complaint in this matter (Gary V. 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Individuals (SALI) + + + + + Enforcement Data Delivery Standards + + + + + Small Businesses + + + + + Appellate Briefs + + + + + Amicus / Friend of the Court Briefs + + + + + + + + + + + + + + + + + + + + + + + + + + Enforcement & Litigation + + + + + + + Litigation Releases + + + + + Administrative Proceedings + + + + + Administrative Law Judge Orders and Initial Decisions + + + + + Trading Suspensions + + + + + Distributions to Harmed Investors + + + + + Receiverships + + + + + Electronic Filings in Administrative Proceedings (eFAP) + + + + + Rules of Practice + + + + + Applications for Reentry + + + + + Reports of Investigations + + + + + Whistleblower Program + + + + + Public Alert: Unregistered Soliciting Entities (PAUSE) + + + + + SEC Action Lookup - Individuals (SALI) + + + + + Enforcement Data Delivery Standards + + + + + Small Businesses + + + + + Appellate Briefs + + + + + Amicus / Friend of the Court Briefs + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + Home + + + Enforcement and Litigation + + + Litigation Releases + + + Bristol-Myers Squibb Company + + + + + + + + + + + + Bristol-Myers Squibb Company + + + + + + + + + + + + + + + + + + + U.S. Securities and Exchange Commission + + Litigation Release No. 18820 / August 4, 2004 + + Accounting and Auditing Enforcement Release No. 2075 / August 4, 2004 + + Securities and Exchange Commission v. Bristol-Myers Squibb Company , Civil Action No. 04-3680 (D.N.J.) (Filed Aug. 4, 2004) (Hochberg, J.) + + The Securities and Exchange Commission today announced the filing of a settled civil fraud action in the United States District Court for the District of New Jersey against Bristol-Myers Squibb Company ("Bristol-Myers"). + + The Commission's Complaint alleges that, from the first quarter of 2000 through the fourth quarter of 2001, Bristol-Myers engaged in a fraudulent scheme to overstate its sales and earnings in order to create the false appearance that the Company had met or exceeded financial projections set by the Company's officers ("targets") and earnings estimates established by Wall Street securities analysts. Bristol-Myers inflated its results primarily by: (1) stuffing its distribution channels with excess inventory near the end of every quarter in amounts sufficient to meet sales and earnings targets set by officers ("channel-stuffing"); and (2) improperly recognizing about $1.5 billion in revenue from consignment-like sales associated with the channel-stuffing in violation of generally accepted accounting principles ("GAAP"). When Bristol-Myers' results fell short of the Wall Street analysts' earnings estimates, the Company used improper accounting, including "cookie jar" reserves, to further inflate its earnings. At no time during 2000 or 2001, did Bristol-Myers disclose that: (1) it was artificially inflating its results through channel-stuffing; (2) channel-stuffing was contributing to a buildup in wholesaler inventory levels; (3) the buildup in wholesaler inventory posed a risk to Bristol-Myers' future sales and earnings; or (4) the Company was using improper accounting, including "cookie jar" reserves, to further inflate its results. In March 2003, Bristol-Myers restated its prior financial statements and disclosed its channel-stuffing activities and improper accounting. + + Simultaneous with the filing of the Commission's Complaint, Bristol-Myers consented, without admitting or denying the allegations in the Commission's Complaint, to the following relief: + + a permanent injunction against future violations of certain antifraud, reporting, books and records and internal controls provisions of the federal securities laws. + + monetary remedies for the benefit of shareholders, including a civil penalty of $100 million plus a $50 million shareholder fund. + + various remedial undertakings, including the appointment of an independent advisor to review Bristol-Myers' accounting practices and internal control systems and periodically assess the status of remedial actions undertaken or planned by the Company in those and other areas, such as financial reporting. + The Commission's investigation is continuing. The Commission acknowledges the assistance and cooperation of the United States Attorney's Office for the District of New Jersey and the Federal Bureau of Investigation in this matter. + + + SEC Complaint in this matter + + + + + +  + + + + + + + + + + + + + + + + + + + + + + + + + Return to top + + + + + SEC homepage + + + + + + + + + + + + + + About the SEC + + + + + + Budget & Performance + + + Careers + + + Commission Votes + + + Contact + + + Contracts + + + + + + + + Transparency + + + + + + Accessibility & Disability + + + Super Intelligence + + + FOIA + + + Inspector General + + + No FEAR Act Data + + + Ombuds + + + SEC Excess Personal Property Guidance + + + + + + + + Websites + + + + + + Investor.gov + + + Related Sites + + + USA.gov + + + + + + + + Site Information + + + + + + Plain Writing + + + Privacy & Security + + + Site Map + + + + + + + + + + + + + + + + + + Stay connected. 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Anixter, et al. + + + + + + + + + + + + Scott C. Anixter, et al. + + + + + + + + + + + + + + + + + + + + + On July 29, 2004, the Securities and Exchange Commission filed an amended complaint in the United States District Court for the Northern District of Illinois that added Scott C. Anixter, the former Chairman of the Board of Anicom, Inc., as a defendant to its lawsuit against six top executives and other employees of the now-defunct company. Anixter, age 55, is a resident of Glencoe, Illinois. + + The Commission's amended complaint alleges that from January 1, 1998 through March 30, 2000, Anixter and the other defendants carried out a massive financial fraud at Anicom in which they falsely reported millions of dollars of non-existent sales, including sales to a fictitious customer, and used other fraudulent techniques to inflate Anicom's net income by more than $20 million. To conceal the fraud, certain of the defendants lied to Anicom's outside auditors, lied to the Audit Committee of Anicom's Board of Directors in an internal investigation, and withheld information from the Commission's staff. When aspects of the fraud were eventually revealed to the public, Anicom's shareholders lost more than $80 million. + + The Commission's amended complaint alleges that the fraud had two distinct aspects. First, Anixter and his co-defendants, President and Chief Executive Officer Carl E. Putnam, Vice President of Sales Daryl T. Spinell, Chief Operating Officer John P. Figurelli, and Billing Manager Renee L. LeVault, improperly recognized numerous sales that inflated reported revenues and net profits. Additionally, Chief Financial Officer Donald C. Welchko, Figurelli, LeVault, and defendant Vice President of Accounting Ronald M. Bandyk, C.P.A., with Anixter and Putnam's knowledge, caused Anicom in 1999 to, among other things, improperly recognize more than $11.7 million in sales to a fictitious customer called SCL Integration Corp. to minimize the effect on income of writing off earlier improper sales. + + Second, Anixter and Welchko improperly manipulated Anicom's expenses to bring the company's financial results in line with, or at least closer to, analysts' expectations. To that end, Welchko and Bandyk engaged in fraud by improperly charging certain expenses to a reserve account and a restructuring charge, unjustifiably inflating purchase rebates accrued, and accelerating the recognition of sales between reporting periods. As a result of the defendants' misconduct, Anicom filed with the Commission at least nine materially false and misleading periodic reports on Forms 10-Q and 10-K reports between January 1, 1998 and March 30, 2000 that, among other things, overstated the company's revenues by more than $38 million. + + The Commission's amended complaint alleges that the defendants' conduct violated the antifraud, periodic reporting, record keeping, internal controls, and lying to the auditors provisions of the federal securities laws. The Commission requests that the court issue a final judgment of permanent injunction and other relief, enjoining certain of the defendants from violating Sections 17(a)(1) and (3) of the Securities Act of 1933, Sections 10(b), and 13(b)(5) of the Securities Exchange Act of 1934 and Rules 10b-5, 13b2-1, and 13b2-2 promulgated thereunder, and aiding and abetting violations of Sections 13(a), 13(b)(2)(A), and 13(b)(2)(B) of the Securities Exchange Act of 1934 and Rules 12b-20, 13a-1, and 13a-13 promulgated thereunder. The Commission seeks civil monetary penalties from each of the defendants, and disgorgement of ill-gotten gains from Anixter, Putnam, Welchko, Figurelli, Bandyk, and Spinell. The Commission also seeks an order permanently barring Anixter, Putnam, Welchko, Figurelli, Spinell, and Bandyk from acting as officers and directors of any public company. + + The Commission filed its lawsuit on May 6, 2002. Additional information regarding the Commission's lawsuit can be found in Litigation Release No. 17504 , May 6, 2002. + + + SEC Complaint in this matter + + + + +  + + + + + + + + + + + + + + + + + + + + + + + + + Return to top + + + + + SEC homepage + + + + + + + + + + + + + + About the SEC + + + + + + Budget & Performance + + + Careers + + + Commission Votes + + + Contact + + + Contracts + + + + + + + + Transparency + + + + + + Accessibility & Disability + + + Super Intelligence + + + FOIA + + + Inspector General + + + No FEAR Act Data + + + Ombuds + + + SEC Excess Personal Property Guidance + + + + + + + + Websites + + + + + + Investor.gov + + + Related Sites + + + USA.gov + + + + + + + + Site Information + + + + + + Plain Writing + + + Privacy & Security + + + Site Map + + + + + + + + + + + + + + + + + + Stay connected. 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Seidelman, CPA + + + + + + + + + + + + Gary L. Seidelman, CPA + + + + + + + + + + + + + + + + + + + Securities Exchange Act of 1934 Release No. 50179 / August 11, 2004 + + Accounting and Auditing Enforcement Release No. 2078 / August 11, 2004 + + Administrative Proceeding File No. 3-11582 + + + + + + + + In the Matter of + + GARY L. SEIDELMAN, CPA + + Respondent. + + + : + : + : + : + : + : + : + : + : + : + + ORDER INSTITUTING PUBLIC ADMINISTRATIVE AND CEASE-AND-DESIST PROCEEDINGS PURSUANT TO SECTION 21C OF THE SECURITIES EXCHANGE ACT OF 1934 AND RULE 102(e) OF THE COMMISSION'S RULES OF PRACTICE, MAKING FINDINGS, AND IMPOSING REMEDIAL SANCTIONS AND A CEASE-AND-DESIST ORDER + + + + + I. + + The Securities and Exchange Commission ("Commission") deems it appropriate that public administrative and cease-and-desist proceedings be, and hereby are, instituted against Respondent Gary L. Seidelman ("Seidelman" or "Respondent") pursuant to Section 21C of the Securities Exchange Act of 1934 ("Exchange Act") and Rule 102(e)(1)(ii) of the Commission's Rules of Practice. 1 + + II. + + In anticipation of the institution of these proceedings, Seidelman has submitted an Offer of Settlement ("Offer") which the Commission has determined to accept. Solely for the purpose of these proceedings and any other proceedings brought by or on behalf of the Commission, or to which the Commission is a party, and without admitting or denying the Commission's findings herein, except as to the Commission's jurisdiction over him and the subject matter of these proceedings, Seidelman consents to the entry of this Order Instituting Public Administrative and Cease-and-Desist Proceedings Pursuant to Section 21C of the Securities Exchange Act of 1934 and Rule 102(e) of the Commission's Rules of Practice, Making Findings, and Imposing Remedial Sanctions and a Cease-and-Desist Order ("Order"), as set forth below. + + III. + + On the basis of the Order and Seidelman's Offer, the Commission finds 2 that: + + A. Respondent and Relevant Entities + + Respondent + + 1. Seidelman, age 52, resides in Batavia, Illinois. Seidelman is a partner in the Chicago office of PricewaterhouseCoopers LLP ("PwC") and a certified public accountant ("CPA") licensed in Illinois. PwC and its predecessor, Coopers & Lybrand LLP, have employed him since 1973. From 1994 to 2000, Seidelman was the engagement partner on all of the audits and interim reviews of the financial statements of Anicom, Inc. ("Anicom"). + + Relevant Entities + + 2. Anicom, a Delaware corporation based in Rosemont, Illinois, was a national distributor of wire and cable products. On July 18, 2000, Anicom announced an internal investigation into accounting irregularities and Nasdaq immediately halted trading in Anicom stock. In November 2000, Anicom issued unaudited revised revenue and pre-tax net income for the period January 1998 through March 2000. Thereafter, Nasdaq delisted Anicom stock from its national exchange. In January 2001, Anicom filed for Chapter 11 bankruptcy protection. Anicom's common stock was registered with the Commission under Section 12(g) of the Exchange Act from January 11, 1995 until November 26, 2002, when the registration was revoked pursuant to Section 12(j) of the Exchange Act. + + 3. PwC, whose principal offices are located in New York City, New York, was created by the merger of Price Waterhouse and Coopers & Lybrand LLP in July 1998. PwC provides audit assurance and business advisory services. PwC has numerous offices domestically and abroad, including an office in Chicago, Illinois. + + B. Facts + + Summary of Fraud at Anicom + + 4. Certain of Anicom's officers and employees (sued by the Commission in SEC v. Putnam, et al., No. 02 C 3235 (N.D. IL) and hereinafter referred to as the Anicom defendants) engaged in improper earnings management techniques that inflated Anicom's revenues by over $38 million and net income by over $20 million from the first quarter of 1998 through the first quarter of 2000. + + 5. Specifically, the Anicom defendants engaged in extensive improper revenue recognition. They inflated Anicom's revenues and cost of sales by causing Anicom to recognize over 66 fictitious sales transactions to at least 38 different customers. The vast majority of the fictitious sales transactions were created just prior to quarter end, when it was clear that Anicom would not meet its revenue goals. These end-of-the-quarter sales transactions were either entirely fictitious or potential orders disguised as sales. The Anicom defendants also accelerated earnings by recording sales early. This practice of recording projected or potential orders as sales transactions was inconsistent with generally accepted accounting principles ("GAAP"). + + 6. The Anicom defendants also engaged in fraudulent accounting practices that understated expenses. Among other things, in the third quarter of 1999, they improperly used a one-time $6.1 million restructuring charge to mischaracterize operating expenses on the income statement, which was inconsistent with GAAP requirements to recognize one-time charges. + + 7. On July 18, 2000, Anicom announced that it was investigating possible accounting irregularities and that its 1998 and 1999 financial statements should not be relied upon. + + 8. In November 2000, Anicom filed a Form 8-K with the Commission reflecting unaudited revised revenue and pre-tax net income that revealed the extent to which Anicom's filings were misstated. In 1998, Anicom's revenues were overstated by $13.6 million and net income by $9.3 million, or 126% of reported profits. In 1999, Anicom's revenues were overstated by $15 million and net losses were understated by $7.3 million, or more than 70% of reported losses. In the first quarter of 2000, Anicom's revenues were overstated by $10 million and net income by $3.8 million, or 327% of reported profits. + + 9. During the time of the Anicom defendants' fraudulent conduct, PwC conducted the audits and interim reviews of Anicom's financial statements. Seidelman, as the engagement partner, was responsible for determining the audit strategy, ensuring that the audit was conducted in accordance with applicable professional standards, reviewing and signing off on critical areas of the audit, ensuring that the audit work was appropriately documented, and issuing the audit report. + + 10. PwC issued an unqualified audit report on Anicom's 1999 financial statements. PwC's unqualified audit report stated in relevant part: + + "In our opinion, the consolidated financial statements … present fairly, in all material respects, the financial position of Anicom, Inc. at December 31, 1999 and 1998, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1999, in conformity with accounting principles generally accepted in the United States….We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement….We believe that our audits provide a reasonable basis for the opinion expressed above." + + 11. Contrary to the representations in PwC's audit report, Anicom's 1999 financial statements did not conform to GAAP and the audit was not conducted in accordance with generally accepted auditing standards ("GAAS") in effect at the time of the audit. + + Seidelman Engaged in Improper Professional Conduct + + 12. Seidelman engaged in improper professional conduct in connection with PwC's 1999 audit and first quarter 2000 interim review of Anicom's financial statements. His conduct was either intentional or knowing conduct, including reckless conduct, or negligent conduct, as defined in Rule 102(e)(1)(iv), which resulted in violations of applicable professional standards. + + Failure to Adequately Plan the 1999 Audit + + 13. The engagement team began planning the 1999 audit in late fall 1999 and began the fieldwork in late January 2000. + + 14. GAAS' First Standard of Field Work required that audit work be adequately planned. AICPA, Codification of Statements on Auditing Standards (AU) §150.02. Particularly, GAAS provided that "in planning the audit, the auditor should consider, among other matters…conditions that may require extension or modification of audit tests, such as the risk of material error or fraud or the existence of related party transactions." AU §311.03. See also AU §316A ("Consideration of Fraud in a Financial Statement Audit"). Contrary to this standard, Seidelman failed to adequately plan the 1999 audit after he learned of several facts over a short period of time that, either standing alone or in the context of the other facts learned during that period, constituted red flags that should have alerted him to the possibility that Anicom's financial statements might be misstated due to fraud: + + a. First, in or around October 1999, a former employee of Anicom alleged that Anicom management was engaging in fraudulent billing practices. Anicom retained an outside law firm to conduct an internal investigation of the allegations, which were determined to be unfounded. However, without knowing the details of the internal investigation, such as who was interviewed or the specific allegations, because it was conducted under attorney-client privilege that Anicom did not waive, Seidelman relied on the conclusions reached in the internal investigation and did not design audit procedures to provide greater assurances that Anicom's accounts receivable were not misstated. + + b. Second, shortly after the internal investigation in December 1999, Seidelman received, and the engagement team placed in PwC's working papers, copies of correspondence from the Commission's enforcement staff requesting that Anicom voluntarily produce records reflecting Anicom's accounts receivable, sales journals, cash payment journals and debit and credit memoranda for certain quarters in 1998 and 1999. + + c. Third, also in or around December 1999, Seidelman and a risk management partner reevaluated Anicom as "high-risk." They did this because Anicom was experiencing increased business-associated risks. First, Anicom had unexpected cash flow problems in the third quarter of 1999. Second, Anicom might not have been in compliance with covenants in agreements with its principal lenders. Third, Anicom incurred a $6.1 million restructuring charge in the same quarter. In reevaluating Anicom as high-risk, Seidelman also considered the former employee's allegations of fraud. Although the fact that Anicom was reevaluated as high-risk was documented in the working papers, the reasons underlying the reevaluation were not. Despite the high-risk reevaluation, Seidelman did not alter any of the audit procedures for the 1999 audit. + + d. Finally, in January 2000, Seidelman learned of allegations of improper sales activity from another former Anicom employee. Seidelman spoke to one member of Anicom management (the Chief Financial Officer) and one of Anicom's lawyers regarding these allegations. Based on the CFO's assertions that this employee was disgruntled because he had been fired for cause and that his allegations were baseless, Seidelman dismissed the allegations. Seidelman also considered his own assessment of the employee's credibility in deciding to dismiss the allegations. + + 15. Despite being aware of the foregoing red flags, Seidelman failed to design audit procedures to test Anicom's accounts receivable more extensively than originally planned, or heighten his scrutiny in his audit of Anicom's accounts receivable, to obtain greater assurances that Anicom's accounts receivable were accurately stated. + + Failure to Obtain Sufficient Competent Evidential Matter + + 16. GAAS' Third Standard of Field Work required that "Sufficient competent evidential matter is to be obtained through inspection, observation, inquiries, and confirmations to afford a reasonable basis for an opinion regarding the financial statements under audit." AU §150.02. Seidelman failed to obtain sufficient competent evidential matter in several areas of the 1999 audit: + + a. Seidelman failed to gather sufficient information and make meaningful inquiries to determine the veracity of the allegations of accounting fraud made by the former Anicom employees. Further, Seidelman failed to modify the audit procedures in light of these allegations. + + b. Seidelman failed to obtain sufficient competent evidential matter regarding Anicom's accounts receivable: + + c. Seidelman failed to obtain sufficient competent evidential matter regarding two items included in the $6.1 million restructuring charge incurred by Anicom in the third quarter of 1999. Consequently, Seidelman approved the inclusion of those items in the restructuring charge although they did not conform with GAAP. Anicom improperly included an almost three-year-old $625,000 note receivable that was unrelated to any aspect of the restructuring. Anicom also included a $300,000 bank waiver fee, which Anicom incurred as a result of violating its loan covenant with a bank. By paying this fee, Anicom maintained its revolving credit line, which yielded future economic benefits to Anicom. Because GAAP requires, among other things, that costs associated with a restructuring charge not benefit activities that will continue, the bank waiver fee was also improperly included. + + d. Seidelman failed to ensure that documentation in the working papers provided sufficient competent evidential matter to support PwC's unqualified audit report. GAAS provided that "working papers are records kept by the auditor of the procedures applied, the tests performed, the information obtained, and the pertinent conclusions reached in the engagement." AU §339.05. Further, "working papers ordinarily should include documentation showing that…(c) the audit evidence obtained, the auditing procedures applied, and the testing performed have provided sufficient competent evidential matter to afford a reasonable basis for an opinion, indicating observance of the third standard of field work." AU §339.05. Seidelman failed to document any conclusions reached regarding specific audit objectives supporting PwC's unqualified audit report. Seidelman also failed to document in the working papers any calculation or evaluation of quantitative materiality thresholds or any quantitative or qualitative materiality considerations for the 1999 audit. Because Seidelman failed to ensure documentation of the conclusions reached regarding specific audit objectives and any materiality determinations or considerations, the working papers did not adequately reflect that PwC obtained sufficient competent evidential matter affording a reasonable basis for its unqualified audit report. + + + + (i) First, Seidelman failed to modify the audit procedures for Anicom's accounts receivable upon learning that a material amount of the balances from Anicom's U.S. operations could not be confirmed. PwC's testing of Anicom's accounts receivable for the U.S. operations included confirming the existence and accuracy of 20 customer balances totaling $14,354,505 out of $98,182,737 in accounts receivable. The testing involved calculating an error rate, which represents the percentage of balances the engagement team was unable to confirm out of the balances tested, to assess the potential for misstated balances and to determine whether additional procedures should be performed. The engagement team could not confirm $1,152,965 of the $14,354,505, translating to an error rate of 8%. Projecting 8% over the entire population of $98,182,737 indicates potentially misstated balances of $7,854,619, which was material to Anicom's financial statements. However, Seidelman neither altered the audit procedures, such as subjecting more accounts receivable balances to confirmation procedures, nor subjected the potentially misstated accounts receivable balances to further testing. + + (ii) Second, in reliance on management representations that approximately $1 million in unsubstantiated sales to an Anicom customer were valid, Seidelman failed to propose an adjustment for the revenue from these sales. Despite Seidelman's and the engagement team's attempts to obtain third party evidence verifying these sales during PwC's confirmation procedures, Anicom never produced adequate evidence. Nevertheless, Seidelman permitted Anicom to recognize revenue from these unconfirmed sales to this customer, although Anicom had not met GAAP requirements for revenue recognition from these purported sales. + + (iii) Third, in additional alternative procedures performed on 17 of the 20 balances for which PwC did not receive third party confirmations, Seidelman failed to verify all subsequent cash payments, totaling $9,817,038 purportedly made by customers towards their balances. GAAS require that "auditing procedures that are appropriate to the particular audit objective should be applied to each sample item." AU §350.25. However, rather than test the entire $9,817,038, e.g., by tracing payments to bank deposits, PwC tested only $2,746,487, or 28%. Despite Seidelman's knowledge of fraud allegations related to Anicom's accounts receivable, however, he did not deem it necessary to apply verification procedures to all subsequent cash payments. + + + + Failure to State Whether the Financial Statements Were Presented in Accordance with GAAP + + 17. GAAS' First Standard of Reporting stated, "The report shall state whether the financial statements are presented in accordance with generally accepted accounting principles." AU §150.02. Contrary to this standard, Seidelman caused PwC to issue an unqualified audit report on Anicom's 1999 financial statements even though the financial statements did not conform to GAAP. Particularly, Seidelman knew, or should have known, that the $925,000 of the $6.1 million restructuring charge incurred by Anicom in the third quarter of 1999 did not meet GAAP requirements for one-time charges. Additionally, Seidelman knew, or should have known, that Anicom's recognition of revenue from approximately $1 million in unsubstantiated sales to an Anicom customer and from potentially misstated accounts receivable balances did not conform to GAAP requirements for revenue recognition. + + Failure to Properly Supervise the 1999 Audit + + 18. GAAS' First Standard of Field Work required that "assistants...are to be properly supervised." AU §150.02. As the engagement partner, Seidelman was responsible for ensuring that the audit was properly supervised. Supervision included informing assistants of their "responsibilities and the objectives of the procedures that they are to perform" and of "matters that may affect the nature, extent, and timing of procedures…." AU §311.12. Seidelman failed to adequately inform the engagement team, or ensure that they were informed, of (a) Anicom's high-risk reevaluation and the reasons underlying the reevaluation; (b) the former Anicom employees' allegations of accounting fraud concerning accounts receivable; and (c) the red flags discussed in paragraph 14 above, so that they could properly perform the audit consistent with GAAS. + + 19. GAAS' First Standard of Field Work also required that assistants' work be reviewed to determine whether it was adequately performed and whether the results are consistent with the auditor's report. AU §311.13. Seidelman failed to adequately review the engagement team's work, or ensure that it was adequately reviewed, to determine that they obtained sufficient competent evidential matter in the areas of the audit identified in paragraph 16 above. + + Failure to Exercise Due Professional Care + + 20. GAAS' Third General Standard provided, "Due professional care is to be exercised in the performance of the audit and the preparation of the report." AU §150. Among other things, due professional care required an auditor to observe the fieldwork and reporting standards of GAAS. AU §230.02. Additionally, due professional care required an auditor to employ professional skepticism, which is "an attitude that includes a questioning mind and a critical assessment of audit evidence." AU §230.07. GAAS also provided that an auditor, "neither assumes that management is dishonest nor assumes unquestioned honesty. In exercising professional skepticism, the auditor should not be satisfied with less than persuasive evidence because of a belief that management is honest." AU §230.09. For all of the reasons stated in paragraphs 13 through 19 above, Seidelman failed to exercise due professional care in violation of this standard. + + Failure to Document Significant Communications Regarding First Quarter 2000 Interim Review + + 21. In connection with an interim review, GAAS in effect at the time of Seidelman's first quarter 2000 interim review provided that "if, in the accountant's judgment, management does not respond appropriately to the accountant's communication within a reasonable period of time, the accountant should inform the audit committee, or others with equivalent authority and responsibility…of the matters as soon as practicable. If the information is communicated orally, the accountant should document the communication in appropriate memoranda or notations in the working papers." AU §722.21. Contrary to GAAS, Seidelman failed to document purported communications that he had with the chairman of the audit committee during the interim review regarding a material $9.5 million bill-and-hold sale that did not meet revenue recognition criteria when it was booked. + + C. Violations + + Seidelman Violated Section 10A(b)(1) of the Exchange Act + + 22. During the time of the conduct described above, Section 10A(b)(1) of the Exchange Act provided in relevant part: + + "If, in the course of conducting an audit…, the independent public accountant detects or otherwise becomes aware of information indicating that an illegal act (whether or not perceived to have a material effect on the financial statements of the issuer) has or may have occurred, the accountant shall, in accordance with generally accepted accounting standards…determine whether it is likely that an illegal act has occurred; and if so, determine and consider the possible effect of the illegal act on the financial statements of the issuer…and as soon as practicable, inform the appropriate level of the management of the issuer and assure that the audit committee of the issuer, or the board of directors…in the absence of such a committee, is adequately informed with respect to illegal acts that have been detected or have otherwise come to the attention of such accountant in the course of the audit, unless the illegal act is clearly inconsequential." + + 23. Seidelman knew, or should have known, that Anicom improperly recognized revenue from a material $9.5 million bill-and-hold sale booked by Anicom at the end of the first quarter of 2000. Anicom's newly appointed vice-president brought this bill-and-hold sale to the engagement team's attention as an unusual transaction. Anicom's recognition of revenue from the transaction was improper under GAAP because it did not satisfy at least two revenue recognition requirements for a bill-and-hold sale. First, the bill-and-hold sale did not meet the "buyer request test," which requires that the buyer, not the seller, request that the sale be on a bill and hold basis. Second, the bill-and-hold sale did not meet GAAP requirements that there be a fixed schedule for delivery of product. + + 24. Despite numerous requests by Seidelman and the engagement team, Anicom never produced substantiating documentation to them that Anicom's customer, not Anicom, initiated the bill-and-hold. Additionally, Anicom never established that there was a fixed schedule of delivery for the product. + + 25. Because Anicom did not provide PwC with evidence supporting its recognition of revenue from the bill-and-hold sale, PwC had not determined the appropriate accounting for the bill-and-hold sale before Anicom filed the Form 10-Q. Consequently, PwC never completed its interim review of Anicom's first quarter 2000 financial statements. Anicom filed its Form 10-Q with the Commission without a completed interim review by PwC. + + 26. Seidelman continued to seek supporting evidence for the bill-and-hold sale after the commencement of the 2000 audit. However, Anicom still was unable to produce any evidence to Seidelman's satisfaction. + + 27. Notwithstanding Anicom's consistent failure to substantiate the accounting for the bill-and-hold sale, in addition to the red flags associated with the 1999 audit, Seidelman violated Section 10A(b)(1) of the Exchange Act when he failed to determine whether it was likely that Anicom's recognition of revenue from this bill-and-hold sale was an illegal act. + + 28. Seidelman also violated Section 10A(b)(1) of the Exchange Act when he failed to determine whether it was likely that Anicom's failure to obtain a completed interim review of its first quarter 2000 financial statements, as required by Rule 10-01(d) of Regulation S-X (17 C.F.R. §210.10-10(d)), was an illegal act. + + Seidelman Caused Anicom's Reporting Violations + + 29. Section 13(a) of the Exchange Act and Rules 13a-1 and 13a-13 thereunder require issuers with securities registered under Section 12 of the Exchange Act to file accurate annual and quarterly reports with the Commission. See SEC v. Savoy Industries, Inc. , 587 F.2d 1149, 1165 (D.C. Cir. 1978), cert. denied , 440 U.S. 913 (1979). In addition, Exchange Act Rule 12b-20 requires that periodic reports contain all information necessary to ensure that statements made in such reports are not materially misleading. Anicom filed annual and quarterly reports with the Commission pursuant to Section 13(a) of the Exchange Act that contained materially false financial statements and failed to make required disclosures concerning its business practices. Anicom's books and records were inaccurate throughout the nine quarters from January 1998 through March 31, 2000. Thus, Anicom violated Section 13(a) of the Exchange Act and Rules 12b-20, 13a-1, and 13a-13 thereunder. + + 30. Seidelman caused Anicom's violations of these reporting provisions for the five quarters from January 1, 1999 through March 31, 2000. He failed to determine that $925,000 of the $6.1 million restructuring charge incurred by Anicom in the third quarter of 1999 was inappropriate. He also failed to determine that Anicom should not recognize revenue from approximately $1 million in unsubstantiated sales to an Anicom customer and from potentially misstated accounts receivable balances. Although the accounting for these transactions did not conform with GAAP, Seidelman nevertheless prepared and approved PwC's unqualified audit report stating that Anicom's 1999 financial statements conformed with GAAP and that the audit was conducted in accordance with GAAS. Seidelman knew or should have known that these acts and omissions would contribute to Anicom's violations. + + D. Findings + + 31. Based on the foregoing, the Commission finds that Seidelman engaged in improper professional conduct within the meaning of Rule 102(e)(1)(ii) of the Commission's Rules of Practice in connection with PwC's 1999 audit and first quarter 2000 interim review of Anicom's financial statements. + + 32. Based on the foregoing, the Commission finds that Seidelman violated Section 10A(b)(1) of the Exchange Act. + + 33. Based on the foregoing, the Commission finds that Seidelman caused Anicom's violations of Section 13(a) of the Exchange Act and Rules 12b-20, 13a-1, and 13a-13 thereunder. + + IV. + + In view of the foregoing, the Commission deems it appropriate to impose the sanctions agreed to in Seidelman's Offer. + + Accordingly, it is hereby ORDERED, effective immediately, that: + + A. Seidelman shall cease and desist from committing or causing any violations and any future violations of Section 10A of the Exchange Act and from causing any violations and any future violations of Section 13(a) of the Exchange Act and Rules 12b-20, 13a-1, and 13a-13 thereunder. + + B. Seidelman is denied the privilege of appearing or practicing before the Commission as an accountant. + + C. After 3 years from the date of this Order, Seidelman may request that the Commission consider his reinstatement by submitting an application (attention: Office of the Chief Accountant) to resume appearing or practicing before the Commission as: + + D. The Commission will consider an application by Seidelman to resume appearing or practicing before the Commission provided that his state CPA license is current and he has resolved all other disciplinary issues with the applicable state boards of accountancy. However, if state licensure is dependant on reinstatement by the Commission, the Commission will consider an application on its other merits. The Commission's review may include consideration of, in addition to the matters referenced above, any other matters relating to Seidelman's character, integrity, professional conduct, or qualifications to appear or practice before the Commission. + + + + 1. a preparer or reviewer, or a person responsible for the preparation or review, of any public company's financial statements that are filed with the Commission. Such an application must satisfy the Commission that Seidelman's work in his practice before the Commission will be reviewed either by the independent audit committee of the public company for which he works or in some other acceptable manner, as long as he practices before the Commission in this capacity; and/or + + 2. an independent accountant. Such an application must satisfy the Commission that: + + + + (a) Seidelman, or the public accounting firm with which he is associated, is registered with the Public Company Accounting Oversight Board ("Board") in accordance with the Sarbanes-Oxley Act of 2002, and such registration continues to be effective; + + (b) Seidelman, or the registered public accounting firm with which he is associated, has been inspected by the Board and that inspection did not identify any criticisms of or potential defects in Seidelman's or the firm's quality control system that would indicate that Seidelman will not receive appropriate supervision or, if the Board has not conducted an inspection, has received an unqualified report relating to his, or the firm's, most recent peer review conducted in accordance with the guidelines adopted by the former SEC Practice Section of the American Institute of Certified Public Accountants Division for CPA Firms or an organization providing equivalent oversight and quality control functions; + + (c) Seidelman has resolved all disciplinary issues with the Board, and has complied with all terms and conditions of any sanctions imposed by the Board (other than reinstatement by the Commission); and + + (d) Seidelman acknowledges his responsibility, as long as he appears or practices before the Commission as an independent accountant, to comply with all requirements of the Commission and the Board, including, but not limited to, all requirements relating to registration, inspections, concurring partner reviews and quality control standards. + + + + + + By the Commission. + + + Jonathan G. Katz +Secretary + + Endnotes + + + + + + + 1 Rule 102(e)(1)(ii) provides, in relevant part, that: The Commission may censure a person or deny, temporarily or permanently, the privilege of appearing or practicing before it in any way to any person who is found ... to be lacking in character or integrity or to have engaged in unethical or improper professional conduct. + + 2 The findings herein are made pursuant to Seidelman's Offer of Settlement and are not binding on any other person or entity in this or any other proceeding. + + + + + + + + + + + + + + + + + + + + + + + + + + + + + Return to top + + + + + SEC homepage + + + + + + + + + + + + + + About the SEC + + + + + + Budget & Performance + + + Careers + + + Commission Votes + + + Contact + + + Contracts + + + + + + + + Transparency + + + + + + Accessibility & Disability + + + Super Intelligence + + + FOIA + + + Inspector General + + + No FEAR Act Data + + + Ombuds + + + SEC Excess Personal Property Guidance + + + + + + + + Websites + + + + + + Investor.gov + + + Related Sites + + + USA.gov + + + + + + + + Site Information + + + + + + Plain Writing + + + Privacy & Security + + + Site Map + + + + + + + + + + + + + + + + + + Stay connected. 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Individuals (SALI) + + + + + Enforcement Data Delivery Standards + + + + + Small Businesses + + + + + Appellate Briefs + + + + + Amicus / Friend of the Court Briefs + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + Home + + + Enforcement and Litigation + + + Administrative Proceedings + + + Joseph Casuccio, CPA + + + + + + + + + + + + Joseph Casuccio, CPA + + + + + + + + + + + + + + + + + + + Securities Exchange Act of 1934 Release No. 50185 / August 12, 2004 + + Accounting and Auditing Enforcement Release No. 2079 / August 12, 2004 + + Administrative Proceeding File No. 3-11586 + + + + + + + + In the Matter of + + JOSEPH CASUCCIO, CPA, + + Respondent. + + + : + : + : + : + : + : + : + : + : + : + + ORDER INSTITUTING ADMINISTRATIVE PROCEEDINGS PURSUANT TO RULE 102(e) OF THE COMMISSION'S RULES OF PRACTICE, MAKING FINDINGS, AND IMPOSING REMEDIAL SANCTIONS + + + + + I. + + The Securities and Exchange Commission ("Commission") deems it appropriate and in the public interest that public administrative proceedings be, and hereby are, instituted against Joseph Casuccio ("Casuccio") pursuant to Rule 102(e) of the Commission's Rules of Practice. 1 + + II. + + In anticipation of the institution of this public administrative proceeding, Casuccio has submitted an Offer of Settlement ("Offer"), which the Commission has determined to accept. Solely for the purpose of this proceeding and any other proceedings brought by or on behalf of the Commission or in which the Commission is a party, and without admitting or denying the findings, except that he admits the entry of the injunction set forth in paragraph III.2, and further admits the Commission's jurisdiction over him and over the subject matter of this proceeding, Casuccio consents to the entry of this Order Instituting Public Administrative Proceedings Pursuant to Rule 102(e) of the Commission's Rules of Practice, Making Findings, and Imposing Remedial Sanctions ("Order") as set forth below. + + III. + + On the basis of this Order and the Respondent's Offer, the Commission makes the following findings: 2 + + 1. Casuccio was a certified public accountant licensed in New York. From 1997 through June 2000, Casuccio was an audit partner at Werblin Casuccio & Moses, P.C. (the "Werblin Firm"), a public accounting firm located in Syosset, New York. Casuccio served as the engagement partner in connection with the Werblin Firm's audit of AppOnline.com, Inc. ("AppOnline"), then known as IMN Financial Corp., for 1997 and 1998. + + 2. On May 21, 2002, the United States District Court for the Eastern District of New York entered a partial final judgment permanently enjoining Casuccio from (i) violating Section 17(a) of the Securities Act of 1933 ("Securities Act"), Sections 10(b) and 13(b)(5) of the Securities Exchange Act of 1934 ("Exchange Act"), and Rules 10b-5 and 13b2-1 thereunder, and (ii) aiding and abetting violations of Sections 13(a) and 13(b)(2) of the Exchange Act and Rules 12b-20, 13a-1, and 13a-13 thereunder. SEC v. Paul Skulsky, et al. , No. 02-CV-1524 (DRH). + + 3. In its complaint in SEC v. Paul Skulsky, et al. , the Commission, among other things, alleged: + + a. Beginning in 1997, AppOnline, a mortgage bank, suffered operating losses and a cash shortage. To address these problems, Paul Skulsky, a convicted felon and AppOnline's undisclosed control person, directed that AppOnline divert funds designated for specified mortgages to pay AppOnline's operating expenses. As of December 31, 1999, AppOnline had misappropriated approximately $47 million from its lenders. In order to conceal its misappropriation of funds (and the source of these funds), AppOnline created a sham liability to the Skulsky Trust, a related party controlled by Paul Skulsky. In fact, AppOnline did not owe the Skulsky Trust any funds. AppOnline then reduced the amount of its stated liabilities by offsetting related party receivables with the purported liability to the Skulsky Trust. Between 1997 and 2000, AppOnline also materially misstated results of operations in its annual filings with the Commission by (i) recording other fraudulent entries on its books, including removing money-losing subsidiaries through sham sale transactions; (ii) manipulating its reported income by improperly recognizing certain revenues and failing to recognize certain expenses; and (iii) failing to disclose Paul Skulsky's management role. + + b. The Werblin Firm caused the issuance of an audit report containing an unqualified opinion stating that the audit was conducted in accordance with Generally Accepted Auditing Standards ("GAAS") and that the financial statements had been prepared in conformity with Generally Accepted Accounting Principles ("GAAP"). Casuccio knew, or was reckless in not knowing, that these representations were false. Specifically, Casuccio knew, or was reckless in not knowing, that AppOnline: (i) had mischaracterized its debt to the warehouse banks as a debt to the Skulsky Trust; (ii) improperly netted unrelated receivables against the sham liability to the Skulsky Trust to reduce the stated balance owed; (iii) improperly recorded ordinary operating expenses as nonrecurring expenses associated with the development of AppOnline's internet division; and (iv) failed to disclose the significant managerial role of Paul Skulsky, a convicted felon, in the operations of AppOnline. + + 4. Based on the foregoing, the Commission finds that: (i) Casuccio has been permanently enjoined within the meaning of Rule 102(e)(3)(i) of the Commission's Rules of Practice "by … [a] court of competent jurisdiction, by reason of his or her misconduct in an action brought by the Commission, from violating or aiding and abetting the violation of any provision of the Federal securities laws or of the rules and regulations thereunder" and (ii) that Casuccio engaged in improper professional conduct and willfully violated, or willfully aided and abetted the violation of, provisions of the Federal securities laws and rules, for purposes of Rule 102(e)(1)(ii) and (iii) respectively, of the Commission's Rules of Practice. Specifically, Casuccio violated Section 17(a) of the Securities Act, Sections 10(b) and 13(b)(5) of the Exchange Act, and Rules 10b-5 and 13b2-1 thereunder, and aided and abetted violations of Sections 13(a) and 13(b)(2) of the Exchange Act and Rules 12b-20, 13a-1, and 13a-13 thereunder. + + IV. + + In view of the foregoing, the Commission deems it appropriate and in the public interest to impose the sanction agreed to in Respondent's Offer. + + Accordingly, IT IS HEREBY ORDERED, effective immediately, that: + + Casuccio is suspended from appearing or practicing before the Commission as an accountant. + + By the Commission. + + + Jonathan G. Katz +Secretary + + Endnotes + + + + + + + 1 Rule 102(e)(1)(ii) provides, in pertinent part, that: + + The Commission may deny, temporarily or permanently, the privilege of appearing or practicing before it any person who is found…to have engaged in improper professional conduct. + + Rule 102(e)(1)(iii) provides, in pertinent part, that: + + The Commission may deny, temporarily or permanently, the privilege of appearing or practicing before it to any person who is found…to have willfully violated, or willfully aided and abetted the violation of any provision of the Federal securities laws or the rules and regulations thereunder. + + Rule 102(e)(3)(i) provides, in pertinent part, that: + + The Commission, with due regard to the public interest and without preliminary hearing, may, by order, . . . suspend from appearing or practicing before it any . . . accountant . . . who has been by name . . . permanently enjoined by any court of competent jurisdiction, by reason of his or her misconduct in an action brought by the Commission, from violating or aiding and abetting the violation of any provision of the Federal securities laws or of the rules and regulations thereunder. + + 2 The findings herein are made pursuant to Casuccio's Offer of Settlement and are not binding on any other person or entity in this or any other proceeding. + + + + + + + + + + + + + + + + + + + + + + + + + Return to top + + + + + SEC homepage + + + + + + + + + + + + + + About the SEC + + + + + + Budget & Performance + + + Careers + + + Commission Votes + + + Contact + + + Contracts + + + + + + + + Transparency + + + + + + Accessibility & Disability + + + Super Intelligence + + + FOIA + + + Inspector General + + + No FEAR Act Data + + + Ombuds + + + SEC Excess Personal Property Guidance + + + + + + + + Websites + + + + + + Investor.gov + + + Related Sites + + + USA.gov + + + + + + + + Site Information + + + + + + Plain Writing + + + Privacy & Security + + + Site Map + + + + + + + + + + + + + + + + + + Stay connected. 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Share sensitive information only on official, secure websites. + + + + + + + + + + + + + + + + + SEC homepage + + + + + + + Menu + + + + + + + + + + + + + + Close + + + + + + + + + + + + + Search SEC.gov & EDGAR + + + + + + Search + + + + + + + + + + + + + + + + + Search Filings + + + + + + + + + Search Filings + + + + + + + + + Full Text Search + + + + + + Latest Filings + + + + + + Mutual Fund Search + + + + + + Variable Insurance Products Search + + + + + + SIC Codes + + + + + + CIK Lookup + + + + + + Public Dissemination Service (PDS) + + + + + + Search Assistance + + + + + + + + + + + + + Submit Filings + + + + + + + + + Submit Filings + + + + + + + + + EDGAR Filer Management Portal + + + + + + EDGAR Filing Portal + + + + + + Online Forms Management Portal + + + + + + EDGAR Next + + + + + + Forms Index + + + + + + Filer Support & Resources + + + + + + + + + + + + + Data & Research + + + + + + + + + Data & Research + + + + + + + + + Data Library + + + + + + Statistics & Data Visualizations + + + + + + Structured Data + + + + + + Investment Management Data + + + + + + Open Data at the SEC + + + + + + + + + + + + + Rules, Enforcement, & Compliance + + + + + + + + + + + + + + + + + + + + Rules & Regulations + + + + + + + + + Rulemaking Activity + + + + + + Submit Public Comments + + + + + + Staff Guidance + + + + + + No-Action, Interpretive, and Exemptive Letters + + + + + + Self-Regulatory Organization Rulemaking + + + + + + Public Petitions for Rulemaking + + + + + + + + + + + + + + + + + Enforcement & Litigation + + + + + + + + + Litigation Releases + + + + + + Administrative Proceedings + + + + + + Administrative Law Judge Orders and Initial Decisions + + + + + + Trading Suspensions + + + + + + Distributions to Harmed Investors + + + + + + Receiverships + + + + + + + + + + + + + + + + + Compliance + + + + + + + + + Examination Priorities + + + + + + Risk Alerts + + + + + + Compliance Outreach Program + + + + + + + + + + + + + + + + + + + + + + + Proposed Rules + + + + + + What's New + + + + + + Whistleblower Program + + + + + + + + + + + + + + + + + + + Featured Topics + + + + + + + + + Featured Topics + + + + + + + + + Crypto Task Force + + + + + + Cybersecurity + + + + + + Market Structure Analytics + + + + + + Saving and Investing for Military Personnel + + + + + + Saving and Investing for Teachers + + + + + + SEC-CFTC Harmonization Initiative + + + + + + Treasury Clearing Implementation + + + + + + + + + + + + + About + + + + + + + + + About + + + + + + + + + Mission + + + + + + Commissioners + + + + + + Divisions & Offices + + + + + + Division & Office Directors + + + + + + Advisory Committees + + + + + + Budget & Performance + + + + + + Reports & Publications + + + + + + Commission Votes + + + + + + Contact the SEC + + + + + + Careers + + + + + + + + + + + + + Submit a Tip or Complaint + + + + + + + + + + + + + + + + + Newsroom + + + | + + + Investors + + + Small Businesses + + + Whistleblowers + + + + + + + + + + + + + + + Newsroom + + + | + + + Investors + + + Small Businesses + + + Whistleblowers + + + + + + + + + + + + + + + + + Search SEC.gov & EDGAR + + + + + + Search + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + More in this Section + + + + + + + + + + + + + Enforcement & Litigation + + + + + + + Litigation Releases + + + + + Administrative Proceedings + + + + + Administrative Law Judge Orders and Initial Decisions + + + + + Trading Suspensions + + + + + Distributions to Harmed Investors + + + + + Receiverships + + + + + Electronic Filings in Administrative Proceedings (eFAP) + + + + + Rules of Practice + + + + + Applications for Reentry + + + + + Reports of Investigations + + + + + Whistleblower Program + + + + + Public Alert: Unregistered Soliciting Entities (PAUSE) + + + + + SEC Action Lookup - Individuals (SALI) + + + + + Enforcement Data Delivery Standards + + + + + Small Businesses + + + + + Appellate Briefs + + + + + Amicus / Friend of the Court Briefs + + + + + + + + + + + + + + + + + + + + + + + + + + Enforcement & Litigation + + + + + + + Litigation Releases + + + + + Administrative Proceedings + + + + + Administrative Law Judge Orders and Initial Decisions + + + + + Trading Suspensions + + + + + Distributions to Harmed Investors + + + + + Receiverships + + + + + Electronic Filings in Administrative Proceedings (eFAP) + + + + + Rules of Practice + + + + + Applications for Reentry + + + + + Reports of Investigations + + + + + Whistleblower Program + + + + + Public Alert: Unregistered Soliciting Entities (PAUSE) + + + + + SEC Action Lookup - Individuals (SALI) + + + + + Enforcement Data Delivery Standards + + + + + Small Businesses + + + + + Appellate Briefs + + + + + Amicus / Friend of the Court Briefs + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + Home + + + Enforcement and Litigation + + + Litigation Releases + + + Bristol-Myers Squibb Company + + + + + + + + + + + + Bristol-Myers Squibb Company + + + + + + + + + + + + + + + + + + + + + The Securities and Exchange Commission today announced that the Honorable Faith S. Hochberg, United States District Court Judge for the District of New Jersey has entered a Final Judgment order ("Order") against defendant Bristol-Myers Squibb Company in the above matter. The Order, to which BMS consented without admitting or denying the allegations in the Commission's Complaint, provides the following relief: + + a permanent injunction against future violations of certain antifraud, reporting, books and records and internal controls provisions of the federal securities laws. + + monetary remedies for the benefit of shareholders, including a civil penalty of $100 million plus a $50 million shareholder fund. + + various remedial undertakings, including the appointment of an independent advisor to review Bristol-Myers' accounting practices and internal control systems and periodically assess the status of remedial actions undertaken or planned by the Company in those and other areas, such as financial reporting. + On August 4, 2004, the Commission filed a civil action against Bristol-Myers alleging violations of the antifraud, reporting, books and records and internal controls provisions of the federal securities laws. The Commission's Complaint alleged that, from the first quarter of 2000 through the fourth quarter of 2001, Bristol-Myers engaged in a fraudulent scheme to overstate its sales and earnings in order to create the false appearance that the Company had met or exceeded financial projections set by the Company's officers ("targets") and earnings estimates established by Wall Street securities analysts. Bristol-Myers inflated its results primarily by: (1) stuffing its distribution channels with excess inventory near the end of every quarter in amounts sufficient to meet sales and earnings targets set by officers ("channel-stuffing"); and (2) improperly recognizing about $1.5 billion in revenue from sales associated with the channel-stuffing in violation of generally accepted accounting principles. When Bristol-Myers' results fell short of the Wall Street analysts' earnings estimates, the Company used improper accounting, including "cookie jar" reserves, to further inflate its earnings. At no time during 2000 or 2001, did Bristol-Myers disclose that: (1) it was artificially inflating its results through channel-stuffing; (2) channel-stuffing was contributing to a buildup in wholesaler inventory levels; (3) the buildup in wholesaler inventory posed a risk to Bristol-Myers' future sales and earnings; or (4) the Company was using "cookie jar" reserves to further inflate its results. In March 2003, Bristol-Myers restated its prior financial statements and disclosed its channel-stuffing activities and improper accounting. + + The Commission's investigation is continuing. + + For further information, see Litigation Release No. 18820 (August 4, 2004). + + +  + + + + + + + + + + + + + + + + + + + + + + + + + Return to top + + + + + SEC homepage + + + + + + + + + + + + + + About the SEC + + + + + + Budget & Performance + + + Careers + + + Commission Votes + + + Contact + + + Contracts + + + + + + + + Transparency + + + + + + Accessibility & Disability + + + Super Intelligence + + + FOIA + + + Inspector General + + + No FEAR Act Data + + + Ombuds + + + SEC Excess Personal Property Guidance + + + + + + + + Websites + + + + + + Investor.gov + + + Related Sites + + + USA.gov + + + + + + + + Site Information + + + + + + Plain Writing + + + Privacy & Security + + + Site Map + + + + + + + + + + + + + + + + + + Stay connected. 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Boylan + + + + + + + + !function(){var e=navigator.userAgent,a=document.documentElement,n=a.className;n=n.replace("no-js","js"),/iPad|iPhone|iPod/.test(e)&&!window.MSStream&&(n+=" ua-ios"),a.className=n}(); + {"path":{"baseUrl":"\/","pathPrefix":"","currentPath":"node\/494681","currentPathIsAdmin":false,"isFront":false,"currentLanguage":"en"},"pluralDelimiter":"\u0003","suppressDeprecationErrors":true,"gtag":{"tagId":"","consentMode":false,"otherIds":[],"events":[],"additionalConfigInfo":[]},"ajaxPageState":{"libraries":"eJxdT0GOwzAI_JBdn_oei2DkeINNZLC22devlaZS2wtiBhhmcKNUTPo97jxyaXEH3GJpiZrFhQW38A4cMqgeYQGlV19JFTKpQ-kUmvQKXP7I0cO4tC2kPnbg2wVdFslM0SCHPMs3vsEPPD7J6hgOGdPCKJyoRxxqUuePHjLLAuzVjimenRJGSLW08NoBK9LUn6SHlrytVOlcpJShB63QLSpBx_WkOzHNePol4fRQo_qMPvQ36ZXsAmd99lMNr2t_GUR9n60EyX9a_wePd5ns","theme":"uswds_sec","theme_token":null},"ajaxTrustedUrl":[],"gtm":{"tagId":null,"settings":{"data_layer":"dataLayer","include_classes":false,"allowlist_classes":"","blocklist_classes":"","include_environment":false,"environment_id":"","environment_token":""},"tagIds":["GTM-TD3BKV"]},"data":{"extlink":{"extTarget":false,"extTargetAppendNewWindowDisplay":true,"extTargetAppendNewWindowLabel":"(opens in a new window)","extTargetNoOverride":false,"extNofollow":false,"extTitleNoOverride":false,"extNoreferrer":false,"extFollowNoOverride":false,"extClass":"0","extLabel":"(link is external)","extImgClass":false,"extSubdomains":true,"extExclude":".*\\.gov|http:\/\/www.xbrl.org\/utr\/2013-05-17\/utr.xml|http:\/\/www.xbrl.org\/dtr\/type\/numeric-2009-12-16.xsd|http:\/\/www.xbrl.org\/dtr\/type\/nonNumeric-2009-12-16.xsd|https:\/\/secir.secure.force.com\/ombudsman\/OMMSForm","extInclude":"","extCssExclude":".data-exempt","extCssInclude":"","extCssExplicit":"","extAlert":true,"extAlertText":"You are now leaving the SEC Website. 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Boylan + + + + + + + + + + + + Peter C. Boylan + + + + + + + + + + + + + + + + + + + + + The Securities and Exchange Commission today announced that Peter C. Boylan, a former senior executive of Gemstar-TV Guide International, Inc. and its wholly owned subsidiary, TV Guide, Inc., has agreed to settle the federal court action filed by the Commission. As part of the settlement, Boylan will consent to a fraud injunction, without admitting or denying the allegations in the Commission's complaint, and will pay a total of $600,000 in disgorgement and civil penalties. The settlement is subject to approval by the court. + + Gemstar is a Los Angeles-based media and technology company that, among other things, publishes TV Guide magazine and develops, licenses, and markets an interactive program guide (IPG) for televisions that enables consumers to navigate through and select television programs. During the relevant period, Gemstar generated revenues from the IPG by licensing the technology to third parties and selling advertising on the IPG. In statements to securities analysts and the investing public, Gemstar repeatedly touted the IPG technology and IPG advertising revenues as the company's future and as the "value driver" of the company's stock, and downplayed expected declines in revenue from TV Guide magazine. + + Boylan, of Tulsa, Oklahoma, is the former co-president, co-chief operating officer and a member of the board of directors of Gemstar and the former co-chairman, chief executive officer, and co-president of Gemstar's wholly owned subsidiary, TV Guide. The Commission's complaint alleges that from June 1999 through September 2002, Gemstar overstated its total revenues by at least $248 million to meet its ambitious projections for revenue growth from IPG licensing and advertising. The complaint further alleges that Boylan participated in Gemstar's fraudulent reporting of transactions relating to IPG advertising. According to the complaint, Boylan structured two transactions so that a portion of the amount to be paid to Gemstar was nominally and artificially allocated to the sale of IPG advertising. The complaint also alleges that in press releases, conference calls with securities analysts, and annual reports filed with the Commission, Boylan omitted to disclose material information regarding the transactions. The complaint charges Boylan with securities fraud, falsifying Gemstar's books and records, and aiding and abetting Gemstar's reporting and record-keeping violations, in violation of Sections 10(b), 13(a), 13(b)(2)(A), and 13(b)(5) of the Securities Exchange Act of 1934 and Rules 10b-5, 12b-20, 13a-1, and 13b2-1 thereunder. + + If approved by the court, Boylan will be enjoined from future violations, or aiding and abetting violations, of the above provisions of the federal securities laws. Boylan is also agreeing to pay disgorgement of $300,000 and a civil penalty of $300,000. The Commission will seek to have this money included in a fund established for harmed shareholders of Gemstar pursuant to Section 308 of the Sarbanes-Oxley Act of 2002. + + The Commission's action is pending against four other former executives of Gemstar: Henry C. Yuen, former chief executive officer; Elsie M. Leung, former chief financial officer; Jonathan B. Orlick, former general counsel; and Craig Waggy, former CFO of TV Guide. The court has scheduled the trial of this matter to begin on January 18, 2005. On June 30, 2004, the court entered a final judgment of permanent injunction against Gemstar as part of a settlement in which the company agreed to pay a $10 million civil penalty to be distributed to harmed shareholders pursuant to Section 308 of the Sarbanes-Oxley Act. + + + SEC Complaint in this matter + + + + +  + + + + + + + + + + + + + + + + + + + + + + + + + Return to top + + + + + SEC homepage + + + + + + + + + + + + + + About the SEC + + + + + + Budget & Performance + + + Careers + + + Commission Votes + + + Contact + + + Contracts + + + + + + + + Transparency + + + + + + Accessibility & Disability + + + Super Intelligence + + + FOIA + + + Inspector General + + + No FEAR Act Data + + + Ombuds + + + SEC Excess Personal Property Guidance + + + + + + + + Websites + + + + + + Investor.gov + + + Related Sites + + + USA.gov + + + + + + + + Site Information + + + + + + Plain Writing + + + Privacy & Security + + + Site Map + + + + + + + + + + + + + + + + + + Stay connected. 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Livesay, CPA + + + + + + + + !function(){var e=navigator.userAgent,a=document.documentElement,n=a.className;n=n.replace("no-js","js"),/iPad|iPhone|iPod/.test(e)&&!window.MSStream&&(n+=" ua-ios"),a.className=n}(); + {"path":{"baseUrl":"\/","pathPrefix":"","currentPath":"node\/367286","currentPathIsAdmin":false,"isFront":false,"currentLanguage":"en"},"pluralDelimiter":"\u0003","suppressDeprecationErrors":true,"gtag":{"tagId":"","consentMode":false,"otherIds":[],"events":[],"additionalConfigInfo":[]},"ajaxPageState":{"libraries":"eJxdT0GOwzAI_JBdn_oei2DkeINNZLC22devlaZS2wtiBhhmcKNUTPo97jxyaXEH3GJpiZrFhQW38A4cMqgeYQGlV19JFTKpQ-kUmvQKXP7I0cO4tC2kPnbg2wVdFslM0SCHPMs3vsEPPD7J6hgOGdPCKJyoRxxqUuePHjLLAuzVjimenRJGSLW08NoBK9LUn6SHlrytVOlcpJShB63QLSpBx_WkOzHNePol4fRQo_qMPvQ36ZXsAmd99lMNr2t_GUR9n60EyX9a_wePd5ns","theme":"uswds_sec","theme_token":null},"ajaxTrustedUrl":[],"gtm":{"tagId":null,"settings":{"data_layer":"dataLayer","include_classes":false,"allowlist_classes":"","blocklist_classes":"","include_environment":false,"environment_id":"","environment_token":""},"tagIds":["GTM-TD3BKV"]},"data":{"extlink":{"extTarget":false,"extTargetAppendNewWindowDisplay":true,"extTargetAppendNewWindowLabel":"(opens in a new window)","extTargetNoOverride":false,"extNofollow":false,"extTitleNoOverride":false,"extNoreferrer":false,"extFollowNoOverride":false,"extClass":"0","extLabel":"(link is external)","extImgClass":false,"extSubdomains":true,"extExclude":".*\\.gov|http:\/\/www.xbrl.org\/utr\/2013-05-17\/utr.xml|http:\/\/www.xbrl.org\/dtr\/type\/numeric-2009-12-16.xsd|http:\/\/www.xbrl.org\/dtr\/type\/nonNumeric-2009-12-16.xsd|https:\/\/secir.secure.force.com\/ombudsman\/OMMSForm","extInclude":"","extCssExclude":".data-exempt","extCssInclude":"","extCssExplicit":"","extAlert":true,"extAlertText":"You are now leaving the SEC Website. 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Individuals (SALI) + + + + + Enforcement Data Delivery Standards + + + + + Small Businesses + + + + + Appellate Briefs + + + + + Amicus / Friend of the Court Briefs + + + + + + + + + + + + + + + + + + + + + + + + + + Enforcement & Litigation + + + + + + + Litigation Releases + + + + + Administrative Proceedings + + + + + + + Information for Respondents in Administrative Proceedings  + + + + + Open Litigated Administrative Proceedings + + + + + Closed Litigated Administrative Proceedings + + + + + Commission Opinions and Adjudicatory Orders + + + + + Delinquent Filings + + + + + Stop Orders + + + + + + + + Administrative Law Judge Orders and Initial Decisions + + + + + Trading Suspensions + + + + + Distributions to Harmed Investors + + + + + Receiverships + + + + + Electronic Filings in Administrative Proceedings (eFAP) + + + + + Rules of Practice + + + + + Applications for Reentry + + + + + Reports of Investigations + + + + + Whistleblower Program + + + + + Public Alert: Unregistered Soliciting Entities (PAUSE) + + + + + SEC Action Lookup - Individuals (SALI) + + + + + Enforcement Data Delivery Standards + + + + + Small Businesses + + + + + Appellate Briefs + + + + + Amicus / Friend of the Court Briefs + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + Home + + + Enforcement and Litigation + + + Administrative Proceedings + + + Kenneth K. Livesay, CPA + + + + + + + + + + + + Kenneth K. Livesay, CPA + + + + + + + + + + + + + + + + + + + + + SECURITIES EXCHANGE ACT OF 1934 +Release No. 50225 / August 20, 2004 + + ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 2082 / August 20, 2004 + + ADMINISTRATIVE PROCEEDING +File No. 3-11593 + + + In the Matter of + KENNETH K. LIVESAY, CPA, + Respondent. + + : : : : : : : : : : + + ORDER INSTITUTING ADMINISTRATIVE PROCEEDINGS PURSUANT TO RULE 102(e) OF THE COMMISSION'S RULES OF PRACTICE, MAKING FINDINGS, AND IMPOSING REMEDIAL SANCTIONS I. + + The Securities and Exchange Commission ("Commission") deems it appropriate and in the public interest that public administrative proceedings be, and hereby are, instituted against Kenneth K. Livesay ("Respondent" or "Livesay") pursuant to Rules 102(e)(2) and 102(e)(3)(i) of the Commission's Rules of Practice. 1 + + II. + + In anticipation of the institution of these proceedings, Respondent has submitted an Offer of Settlement (the "Offer") which the Commission has determined to accept. Solely for the purpose of these proceedings and any other proceedings brought by or on behalf of the Commission, or to which the Commission is a party, and without admitting or denying the findings herein, except as to the Commission's jurisdiction over him and the subject matter of these proceedings, and the findings contained in Sections III.3 and III.5 below, which are admitted, Respondent consents to the entry of this Order Instituting Administrative Proceedings Pursuant to Rule 102(e) of the Commission's Rules of Practice, Making Findings, and Imposing Remedial Sanctions ("Order"), as set forth below. + + III. + + On the basis of this Order and Respondent's Offer, the Commission finds that: + + 1. Livesay, age 43, is and has been a certified public accountant licensed to practice in the State of Alabama. He served as assistant controller of HealthSouth Corporation ("HealthSouth") from 1989 until November 1999. + + 2. HealthSouth was, at all relevant times, a Delaware corporation with its principal place of business in Birmingham, Alabama. HealthSouth was in the business of, among other things, providing outpatient diagnosis and surgery. At all relevant times, HealthSouth's common stock was registered with the Commission pursuant to Section 12(b) of the Securities Exchange Act of 1934 ("Exchange Act"), and traded on the New York Stock Exchange. + + 3. On April 3, 2003, the Commission filed a complaint against Livesay in SEC v. Kenneth K. Livesay et al. , (Civil Action No. CV-03-S-0758-S). On August 19, 2004, the court entered an order permanently enjoining Livesay, by consent, from future violations of Section 17(a) of the Securities Act of 1933 ("Securities Act") and Sections 10(b) and 13(b)(5) of the Exchange Act and Rules 10b-5 and 13b2-1 thereunder, and from aiding and abetting violations of Section 17(a) of the Securities Act and Sections 10(b), 13(a), 13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act and Rules 10b-5, 12b-20, 13a-1 and 13a-13 thereunder. + + 4. The Commission's complaint alleged, among other things, that Livesay, at the direction of senior officers of HealthSouth, engaged in a fraudulent scheme which resulted in HealthSouth filing materially false and misleading financial statements in the company's annual reports on Forms 10-K and periodic reports on Forms 10-Q from 1999 through 2002. Among other things, the complaint alleged that Livesay directed other HealthSouth employees to record fictitious assets on the company's books which matched generally fraudulent overstatements of income. The complaint alleged that the fraudulent entries were designed to avoid detection by HealthSouth's independent auditors. + + 5. On June 3, 2004, a judgment of conviction was entered against Livesay in United States v. Livesay , CR-03-C-0182-S, in the United States District Court for the Northern District of Alabama, finding him guilty of one count of conspiracy to commit wire fraud, one count of securities fraud and one count of willfully and knowingly falsifying books and records of HealthSouth. + + 6. As a result of this conviction, Livesay was sentenced to 60 months probation, with the first six months home detention, to pay a $10,000 fine, to forfeit $750,000 and to pay a $200 assessment. + + IV. + + In view of the foregoing, the Commission deems it appropriate and in the public interest to impose the sanction agreed to in Respondent Livesay's Offer. + + Accordingly, it is hereby ORDERED, effective immediately, that: + + Livesay is forthwith suspended from appearing or practicing before the Commission as an accountant. + + By the Commission. + + +Jonathan G. Katz +Secretary + + Endnotes + 1 Rule 102(e)(2) provides, in relevant part, that: + + + Any . . . person who has been convicted of a felony or a misdemeanor involving moral turpitude shall be forthwith suspended from appearing or practicing before the Commission. + + Rule 102(e)(3)(i) provides, in relevant part, that: + + The Commission, with due regard to the public interest and without preliminary hearing, may, by order, . . . suspend from appearing or practicing before it any . . . accountant . . . who has been by name . . . permanently enjoined by any court of competent jurisdiction, by reason of his or her misconduct in an action brought by the Commission, from violating or aiding and abetting the violation of any provision of the Federal securities laws or of the rules and regulations thereunder. + + + +  + + + + + + + + + + + + + + + + + + + + + + + + + Return to top + + + + + SEC homepage + + + + + + + + + + + + + + About the SEC + + + + + + Budget & Performance + + + Careers + + + Commission Votes + + + Contact + + + Contracts + + + + + + + + Transparency + + + + + + Accessibility & Disability + + + Super Intelligence + + + FOIA + + + Inspector General + + + No FEAR Act Data + + + Ombuds + + + SEC Excess Personal Property Guidance + + + + + + + + Websites + + + + + + Investor.gov + + + Related Sites + + + USA.gov + + + + + + + + Site Information + + + + + + Plain Writing + + + Privacy & Security + + + Site Map + + + + + + + + + + + + + + + + + + Stay connected. 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Livesay, et al. + + + + + + + + + + + + Kenneth K. Livesay, et al. + + + + + + + + + + + + + + + + + + + + + On August 19, 2004, the Honorable Virginia Emerson Hopkins, U. S. District Judge for the Northern District of Alabama, entered a Final Judgment as to defendant Kenneth K. Livesay (Livesay), formerly senior vice president, chief information officer and assistant controller of HealthSouth Corporation. The Final Judgment enjoined him from further violations of Section 17(a) of the Securities Act of 1933 (Securities Act), Sections 10(b) and 13(b)(5) of the Securities Exchange Act of 1934 (Exchange Act) and Rules 10b-5 and 13b2-1 thereunder, and from aiding and abetting violations of Section 17(a) of the Securities Act, Sections 10(b), 13(a), 13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act and Rules 10b-5, 12b-20, 13a-1 and 13a-13 thereunder. Livesay was also permanently barred from serving as an officer or director of a public company. Livesay was not ordered to pay disgorgement and civil penalties in view of the forfeiture and fine ordered against him in the related criminal proceeding. Livesay consented to the entry of the judgment without admitting or denying any of the allegations of the Commission's Complaint. + + The Commission's Complaint alleged that Livesay made or directed HealthSouth employees to make false accounting entries to inflate reported operating results in order to meet or exceed Wall Street earnings expectations. + + See also: +L.R. 18044 / March 20, 2003; +L. R. 18059 / April 1, 2003; +L. R. 18060 / April 1, 2003; +AAER No. 1749 / April 1, 2003; +L. R. 18070 / April 4, 2003; and +L. R. 18339 / September 10, 2003; and +AAER No. 2004 / May 10, 2004. + + + + +  + + + + + + + + + + + + + + + + + + + + + + + + + Return to top + + + + + SEC homepage + + + + + + + + + + + + + + About the SEC + + + + + + Budget & Performance + + + Careers + + + Commission Votes + + + Contact + + + Contracts + + + + + + + + Transparency + + + + + + Accessibility & Disability + + + Super Intelligence + + + FOIA + + + Inspector General + + + No FEAR Act Data + + + Ombuds + + + SEC Excess Personal Property Guidance + + + + + + + + Websites + + + + + + Investor.gov + + + Related Sites + + + USA.gov + + + + + + + + Site Information + + + + + + Plain Writing + + + Privacy & Security + + + Site Map + + + + + + + + + + + + + + + + + + Stay connected. 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Piranha, Inc., et al., Civil Action No. 3 :04-CV-1829-N, USDC, NDTX (Dallas Division) + + SEC Sues Piranha, Inc. and Its Former CEO and CFO for Accounting Fraud and Market-Manipulation Scheme + + The Securities and Exchange Commission filed a civil lawsuit on August 23, 2004 in federal district court in Dallas, Texas, alleging an accounting-fraud and market-manipulation scheme involving the stock of Piranha, Inc., a development-stage technology company formerly traded on the OTC Bulletin Board. The SEC alleges that the scheme was orchestrated by Piranha's former CFO and principal shareholder Richard S. Berger, 70, of Chicago, Illinois, and the company's former CEO Edward W. Sample, 53, of Plano, Texas. + According to the SEC's complaint, Piranha issued numerous misleading press releases, during 2000 and 2001, presenting the company as a promising software-technology company with the potential for huge earnings when, in truth, the company never developed a commercially marketable product and generated virtually no revenue. Piranha is also alleged to have filed false reports with the SEC that materially overstated the value of the company's principal asset, a mathematical algorithm from which the company intended to develop various software products. These reports also failed to disclose and wrongly accounted for $675,000 that Berger allegedly misappropriated from the company. During the scheme, Piranha's stock price reached $65 per share, giving the company a market capitalization of over $596 million within just four months of its inception. The complaint also alleges that Berger profited from the scheme by selling more than $1.5 million of Piranha shares individually and through his wife, Linda A. Shaughnessy, of Chicago, Illinois, who acted as his nominee in selling the shares. + The SEC's complaint alleges that Piranha, Berger, and Sample violated the anti-fraud provisions of the federal securities laws found in Section 10(b) of the Securities Exchange Act of 1934 ("Exchange Act") and Rule 10b-5; that Berger violated Section 17(a) of the Securities Act of 1933; that Piranha, aided and abetted by Berger and Sample, violated the issuer-reporting and internal-controls provisions found in Sections 13(a) and 13(b)(2) of the Exchange Act and Rules 12b-20, 13a-1, and 13a-13; that Berger and Sample violated Section 13(b)(5) of the Exchange Act and Rule 13b2-1, which prohibit falsifying books and records of SEC reporting companies; and that Berger violated Exchange Act Rule 13b2-2 by making false statements to an accountant. + The SEC is seeking permanent injunctions against Piranha, Berger, and Sample, civil penalties and officer-and-director bars against Berger and Sample, and disgorgement plus prejudgment interest against Berger. The SEC also named Shaughnessy as a relief defendant, solely for the purpose seeking disgorgement of the proceeds from her stock sales. Finally, without admitting or denying the allegations in the complaint, Sample consented to the entry of a permanent injunction; a five-year officer-and-director bar; and a $25,000 civil penalty. Sample's settlement is subject to Court approval. + + + SEC Complaint in this matter + + + + + + + + + + + + + + + + + + + + + + + + + + Return to top + + + + + SEC homepage + + + + + + + + + + + + + + About the SEC + + + + + + Budget & Performance + + + Careers + + + Commission Votes + + + Contact + + + Contracts + + + + + + + + Transparency + + + + + + Accessibility & Disability + + + Super Intelligence + + + FOIA + + + Inspector General + + + No FEAR Act Data + + + Ombuds + + + SEC Excess Personal Property Guidance + + + + + + + + Websites + + + + + + Investor.gov + + + Related Sites + + + USA.gov + + + + + + + + Site Information + + + + + + Plain Writing + + + Privacy & Security + + + Site Map + + + + + + + + + + + + + + + + + + Stay connected. Sign up for email updates. + + + + + + Your email address + + Sign Up + + + + + + + + + + + + X + + + + + + + + Facebook + + + + + + + + Instagram + + + + + + + + RSS + + + + + + + + YouTube + + + + + + + + Email Updates + + + + + + + + + + + + + + + + + + + diff --git a/raw/aaer/2004/AAER-2085.txt b/raw/aaer/2004/AAER-2085.txt new file mode 100644 index 0000000000000000000000000000000000000000..2d3fb212b06aeae1a818326469beb931aed78b9a --- /dev/null +++ b/raw/aaer/2004/AAER-2085.txt @@ -0,0 +1,910 @@ +UNITED STATES OF AMERICA +Before the +SECURITIES AND EXCHANGE COMMISSION +SECURITIES EXCHANGE ACT OF 1934 +Release No. 50233 / August 24, 2004 +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 2085 / August 24, 2004 +ADMINISTRATIVE PROCEEDING +File No. 3-11595 + +In the Matter of + +Royal Dutch Petroleum Company and +The “Shell” Transport and Trading Co., +p.l.c. + +Respondents +: +: +: +: +: +: +: +: +: + +ORDER INSTITUTING CEASE-AND- +DESIST PROCEEDINGS PURSUANT +SECTION 21C OF THE SECURITIES +EXCHANGE ACT OF 1934, MAKING +FINDINGS, AND IMPOSING A +CEASE-AND-DESIST ORDER +I. + + The Securities and Exchange Commissi on (“Commission”) deems it appropriate that +public administrative proceedings be, and hereby are, instituted pursuant to Section 21C of the +Securities Exchange Act of 1934 (“Exchange Act”) against Royal Dutch Petroleum Company +(“Royal Dutch”) and The “Shell” Transport and Trading Company, p.l.c. (“Shell Transport”) +(collectively with Royal Dutch, “Respondents”). + +II. + + In anticipation of the institution of these proceedings, Respondents have submitted an +Offer of Settlement (the “Offer”), which the Commission has determined to accept. Solely for +the purpose of these proceedings and any other proceedings brought by or on behalf of the +Commission, or to which the Commission is a party, and without admitting or denying the +findings herein, except as to the Commission's jurisdiction over it and the subject matter of these +proceedings, Respondents consent to the entry of this Order Instituting Cease-and-Desist +Proceedings Pursuant to Section 21C of the Securities Exchange Act of 1934, Making Findings, +and Imposing Cease-and-Desist Order, as set forth below. +1 + +1 In a separate civil action filed simultaneously with this proceeding, Royal Dutch and Shell Transport consented to +the entry of a judgment by the U.S. District Court for the Southern District of Texas, Houston Division, pursuant to +Section 21(d) of the Securities Exchange Act of 1934 ordering Royal Dutch and Shell Transport, collectively, to pay +$1 disgorgement and a $120 million civil penalty. SEC v. Royal Dutch Petroleum Company and The “Shell” +Transport and Trading Company, p.l.c., H-04-3359 (S.D. Tex.) (August 24, 2004). + + +III. +FACTS + + On the basis of this Order and the Respondents’ Offer, the Commission finds that:2 + +A. Respondents + + 1. Royal Dutch Petroleum Company + + Royal Dutch is a corporation incorporated under the laws of the Netherlands and +headquartered in The Hague, Netherlands. Its stock is registered with the Commission pursuant +to Section 12(b) of the Exchange Act and trades on the New York Stock Exchange. + + 2. The “Shell” Transport and Trading Company, p.l.c. + + Shell Transport is a corporation incorporated under the laws of England and +headquartered in London, England. Its Ordinary shares, as well as New York Shares +representing Ordinary shares of an aggregate nominal amount of ₤1.50 and evidenced by +Depositary Receipts (“New York Shares”), are registered with the Commission pursuant to +Section 12(b) of the Exchange Act. Its New York Shares trade on the New York Stock +Exchange. + + 3. The Royal Dutch/Shell Group of Companies + + Royal Dutch and Shell Transport do not engage in operational activities. They derive the +whole of their respective incomes – except interest income on cash balances or short-term +investments – from their interests in the collection of companies known as the Royal Dutch/Shell +Group of Companies (the “Group” and, collectively with Royal Dutch and Shell Transport, +“Shell”). The Group is organized under two Group holding companies that, directly or +indirectly, own all of the Group companies. The parent companies, Royal Dutch and Shell +Transport, own all of the shares of the two holding companies. Royal Dutch and Shell Transport +are entitled to have their respective nominees elected as the members of the boards of directors +of the holding companies. The managing directors of the holding companies are, in turn, +appointed to a joint Committee of Managing Directors (“CMD”) responsible for considering and +developing objectives and long-term plans of the Group. + +B. Summary + +In a series of announcements between January 9 and May 24, 2004, Shell announced the +recategorization of 4.47 billion barrels of oil equivalent (“boe”), or approximately 23%, of the +“proved” reserves it reported as of year-end 2002, because they did not comply with the + +2 The findings herein are made pursuant to Respondents’ Offer and are not binding on any other person or entity in +this or any other proceeding. + + + +2 + +definition of “proved” reserves in Rule 4-10 of Regulation S-X (“Rule 4-10”).3 This +recategorization reduced the standardized measure of future cash flows reported in Shell’s +original 2002 Form 20-F as Supplemental Information under Statement of Financial Accounting +Standard No. 69 (“FAS 69”) by approximately $6.6 billion. On July 2, 2004, Shell filed an +amended 2002 Form 20-F reflecting the restatement of its proved reserves and standardized +measure of future cash flows for the years 1999 to 2002 as follows: + +Year +Reduction in +“Proved” +Reserves % Reduction +Reduction in +Standardized +Measure % Reduction +1997 3.13 boe 16% N/A4 N/A +1998 3.78 boe 18% N/A N/A +1999 4.58 boe 23% $7.0 billion 11% +2000 4.84 boe 25% $7.2 billion 10% +2001 4.53 boe 24% $6.5 billion 13% +2002 4.47 boe 23% $6.6 billion 9% + + +As a result of the overstatement of proved reserves for 2002 and prior years, Shell also +announced a reduction in its Reserves Replacement Ratio (“RRR”) for the five-year period, 1998 +through 2002, from the previously reported 100% to approximately 80%. Had Shell reported +proved reserves properly, its annual and three-year RRR over this span would have been as +follows: + +1-Year RRR 3-Year RRR Year Original Restated Original Restated +1998 182% 134% n/a n/a +1999 56% -5% n/a n/a +2000 69% 50% 102% 60% +2001 74% 97% 66% 48% +2002 117% 121% 87% 90% +2003 n/a 63% n/a 94% + +As discussed more fully below, Shell’s overstatement of proved reserves, and its delay in +correcting the overstatement, resulted from (i) its desire to create and maintain the appearance of +a strong RRR, a key performance indicator in the oil and gas industry, (ii) the failure of its +internal reserves estimation and reporting guidelines to conform to Rule 4-10’s requirements, +and (iii) the lack of effective internal controls over the reserves estimation and reporting +processes. These failures led Shell to record and maintain proved reserves it knew (or was +reckless in not knowing) did not satisfy Rule 4-10’s requirements, and to report for certain years +a stronger RRR than it actually had achieved. Indeed, Shell was warned on several occasions + +3 17 C.F.R. §210.4-10. +4 Although Shell estimated the effects of the reserve recategorization on its proved reserves through 1997, its +restatement of its FAS 69 standardized measure of future cash flows extended only through 1999. + + + +3 + +prior to the Fall of 2003 that reported proved reserves potentially were overstated and, in such +critical operating areas as Nigeria and Oman, depended upon unrealistic production forecasts. In +each case, Shell either rejected the warnings as immaterial or unduly pessimistic, or attempted to +“manage” the potential exposure by, for example, delaying de-booking of improperly recorded +proved reserves until new, offsetting proved reserves bookings materialized. + +On March 3, 2004, the Royal Dutch and Shell Transport boards of directors requested +and received the resignations of the chairman of the CMD and the CEO of Shell’s Exploration +and Production business (“EP”) from their respective positions as the chairman of the board of +directors of Shell Transport and a member of the board of management of Royal Dutch as well +as their positions as managing directors of the Group. On April 19, 2004, Shell also announced +that its Group Chief Financial Officer would step aside from that position. + +Since announcing the reserves recategorization, Shell has undertaken significant remedial +action, including an investigation by the Group Audit Committee (“GAC”) and the +implementation of measures to address the internal control deficiencies that permitted the +overstatement of proved reserves. + +1. Shell’s Internal Guidelines Failed to Conform to Rule 4-10’s Criteria for +“Proved Reserves” + +a. Rule 4-10 and SEC Staff Guidance Thereon + +Royal Dutch and Shell Transport are required to include supplemental information on +their “proved” oil and natural gas reserves in their annual reports to the Commission on Form 20- +F. Rule 4-10 defines “proved reserves” for reporting purposes as “the estimated quantities of +crude oil, natural gas, and natural gas liquids which geological and engineering data demonstrate +with reasonable certainty to be recoverable in future years from known reservoirs under existing +economic and operating conditions, i.e., prices and costs as of the date the estimate is made.” +Under Item 102(5) of Regulation S-K, issuers may not disclose in Commission filings estimates +of oil and gas reserves other than “proved reserves” unless such disclosure is required under state +law or the law of a non-U.S. jurisdiction. + +In 2000 and 2001, the Commission’s staff issued interpretive guidance on the disclosure +of proved reserves according to the definitions in Rule 4-10.5 In this guidance, the staff: + +• emphasized the conservatism underlying the definition of “proved reserves,” +highlighting that “[t]he concept of reasonable certainty implies that, as more +technical data becomes available, a positive, or upward, revision is much more +likely than a negative, or downward, revision”; + + +5 See Division of Corporation Finance: Current Accounting and Disclosure Issues (June 30, 2000); Division of +Corporation Finance: Frequently Requested Accounting and Financial Reporting Interpretations and Guidance +(March 31, 2001). + + + +4 + +• observed that “[e]conomic uncertainties such as the lack of a market (e.g. stranded +hydrocarbons) … can also prevent reserves from being classified as proved”; + +• specifically advised that, in “developing frontier areas … [i]ssuers must +demonstrate that there is reasonable certainty that a market exists for the +hydrocarbons and that an economic method of extracting, treating and +transporting them to market exists or is feasible and is likely to exist in the near +future. A commitment by the company to develop the necessary production, +treatment and transportation infrastructure is essential to the attribution of proved +undeveloped reserves. Significant lack of progress on the development of such +reserves may be evidence of a lack of commitment. Affirmation of this +commitment may take the form of signed sales contracts for the products; request +for proposals to build facilities; signed acceptance of bid proposals; memos of +understanding between the appropriate organizations and governments; firm plans +and timetables established; approved authorization for expenditures to build +facilities; approved environmental permits, etc. Reasonable certainty of +procurement of project financing by the company is a requirement for the +attribution of proved reserves. An inordinately long delay in the schedule of +development may introduce doubt sufficient to preclude the attribution of proved +reserves”; and + +• with respect to hydrocarbon volumes whose production depends on the extension +of government permits or licenses, indicated that automatic renewal of such +permits or licenses “cannot be expected … unless there is a long and clear track +record which supports the conclusion that such approvals and renewals are a +matter of course.” + +b. The Shell Guidelines + +Shell has, since at least the 1970’s, relied on – and instructed and trained its personnel to +follow – a series of comprehensive, detailed internal guidelines for the estimation and reporting +of oil and gas resources. Since the Commission adopted Rule 4-10, Shell also has relied on the +guidelines to estimate and report “proved reserves” in its Commission filings. As outlined +below, Shell’s guidelines failed to conform to the requirements of Rule 4-10, as supplemented by +the Commission staff’s interpretative guidance, in a number of significant ways. + +(i) 1998: Shell adopts new guidelines that substantially increase its +reported proved reserves + +In 1997, following several years of reporting RRR that lagged its peers, Shell EP +commissioned a “Value Creation Team” (“VCT”) to, among other things, assess the company’s +conservatism in reporting proved reserves relative to its competitors. In 1998, the VCT reported +to EP management that Shell was more conservative than its peers in reporting proved developed + + + +5 + +oil and gas reserves,6 but that it was “early in registering [proved undeveloped] reserves” relative +to competitors.7 + +As part of its work, the VCT also evaluated the impact of Shell adopting a +“deterministic” approach to estimating reserves in all fields, noting that this would “provide +directly comparable [reserves] figures to American competitors,” all of whom used such methods +to estimate publicly reported proved reserves.8 This would have represented a sea-change in +Shell’s reserve reporting practices, which historically were founded on “probabilistic” +methodology.9 Shell ultimately declined to adopt deterministic methods for all fields, in part +because this was unlikely to substantially increase reported RRR. As VCT documentation +evaluating these approaches describes: + +The only way to provide directly comparable figures to American competitors +would be to adopt a deterministic approach to the derivation of proved reserves, +whilst retaining the probabilistic approach for internal assessments for project +optimization and evaluation. The result is likely to be an increase in reported +proved developed reserves, offset partly, or in whole, by a reduction in proved +undeveloped reserves. Thus published total proved reserves may not benefit +significantly. + +Shell instead revised its internal guidelines in 1998 to adopt a system under which it +maintained its existing probabilistic methods for estimating proved reserves in “immature” +fields, but applied more deterministic methods in “mature” fields, directing OUs to increase +proved reserves in such fields to equal “expectation” volumes.10 This guideline revision added +substantial volumes to Shell’s reported proved reserves. For instance, nearly 40% of the total +proved reserves Shell added in 1998 resulted from this guideline revision. From 1998 through +2001, this guideline revision resulted in more than 1.2 billion boe being added to reported proved + +6 “Proved developed oil and gas reserves” are reserves that can be expected to be recovered through existing wells +with existing equipment and operating methods. See Rule 4-10(a)(3) [17 C.F.R. §210.4-10(a)(3)]. +7 “Proved undeveloped reserves” are reserves that are expected to be recovered from new wells on undrilled acreage, +or from existing wells where a relatively major expenditure is required for recompletion. See Rule 4-10(a)(4) [17 +C.F.R. §210.4-10(4)]. +8 An oil and gas reserves estimation methodology is considered “deterministic” if a single best estimate of reserves +is made based on known geological, engineering and economic data. +9 An oil and gas reserves estimation methodology is considered “probabilistic” when the known geological, +engineering and economic data are used to generate a range of estimates and their associated probabilities. +10 As used by Shell, “expectation reserves” are the most likely estimate of hydrocarbon volumes remaining to be +recovered from a project that is technically and commercially mature, or from a producing asset. If probabilistic +techniques are used in reserve estimation, the expectation reserves are the probability weighted average of all +possible outcomes (commonly referred to as the “P50” outcome). If deterministic techniques are used, expectation +reserves correspond to the most likely estimate of future recovery. +Generally, a field was “mature” under the revised guidelines if total production was greater than 30% of expectation +reserves. + + + +6 + +reserves. In implementing this change, however, certain of Shell’s operating units failed to +perform the detailed analysis necessary to support the resulting increase in proved reserves, +particularly in Nigeria. Notably, Shell’s only public disclosure of this change was a single +sentence accompanying the supplemental oil and gas information in its 1998 annual report, +which states only that “[e]stimation methods have been refined during 1998.” + +(ii) Shell’s internal guidelines did not require market existence or +project commitment + + Before September 2003, with respect to frontier developments, Shell’s guidelines +required neither a currently existing market for a field’s hydrocarbons nor a commitment by +Shell to develop the field or the infrastructure necessary to bring the hydrocarbons to market. As +discussed below, the most significant proved reserves addition recorded and maintained as a +result was the giant Gorgon natural gas field in Australia, originally booked in 1997. + + Though realizing by year-end 2001 that these aspects of its guidelines fell short of SEC +requirements, Shell did not remedy these shortcomings until its September 2003 guideline +revisions. The 2003 guidelines for the first time required certainty of an existing market (e.g., a +sales agreement for proved natural gas reserves) and a “Final Investment Decision” on +significant projects before reserves associated with the project could be deemed proved. + +(iii) Shell’s guidelines were too permissive regarding government +and regulatory approvals + +Despite explicit staff guidance in 2000 and 2001 that reserves subject to significant +government and regulatory approvals (e.g., production license extensions) required “a long and +clear track record which supports the conclusion that such approvals and renewal are a matter of +course,” Shell’s guidelines through 2002 failed to require sufficient assurance of such approvals +and, as a result, Shell booked proved reserves for certain projects for which governmental or +regulatory approvals were not sufficiently assured for there to be “reasonable certainty” of the +recovery of those reserves in future years. These deficiencies impacted reserves bookings in +Kazakhstan (Kashagan field), Ireland (Corrib field), Italy (Tempa Rossa field) and the +Netherlands (Waddenzee fields). + +(iv) Application of technical requirements + +Shell’s guidelines failed in several respects to comply with the technical engineering +standards embodied in Rule 4-10 for the estimation of oil and natural gas reserve volumes. +These technical requirements include both restrictions on estimates of the depth and lateral +extent of reserves – known in the engineering field as “lowest known hydrocarbon” and “lateral +extent of proved area” requirements – as well as standards governing the use of year-end prices, +improved oil and gas recovery techniques and advanced computer reserve modeling, specifically +requirements that such methods be supported by sufficient reservoir analogies and/or actual +performance information. + + + + +7 + +(v) Requirements and procedures for de-booking non-compliant +reserves + +To be reported as “proved,” reserves must satisfy Rule 4-10. If at any point previously +reported proved reserves fail to do so, they can no longer be included in proved reserves +disclosures. Shell’s guidelines did not require the de-booking of reserves that no longer qualified +as “proved” under Rule 4-10. Instead, the guidelines urged Shell personnel to “exert caution” in +de-booking reserves to “minimize fluctuations [in proved reserves] over time.” This effectively +shielded questionable proved reserves from de-booking in all but the most extreme +circumstances, which contributed to Shell’s failure to de-book significant volumes that, by year- +end 2001, had been identified as potentially not compliant with Rule 4-10. + +2. Shell Failed to Maintain Adequate Internal Controls Over Its Reserves +Estimation and Reporting Processes + +Shell also failed in several respects to implement and maintain internal controls sufficient +to provide reasonable assurance that it was estimating and reporting proved reserves accurately +and in compliance with applicable requirements. These failures arose from (i) inadequate +training and supervision of the operating unit personnel responsible for estimating and reporting +proved reserves in the first instance, and (ii) deficiencies in the internal reserves audit function. + + a. Inadequate operating unit controls + +Shell’s reserve estimation and reporting practices were largely decentralized in that they +required operating unit personnel initially to determine resource volume categorization, +including estimating volumes of proved reserves for Shell’s Commission filings and other public +reporting. Shell, however, failed to ensure that its personnel were adequately trained with +respect to the Commission’s reporting requirements. Indeed, Shell’s Group Reserves Auditor +observed in January 2003 that operating unit comprehension of both Group guidelines and +Commission rules regarding proved reserves was generally lacking. + +b. Deficiencies in the Group Reserve Auditing Function + +Shell’s decentralized system required an effective internal reserves audit function. To +perform this function, Shell historically had engaged as Group Reserves Auditor a lone retired +Shell petroleum engineer – who worked only part-time and was provided limited resources and +no staff – to audit its vast worldwide operations. Although the Group Reserves Auditor was an +experienced reservoir engineer, he received scant, if any, additional training on such critical +matters as how he should conduct his work and the rules and standards on which his opinions +should be based. He also lacked authority to require operating unit compliance with either +Commission rules or Group reserves guidelines. Moreover, he reported to EP management, +meaning he was answerable to the same people he audited. + +To fulfill his duties, the Group Reserves Auditor made brief visits to a handful of +operating units per year. He then issued reports rating the operating unit’s systems, compliance +with Group guidelines and audit response as “good,” “satisfactory” or “unsatisfactory” and + + + +8 + +opining whether the operating unit’s reported reserves met Group guidelines.11 Although more +frequent operating unit visits could occur in principle, they occurred in practice only once every +four or more years. + +The Group Reserves Auditor also issued an annual report on the reasonableness of +Shell’s year-end total reserves summary. Until his February 2004 report on Shell’s 2003 proved +reserves, the Group Reserve Auditor focused as much on whether Group proved reserves +complied with Group guidelines as he did on whether they complied with Commission +requirements. + +Critically, the Group Reserves Auditor also failed to act independently in several +respects. At times, he allowed proved reserves associated with a project to remain booked +because he was more “bullish” on its prospects than the local management responsible for the +project. At other times, he advised local management to submit development plans that were +unlikely ever to be executed solely to support booking proved reserves for otherwise uneconomic +projects. This lack of independence facilitated the booking of questionable reserves (such as +approximately 75 million boe booked in 2001 connection with the Block 18 project in Angola) +and contributed to Shell’s maintenance of increasingly questionable bookings (such as Gorgon +and certain legacy bookings in Brunei) well after they should have been de-booked. + +3. Shell Booked and Maintained Significant Reserves in Australia, Nigeria and +Oman that Failed to Qualify as “Proved Reserves” Under Rule 4-10 + +Shell’s reserves recategorization involves a number of countries and, often, multiple +projects or fields within each country. Events surrounding improper proved reserves bookings or +maintenance in three of the largest affected countries – Australia’s Gorgon project, the Shell’s +onshore operations in Nigeria and Shell’s Omani interests (which, collectively, account for +between approximately 50% and 90% of the recategorization in the years 1997 through 2002) – +exemplify the faults in Shell’s reserves estimation and reporting practices. + + a. Gorgon (Australia) + +Gorgon, an undeveloped frontier gas field off the northwest coast of Australia, was +discovered in 1980. No gas from Gorgon has ever been sold or firmly contracted for, and Shell +has yet to make a Final Investment Decision to develop Gorgon’s hydrocarbons. Nonetheless, in +1997, Shell booked over 550 million boe of proved reserves in Gorgon based on indications of +interest from a prospective purchaser and on the then-current Shell guidelines. At that time, +Shell did not have a contract to sell Gorgon gas, had no firm development plan and had not made +a Final Investment Decision. By 1999, the Asian economic crisis had, at least, significantly +delayed whatever market interest there had been in Gorgon gas, and Shell still had not firmly +committed to develop the field. Yet, Shell maintained Gorgon as proved reserves.12 + +11 From the start of his tenure in January 1999 until September 2003, the Group Reserves Auditor did not issue a +single “unsatisfactory” rating. +12 In 1999, further technical work by Gorgon’s operator indicated additional hydrocarbon volumes in the field. +Because there was no currently existing market for Gorgon gas, however, Shell decided not to add these volumes as + + + +9 + + +On several occasions from 1999 through 2003, Shell reevaluated whether to maintain +Gorgon’s “proved” status. During this time, Shell learned that none of its partners in Gorgon +had booked proved reserves in the field. In March 2000, Shell’s Australian affiliate was +instructed by regional Shell management to review options for gradually de-booking Gorgon +proved reserves, such as by offsetting Gorgon de-bookings against then-anticipated new proved +reserves bookings in Shell’s Sunrise natural gas field in the Timor Sea. Though these offset +opportunities did not materialize, Shell nevertheless determined to maintain Gorgon as proved +reserves unless, as Shell’s then-Group Reserves Coordinator concluded in September 2002, it +became “absolutely clear that development will not proceed in a reasonable time frame.” + +By December 2002, Shell’s EP personnel recognized that Gorgon was a “dodgy” booking +whose status as proved reserves was not supportable even under Shell’s lenient 2002 internal +reserves guidelines. Yet, Shell did not de-book Gorgon from proved reserves until the 2004 +reclassification. + + b. Shell Petroleum Development Company (“SPDC”) (Nigeria) + +Nigeria represents one of Shell’s largest worldwide concentrations of reserves and +production. Shell’s Nigerian operations generally are divided into on-shore and shallow-water +operations (run by SPDC) and deep-water operations. + +By the end of 1999, SPDC’s existing proved reserves – which had increased significantly +because of the 1998 revised Shell reserves guidelines – had grown increasingly dependent on +production forecasts that gave the appearance that the proved portion of the reserves could be +produced within the remaining license period. These projections, in turn, depended on a number +of assumptions concerning improved economic and operating conditions, such as improvements +in the country’s economic stability, increases in Shell’s production quota from the Nigerian +authorities and increases in Nigeria’s production quota from OPEC. Apart from the divergence +of these “assumptions” from the requirement in Rule 4-10 that proved reserves be based on +“existing conditions,” none of these assumptions was reasonable, particularly in light of the fact +that SPDC’s operations performed well below the projected levels throughout the period. + +Many of these concerns were highlighted for Shell EP management in January 2000 in a +presentation discussing, among other things, that a substantial part of SPDC’s reported proved +reserves (perhaps more than 600 million boe) was constrained by license expiration and +depended on unrealistic production forecasts that appeared to have been “reverse engineered” +solely to support the reserve figures.13 EP management agreed only to impose a freeze on the +booking of additional reserves in SPDC and did not order any of the potentially exposed reserves +to be de-booked. The very next month, however, the Group Reserves Auditor’s report on Shell’s + +proved. Inconsistently, the lack of an existing market did not prompt Shell to de-book the Gorgon reserves already +recorded. +13 This presentation also concluded that Shell’s 1999 RRR was 37%. EP management forcefully rejected this +conclusion and instead caused Shell to report a 56% RRR for that year. + + + +10 + +1999 proved reserves repeated these concerns, noting that SPDC faced license expiration +problems and could support its proved reserves figures only through “significant aspirational +upturns in future offtake levels in order to justify their proved reserves levels.” The Group +Reserves Auditor repeated these concerns, without EP taking any steps to de-book non- +compliant reserves, in each of his next two annual reports. + +By early 2002, other Shell reserves personnel, including the Group Reserves Coordinator, +had raised concerns within EP that SPDC’s reported proved reserves could not be produced +within existing license constraints. In a February 11, 2002 note to the CMD, the EP reported that +in certain operations in Nigeria, Oman and Abu Dhabi, “no further proved reserves can be +booked since it is no longer ‘reasonably certain’ that the proved reserves will be produced within +license” and that “[t]he overall exposure should the [operating unit] business plans not transpire +is 1,300 mln boe.” The note concludes that “[w]ork has begun to address this important issue,” +but it failed to recommend any de-bookings to address the license expiration issues.14 + +EP thereafter continued to review the technical and commercial maturity of SPDC’s +reserves. After completing the initial phase of its work in September 2003, the EP review team +concluded that there was an approximately 750 million boe “gap” between the reported proved +reserves and those supported by projects in the business plans. That same month, the Group +Reserves Auditor reported the results of his just-completed audit of SPDC’s proved reserves, +rating SPDC’s proved reserves reporting as “unsatisfactory” and concluding that “there can be +no doubt that the portfolio of proved oil reserves per 1.1.2003 has been overstated due to +insufficient maturity in the underlying future projects.” The Group Reserves Auditor noted that +the “precise” amount of the de-booking required was dependent on the additional reviews +already underway by EP. + +By November 2003, the second phase of the EP review team’s work was complete. It +confirmed the earlier findings of a 750 million boe “gap” and added another 800 million boe of +proved reserves that were not sufficiently mature under Shell guidelines. This information, +combined with the unsatisfactory SPDC audit report and contemporaneous negative information +and audit reports on Shell’s Omani operations, ultimately led Shell to comprehensively review +all of its proved reserves exposures and, eventually, to the January 9, 2004 recategorization +announcement. + + c. Oman + + Shell’s interests in Oman derive from its indirect 34% ownership of Petroleum +Development of Oman (“PDO”), an Omani company 60% of which is owned by the Omani +government. Shell is the largest private shareholder in PDO and serves as PDO’s technical +adviser. + + At year-end 2000, Shell and PDO determined to raise PDO’s proved reserves estimates +by assuming that, for fields of certain maturity, both proved developed and proved undeveloped + +14 Ultimately, in late 2002 and early 2003, Shell sought and received legal advice both from Nigerian and U.S. +counsel that Shell’s Nigerian operation had the equivalent of a legal right to a license extension. + + + +11 + +reserves would be increased to equal the expectation developed and undeveloped volumes. This +upward revision was based on the 1998 revisions to Shell’s guidelines and added 251 million boe +to Shell’s reported proved reserves at December 31, 2000. + + In mid-2001, PDO began experiencing a steep production decline. Within a few months, +the situation had grown sufficiently dire that PDO took the highly unusual step of withdrawing +its long-term business plan for 2002. The production decline also prompted the Omani +government to question the volume of expectation reserves PDO was carrying, as a result of +which Shell agreed to a $30 million “down payment” to the Omani government on what was +expected to be an eventual refund of expectation reserve booking fees it previously had received. +By the end of 2001, as its production continued to drop, PDO had no reliable or realistic long- +term plan on which to base its proved reserves reporting. With Shell’s encouragement, PDO +instead adopted an “aspirational” production forecast to support its reported proved reserves +figures. + + During 2002, Shell was advised that PDO’s proved reserves figures depended upon +sustaining current production rates, without any declines, throughout the remaining lifetime of +the production license, which was to expire in 2012. In view of the production declines already +being experienced, this was not realistic. Shell nevertheless continued to report its share of +PDO’s reserves as proved at year-end 2002. + + Further reviews of PDO reserves in 2003 and 2004 ultimately concluded that 393 million +boe of the Shell share proved reserves associated with PDO had to be de-booked as non- +compliant with Rule 4-10. Of this amount, 144 million boe were found non-compliant because +they were “associated with projects … not sufficiently mature to qualify as proved undeveloped +reserves.” The remaining 249 mboe were non-compliant because they were not supported by +any identified projects. + +4. Shell Failed to Timely and Effectively Ensure that its Reported “Proved +Reserves” Complied with Rule 4-10 + +Until January 2004, Shell failed to timely and appropriately act to ensure that its reported +proved reserves complied with Rule 4-10 and instead sought to ascertain the extent to which the +differences could be either reconciled without impacting Shell’s existing proved reserves or +rationalized as immaterial. Further, the non-executive directors of Royal Dutch and Shell +Transport, including the members of the GAC, were not provided with the information necessary +for the boards of the two companies to ensure that timely and appropriate action was taken with +respect to the proved reserves estimation and reporting practices. + +In January 2002, the Group Reserves Auditor’s report on Shell’s 2001 proved reserves +stated that “recent clarifications of FASB reserves guidelines by the US Security [sic] and +Exchange Commission (SEC) have shown that current Group reserves practice regarding the +first-time booking of Proved reserves in new fields is in some cases too lenient.” The Group +Reserves Auditor recommended that the “Group guidelines should be reviewed [and] [f]irst-time +bookings should be aligned closer with SEC guidance and industry practice and they should be +allowed only for firm projects with technical maturity and full economic viability.” + + + +12 + + +On February 11, 2002, an EP Note for Information to the CMD addressed the divergence +between Shell’s guidelines and the Commission’s rules and estimated the possible impact of this +divergence on Shell’s reported proved reserves. The Note explicitly relayed that “[r]ecently the +SEC issued clarifications that make it apparent that the Group guidelines for booking Proved +Reserves are no longer fully aligned with the SEC rules.” Potential exposures identified to the +CMD at this time included approximately 1 billion boe of proved reserves relating to projects, +including Gorgon, where potential environmental, political or commercial factors might prevent +development, and 1.3 billion boe relating to reserves associated with projects, including certain +projects in Nigeria and Oman, that might not be producible within existing license constraints. +The note failed to recommend de-bookings to CMD and Shell did not take action to de-book any +of these proved reserves at that time. + + On February 25, 2002, the EP CEO provided a note to the CMD regarding EP’s 2001 +performance. In his cover note to the presentation, the EP CEO asked his colleagues to “keep a +balanced perspective on EP performance in 2001 and not have it overshadowed by the high +profile issues around production growth and reserves replacement.” As one of the “Main Issues,” +the note stated: + +In 2001, SEC issued clarifications of the rules for reserves reporting that made it +clear that the probabilistic approach still advocated in the Shell guidelines is, in +many cases too aggressive. This will likely impact future bookings in new fields +(e.g., Nigeria SNEPCo and Brazil) and possibly existing booked volumes (e.g., +Gorgon, Angola Block 18, Ormen Lange and Waddenzee representing some 1.0 +bln boe). + +SPDC, PDO and Abu Dhabi represent 18% of EP’s production, where reserves +can no longer be booked due to license expiry issues and production limitations. +The reserves exposures in these OUs is over 1 bln bbls. +The note failed to recommend de-bookings to CMD and Shell did not take action to de-book any +of these proved reserves at that time. + +In July 2002, EP again reported to CMD that the SEC was tightening its requirements +respecting proved reserves. EP, however, reported that “[i]t is considered unlikely that potential +over-bookings would need to be de-booked in the short term, but the reserves that are exposed to +project risk or license expiry cannot remain on the books indefinitely if little progress is made to +convert them to production in a timely manner.” The minutes of this meeting, however, also +reflect that the executives were advised of the concerns that had arisen within EP “that some +booking practices had been too aggressive in the past.” A Note for Discussion prepared for this +meeting repeats the observation that “[w]ith the benefit of hindsight, some of the organic +revisions made in recent years now appear somewhat aggressive,” principally in Gorgon and +SPDC. The Note observes that without Gorgon and SPDC bookings, “total Proved RRR over +the last 10 years would be reduced from 102% to 88%.” + +By September 2002, the CEO of EP internally spoke in blunt terms of his perception of +the operational and performance problems facing EP, noting to his CMD colleagues that “[w]e + + + +13 + +are struggling on all key criteria” and that “RRR remains below 100% mainly due to aggressive +booking in 1997-2000.” He further observed that “we have tried to adhere to a bunch of criteria +that can only be managed successfully for so long” and admonished that “[g]iven the external +visibility of our issues (lean organic development portfolio funnel, RRR low, F&D unit costs +rising), the market can only be ‘fooled’ if 1) credibility of the company is high, 2) medium and +long-term portfolio refreshment is real and/or 3) positive trends can be shown on key indicators.” + +A month later, the Group Chairman emailed the EP CEO that he was “not contemplating +a change in the external promise . . . .” The next day, the EP CEO responded, stating “I must +admit that I become sick and tired about arguing about the hard facts and also can not perform +miracles given where we are today. If I was interpreting the disclosure requirements literally +(Sorbanes-Oxley Act etc.) [sic] we would have a real problem.” + +None of these events prompted Shell to de-book significant volumes. To the contrary, +Shell continued to make large, questionable proved reserves bookings during this period, such as +the September 2002 booking of 380 million boe in the Kashagan field in Kazakhstan, on which +project Shell did not expect to make a Final Investment Decision until 2003 at the earliest. This +booking alone increased Shell’s 2002 RRR by approximately 26%. + +By the Summer of 2003, Shell’s analysis of reserves exposures had progressed, but still +no de-bookings were recommended to the CMD. A July 22, 2003 CMD Note for Information +reported that “some 1040 million boe (5%) is considered to be potentially at risk.” The note +concluded, however, “at this stage, no action in relation to entries in the [Proved Reserves +Exposure] Catalogue is recommended . . . . It should be noted that the total potential exposure +listed in Appendix C is broadly offset by the potential to include gas fuel and flare volumes in +external reserves disclosures.” The Proved Reserves Exposure Catalogue in Appendix C +quantifies “exposures” at approximately 1 billion boe and “threats” at approximately 1.6 billion +boe, or a total of approximately 2.6 billion boe known to be or potentially noncompliant with +Rule 4-10. + +In late August 2003, EP completed a Note for Information to the GAC on Shell’s reserves +practices. The final version, dated August 26, 2003, was included in materials circulated to the +GAC for its October 21, 2003 meeting. The Note apprises the Committee of steps taken to +address possible non-compliance with the Commission’s regulations. The GAC, however, was +advised that “[m]uch, if not all, of the potential exposure arising from interpretation of factors +listed above [“Possible areas of non-compliance with SEC regulations”] is offset by Shell’s +practice of not disclosing reserves in relation to gas production that is consumed on site as fuel or +(incidental) flaring and venting.” + +Notwithstanding the disclosure of “potential exposures,” in the October 21 meeting with +the GAC, EP personnel failed to update the Committee with several critical facts that had +emerged since the Note was prepared, including the unsatisfactory audit report on Nigeria, the +initial conclusions of the SPDC review that there was a significant “gap” between proved + + + +14 + +reserves carried and those that could be supported, and a substantially reduced estimate of the +potential offset from “fuel and flare” gas.15 + +5. Shell’s Remedial Actions + +Shell has undertaken substantial remedial efforts in connection with the reserves +recategorization as well as corporate governance issues raised following the recategorization +announcement, including the following: +• a determination to self-report the need for a recategorization to both the public and +the Commission prior to the involvement of any external governmental agency or +public release of the reserves overstatement; +• an independent investigation into the facts and circumstances ordered by the GAC, +the results of which have been provided to the Commission; +• retention of an independent reserves engineering firm to assist in a review of Shell’s +proved reserves, which led to the March 18 and April 19 announcements of additional +recategorizations; +• formal review and approval of all reported reserves by the CMD and review by the +GAC on an annual basis; +• enhancements to the resources of the Group Reserves Auditor, including the +provision for systematic and consistent use of external reserves experts in the audit +process; +• a restructuring of the Group Reserves Audit function to report through the Group +Internal Audit function, with direct access to the GAC; +• expansion of the Group Reserves Audit program to include more frequent and +detailed audits, including annual audits of every major operating unit; +• implementation of a Global Reserves Committee within EP, including an approval +process for all reserves through regional peer challenges on reserves decisions; +• a restructuring of the EP business to place reserves reporting within the technical +reserves function rather than the planning function; +• strengthening of the line responsibilities for reserve reporting within EP to ensure that +appropriate levels of authority and responsibility for reserves booking and de-booking + +15 Although the August 26, 2003 Note for Discussion’s report on possible “fuel and flare” offsets may have been +consistent with EP’s understanding at the time it was finalized, by October 20, 2003, a Note to the CEO of EP +reported that, for reasons EP did not yet understand, the potential offset from “fuel and flare” gas would be only +approximately 300 million boe rather than the 1 billion boe previously believed. + + + +15 + +decisions are assigned to local Chief Reservoir Engineers, local management and EP +management; +• inclusion of reserves reporting in the existing Group assurance and disclosure +controls review processes; +• focused and enhanced training of EP reserves staff worldwide to ensure that the +Commission’s rules, guidance and compliance requirements are communicated to and +understood by all involved in the reserves estimation and reporting process; and +• significant revision to the Shell guidelines to ensure that they provide clear direction +compliant with the requirements of Rule 4-10 on the reporting of proved reserves. +• a restructuring of the Group finance function to make business unit chief financial +officers report directly to the Group CFO; +• enhancement of the Group legal function to improve the ability of Group +management to benefit from appropriate legal advice concerning potential corporate +governance, reporting and disclosure issues. +• appointment of a non-executive chairman of Shell Transport and a non-executive +chair of the conference of the boards of Royal Dutch and Shell; +• creation of a committee of members of the Royal Dutch and Shell Transport boards to +study issues relating to the structure and governance of the Group, including +consultation with shareholders and a public report of the results of the study; and +• a public commitment by the board of Royal Dutch to submit a proposal to +shareholders at Royal Dutch’s 2005 Annual General Meeting to abolish the “priority +shares” in Royal Dutch. +IV. +LEGAL ANALYSIS + +A. Violations of Section 10(b) and Rule 10b-5 + +Section 10(b) of the Exchange Act and Rule 10b-5 thereunder prohibit the em ployment +of a fraudulent scheme or the making of material misrepresentations and omissions in connection +with the purchase o r sale of securities. To violate these pr ovisions, the alleged +misrepresentations or omitted facts must be mater ial. Inf ormation is m aterial if it would hav e +assumed significance in the investm ent de liberations of a reasonable investor. Basic, In c. v. +Levinson, 485 U.S. 224 (1988). + +Violations of these prov isions require proof of scienter. Aaron v. SEC , 446 U.S. 680 +(1980). Scienter is the “m ental state embracing intent to deceive, m anipulate or defraud,” Ernst +& Ernst v. Hochfelder, 425 U.S. 185, 193 (1976), which may be established by showing that the +defendants acted intentionally or with severe recklessness. See Broad v. Rockwell International + + + +16 + +Corp., 642 F.2d 929 (5th Cir.) ( en banc ), cert. denied , 454 U.S. 965 (1981). T o establish +scienter on the part of a com pany, the m ental state of the company’s of ficers is im puted to the +company. SEC v. Manor Nursing Centers, Inc., 458 F.2d 1082, 1089 n.3 (2d Cir. 1972). + +Based on the conduct described above, Respondents Royal Dutch and Shell Transport +violated Section 10(b) of the Exchange Act and Rule 10b-5 thereunder. Respondents knowingly +or recklessly reported proved reserves that were non-compliant with Rule 4-10, and failed (i) to +ensure that Shell’s internal proved reserves estimation and reporting guidelines complied with +Rule 4-10 and (ii) to take timely and appropriate action to ensure that their reported proved +reserves were not overstated in their filings with the Commission and other public statements. + +B. Violations of Section 13(a) and Rules 13a-1 and 12b-20 + +Section 13(a) of the Exchange Act and Rule 13a-1 thereunder require issuers whose +securities are registered with the Commission pursuant to Section 12 of the Exchange Act to file +annual reports with the Commission. These reports must be complete and accurate in all +material respects. United States v. Bilzerian, 926 F.2d 1285, 1298 (2d Cir. 1991); SEC v. Savoy +Indus., Inc., 587 F.2d 1149, 1165 (D.C. Cir. 1978), cert. denied, 440 U.S. 913 (1979). Rule 12b- +20 of the Exchange Act requires that an issuer’s periodic reports include any additional +information “necessary to make the required statements, in the light of the circumstances under +which they are made, not misleading.” + +Based on the conduct described above, Respondents Royal Dutch and Shell Transport +violated Section 13(a) of the Exchange Act and Rules 13a-1 and 12b-20 thereunder. +Respondents’ failures to ensure that Shell estimated and reported proved reserves accurately in +compliance with Rule 4-10 caused them to file annual reports on Form 20-F for the years 1997 +through 2002 that were materially inaccurate in that they overstated Respondents’ reported +proved reserves and accompanying supplemental information, including the standardized +measure of future cash flows. + +C. Violations of Sections 13(b)(2)(A) and 13(b)(2)(B) and Rule 13b2-1 + +Section 13(b)(2)(A) of the Exchange Act requires issuers to “make and keep books, +records, and accounts, which, in reasonable detail, accurately and fairly reflect the transactions +and dispositions of the assets of the issuer.” Rule 13b2-1 promulgated under the Exchange Act +provides that no person shall directly or indirectly falsify or cause to be falsified, any book, +record or account subject to Section 13(b)(2)(A). Section 13(b)(2)(B) of the Exchange Act +requires issuers to devise and maintain a system of internal accounting controls sufficient to +provide reasonable assurances that transactions are recorded as necessary to permit the +preparation of accurate financial statements. No showing of scienter is necessary to establish a +violation of these provisions. See SEC v. World-Wide Coin Investments, Ltd., et al., 567 F. Supp. +724, 749-51 (N.D. Ga. 1983). + +Based on the conduct described above, Respondents Royal Dutch and Shell Transport +violated Sections 13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act. Respondents failed to +ensure that Shell created and maintained accurate estimates of its proved reserves in compliance + + + +17 + +with Rule 4-10, and failed to ensure that Shell implemented and maintained adequate controls +with respect to Shell’s reserves processes sufficient to provide assurance that the reserves were +estimated and reported accurately in accordance with Rule 4-10. + +V. +FINDINGS + + Based on the foregoing, the Commission finds that Respondents Royal Dutch and Shell +Transport violated Sections 10(b), 13(a), 13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act and +Rules 10b-5, 12b-20, 13a-1 and 13b2-1 thereunder. + +VI. +UNDERTAKINGS + +A. Shell has undertaken and agreed to cooperate fully with the Commission in any and all +investigations, litigation, or other proceedings relating to or arising from the matters described +herein. In connection with such cooperation, Shell has undertaken: + + 1. To produce, without service of subpoena, any and all non-privileged documents +requested by the Commission staff; and + + 2. To use its best efforts consistent with applicable local laws to make available +current Shell employees, including non-United States nationals, (1) to be interviewed by the +Commission’s staff at such times and such locations as the staff may reasonably direct and (2) to +appear and testify without service of subpoena or other process in such investigations, +depositions, hearings or trials as may be requested by the Commission’s staff. + +B. Shell has undertaken to spend $5 million in the development and implementation of a +comprehensive internal compliance program under the direction and oversight of the Group’s +Legal Director. Shell has committed that such amounts will be in addition to any amounts that +already have been budgeted to the Group’s compliance function. Shell has further undertaken to +report to the Commission staff within twelve months on the expenditure of the funds and the +status of the compliance program. + + In determining to accept the Offer of Royal Dutch and Shell Transport, the Commission +has considered these undertakings as well as Shell’s remedial measures and cooperation with the +Commission staff’s investigation. + + + + +18 + +VII. + +In view of the foregoing, the Commission deems it appropriate to impose the sanctions +agreed to in the Offer. + +Accordingly, it is hereby ORDERED: Pursuant to Section 21C of the Exchange Act, +Respondents Royal Dutch and Shell Transport shall cease and desist from committing or causing +any violation or future violation of Sections 10(b), 13(b)(2)(A) and 13(b)(2)(B) of the Exchange +Act and Rules 10b-5, 12b-20, 13a-1 and 13b2-1 thereunder. + + +By the Commission. + +Jonathan G. Katz +Secretary + + + + +19 \ No newline at end of file diff --git a/raw/aaer/2004/AAER-2086.txt b/raw/aaer/2004/AAER-2086.txt new file mode 100644 index 0000000000000000000000000000000000000000..7b40bf67b9a9f068742fbd03992cd6f514cf07aa --- /dev/null +++ b/raw/aaer/2004/AAER-2086.txt @@ -0,0 +1,1377 @@ + + + + + + + + + + + + + + + + SEC.gov | Royal Dutch Petroleum Company and The "Shell" Transport and Trading Company, p.l.c. + + + + + + + + !function(){var e=navigator.userAgent,a=document.documentElement,n=a.className;n=n.replace("no-js","js"),/iPad|iPhone|iPod/.test(e)&&!window.MSStream&&(n+=" ua-ios"),a.className=n}(); + {"path":{"baseUrl":"\/","pathPrefix":"","currentPath":"node\/494771","currentPathIsAdmin":false,"isFront":false,"currentLanguage":"en"},"pluralDelimiter":"\u0003","suppressDeprecationErrors":true,"gtag":{"tagId":"","consentMode":false,"otherIds":[],"events":[],"additionalConfigInfo":[]},"ajaxPageState":{"libraries":"eJxdT0GOwzAI_JBdn_oei2DkeINNZLC22devlaZS2wtiBhhmcKNUTPo97jxyaXEH3GJpiZrFhQW38A4cMqgeYQGlV19JFTKpQ-kUmvQKXP7I0cO4tC2kPnbg2wVdFslM0SCHPMs3vsEPPD7J6hgOGdPCKJyoRxxqUuePHjLLAuzVjimenRJGSLW08NoBK9LUn6SHlrytVOlcpJShB63QLSpBx_WkOzHNePol4fRQo_qMPvQ36ZXsAmd99lMNr2t_GUR9n60EyX9a_wePd5ns","theme":"uswds_sec","theme_token":null},"ajaxTrustedUrl":[],"gtm":{"tagId":null,"settings":{"data_layer":"dataLayer","include_classes":false,"allowlist_classes":"","blocklist_classes":"","include_environment":false,"environment_id":"","environment_token":""},"tagIds":["GTM-TD3BKV"]},"data":{"extlink":{"extTarget":false,"extTargetAppendNewWindowDisplay":true,"extTargetAppendNewWindowLabel":"(opens in a new window)","extTargetNoOverride":false,"extNofollow":false,"extTitleNoOverride":false,"extNoreferrer":false,"extFollowNoOverride":false,"extClass":"0","extLabel":"(link is external)","extImgClass":false,"extSubdomains":true,"extExclude":".*\\.gov|http:\/\/www.xbrl.org\/utr\/2013-05-17\/utr.xml|http:\/\/www.xbrl.org\/dtr\/type\/numeric-2009-12-16.xsd|http:\/\/www.xbrl.org\/dtr\/type\/nonNumeric-2009-12-16.xsd|https:\/\/secir.secure.force.com\/ombudsman\/OMMSForm","extInclude":"","extCssExclude":".data-exempt","extCssInclude":"","extCssExplicit":"","extAlert":true,"extAlertText":"You are now leaving the SEC Website. 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Royal Dutch Petroleum Company and The "Shell" Transport and Trading Company, p.l.c., Civil Action No. H-04-3359, U.S.D.C./Southern District of Texas (Houston Division) + + In the Matter of Royal Dutch Petroleum Company and The "Shell" Transport and Trading Company, p.l.c., Exchange Act Rel. No. 34-50233 (August 24, 2004). + + SEC Settles Securities Fraud Case with Royal Dutch Petroleum Company and The "Shell" Transport and Trading Company, p.l.c. Involving Proved Reserves Overstatement of 4.47 Billion Barrels + + Companies Will Pay a $120 Million Civil Penalty + + The U.S. Securities and Exchange Commission today announced settlement of an enforcement action against foreign-based oil companies Royal Dutch Petroleum Company ("Royal Dutch") and The "Shell" Transport and Trading Company, p.l.c. ("Shell Transport" and, together with Royal Dutch, "Shell"), in connection with their overstatement of 4.47 billion barrels of previously reported proved hydrocarbon reserves. Royal Dutch is a Dutch corporation headquartered in The Hague, while Shell Transport is an English corporation headquartered in London. + Royal Dutch and Shell Transport agreed to settle these proceedings by consenting to a cease-and-desist order finding violations of the antifraud, internal controls, record-keeping and reporting provisions of the federal securities laws, and by paying $1 disgorgement and a $120 million penalty in a related civil action the Commission filed in U.S. District Court in Houston. Shell also has undertaken to commit an additional $5 million to develop and implement a comprehensive internal compliance program under the direction and oversight of the Group's legal director. The companies settled without admitting or denying the Commission's substantive findings. + According to the Commission's order and complaint, Shell overstated proved reserves reported in its 2002 Form 20-F by 4.47 billion barrels of oil equivalent, or approximately 23%. The order further concludes that Shell overstated the standardized measure of future cash flows reported in this filing by approximately $6.6 billion. The Commission's order also finds, and the complaint alleges, that, for the years 1998 through 2002, Shell materially misstated its reserves replacement ratio ("RRR"), a key performance indicator in the oil and gas industry. Had Shell properly reported proved reserves, its RRR for the one-, three- and five-year periods through 2002 would have been materially different from what it originally reported. + The Commission also found and alleges that Shell's overstatement of proved reserves, and its delay in correcting the overstatement, resulted from (i) its desire to create and maintain the appearance of a strong RRR, (ii) the failure of its internal reserves estimation and reporting guidelines to conform to SEC requirements, and (iii) the lack of effective internal controls over the reserves estimation and reporting process. These failures led Shell to record and maintain proved reserves it knew (or was reckless in not knowing) did not satisfy SEC requirements, and to report for certain years a stronger RRR than it actually had achieved. Indeed, Shell was warned on several occasions prior to the fall of 2003 that reported proved reserves potentially were overstated and, in such critical operating areas as Nigeria and Oman, depended upon unrealistic production forecasts. In each case, Shell either rejected the warnings as immaterial or unduly pessimistic, or attempted to "manage" the potential exposure by, for example, delaying de-booking of improperly recorded proved reserves until new, offsetting proved reserves bookings materialized. + In accepting Shell's settlement offer, the Commission took into account Shell's cooperation with the staff's investigation and the remedial actions Shell has undertaken, as outlined in the order. + ********** + The cease-and-desist order finds and civil complaint alleges that Royal Dutch and Shell Transport violated Sections 10(b), 13(b)(2)(A) and 13(b)(2)(B) of the Securities Exchange Act 0f 1934 and Rules 10b-5, 12b-20, 13a-1 and 13b2-1 thereunder + The Commission's investigation continues as to other individuals and entities. + + + + + SEC Complaint in this matter + + + + + + + + + + + + + + + + + + + + + + + + + + Return to top + + + + + SEC homepage + + + + + + + + + + + + + + About the SEC + + + + + + Budget & Performance + + + Careers + + + Commission Votes + + + Contact + + + Contracts + + + + + + + + Transparency + + + + + + Accessibility & Disability + + + Super Intelligence + + + FOIA + + + Inspector General + + + No FEAR Act Data + + + Ombuds + + + SEC Excess Personal Property Guidance + + + + + + + + Websites + + + + + + Investor.gov + + + Related Sites + + + USA.gov + + + + + + + + Site Information + + + + + + Plain Writing + + + Privacy & Security + + + Site Map + + + + + + + + + + + + + + + + + + Stay connected. 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Share sensitive information only on official, secure websites. + + + + + + + + + + + + + + + + + SEC homepage + + + + + + + Menu + + + + + + + + + + + + + + Close + + + + + + + + + + + + + Search SEC.gov & EDGAR + + + + + + Search + + + + + + + + + + + + + + + + + Search Filings + + + + + + + + + Search Filings + + + + + + + + + Full Text Search + + + + + + Latest Filings + + + + + + Mutual Fund Search + + + + + + Variable Insurance Products Search + + + + + + SIC Codes + + + + + + CIK Lookup + + + + + + Public Dissemination Service (PDS) + + + + + + Search Assistance + + + + + + + + + + + + + Submit Filings + + + + + + + + + Submit Filings + + + + + + + + + EDGAR Filer Management Portal + + + + + + EDGAR Filing Portal + + + + + + Online Forms Management Portal + + + + + + EDGAR Next + + + + + + Forms Index + + + + + + Filer Support & Resources + + + + + + + + + + + + + Data & Research + + + + + + + + + Data & Research + + + + + + + + + Data Library + + + + + + Statistics & Data Visualizations + + + + + + Structured Data + + + + + + Investment Management Data + + + + + + Open Data at the SEC + + + + + + + + + + + + + Rules, Enforcement, & Compliance + + + + + + + + + + + + + + + + + + + + Rules & Regulations + + + + + + + + + Rulemaking Activity + + + + + + Submit Public Comments + + + + + + Staff Guidance + + + + + + No-Action, Interpretive, and Exemptive Letters + + + + + + Self-Regulatory Organization Rulemaking + + + + + + Public Petitions for Rulemaking + + + + + + + + + + + + + + + + + Enforcement & Litigation + + + + + + + + + Litigation Releases + + + + + + Administrative Proceedings + + + + + + Administrative Law Judge Orders and Initial Decisions + + + + + + Trading Suspensions + + + + + + Distributions to Harmed Investors + + + + + + Receiverships + + + + + + + + + + + + + + + + + Compliance + + + + + + + + + Examination Priorities + + + + + + Risk Alerts + + + + + + Compliance Outreach Program + + + + + + + + + + + + + + + + + + + + + + + Proposed Rules + + + + + + What's New + + + + + + Whistleblower Program + + + + + + + + + + + + + + + + + + + Featured Topics + + + + + + + + + Featured Topics + + + + + + + + + Crypto Task Force + + + + + + Cybersecurity + + + + + + Market Structure Analytics + + + + + + Saving and Investing for Military Personnel + + + + + + Saving and Investing for Teachers + + + + + + SEC-CFTC Harmonization Initiative + + + + + + Treasury Clearing Implementation + + + + + + + + + + + + + About + + + + + + + + + About + + + + + + + + + Mission + + + + + + Commissioners + + + + + + Divisions & Offices + + + + + + Division & Office Directors + + + + + + Advisory Committees + + + + + + Budget & Performance + + + + + + Reports & Publications + + + + + + Commission Votes + + + + + + Contact the SEC + + + + + + Careers + + + + + + + + + + + + + Submit a Tip or Complaint + + + + + + + + + + + + + + + + + Newsroom + + + | + + + Investors + + + Small Businesses + + + Whistleblowers + + + + + + + + + + + + + + + Newsroom + + + | + + + Investors + + + Small Businesses + + + Whistleblowers + + + + + + + + + + + + + + + + + Search SEC.gov & EDGAR + + + + + + Search + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + More in this Section + + + + + + + + + + + + + Enforcement & Litigation + + + + + + + Litigation Releases + + + + + Administrative Proceedings + + + + + Administrative Law Judge Orders and Initial Decisions + + + + + Trading Suspensions + + + + + Distributions to Harmed Investors + + + + + Receiverships + + + + + Electronic Filings in Administrative Proceedings (eFAP) + + + + + Rules of Practice + + + + + Applications for Reentry + + + + + Reports of Investigations + + + + + Whistleblower Program + + + + + Public Alert: Unregistered Soliciting Entities (PAUSE) + + + + + SEC Action Lookup - Individuals (SALI) + + + + + Enforcement Data Delivery Standards + + + + + Small Businesses + + + + + Appellate Briefs + + + + + Amicus / Friend of the Court Briefs + + + + + + + + + + + + + + + + + + + + + + + + + + Enforcement & Litigation + + + + + + + Litigation Releases + + + + + Administrative Proceedings + + + + + Administrative Law Judge Orders and Initial Decisions + + + + + Trading Suspensions + + + + + Distributions to Harmed Investors + + + + + Receiverships + + + + + Electronic Filings in Administrative Proceedings (eFAP) + + + + + Rules of Practice + + + + + Applications for Reentry + + + + + Reports of Investigations + + + + + Whistleblower Program + + + + + Public Alert: Unregistered Soliciting Entities (PAUSE) + + + + + SEC Action Lookup - Individuals (SALI) + + + + + Enforcement Data Delivery Standards + + + + + Small Businesses + + + + + Appellate Briefs + + + + + Amicus / Friend of the Court Briefs + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + Home + + + Enforcement and Litigation + + + Litigation Releases + + + Athena Diaz + + + + + + + + + + + + Athena Diaz + + + + + + + + + + + + + + + + + + + U.S. SECURITIES AND EXCHANGE COMMISSION + Litigation Release No. 18848 / August 24, 2004 + + Accounting and Auditing Enforcement +Release No. 2087 / August 24, 2004 + + SECURITIES AND EXCHANGE COMMISSION v. ATHENA DIAZ, United States District Court for the Western District of Washington (Seattle Division), Civil Action No. CV 04-1837 Zilly + + SEC FILES FRAUD CHARGES AGAINST FORMER CONTROLLER OF SEATTLE CLOTHING COMPANY CUTTER & BUCK + + The Securities and Exchange Commission today announced fraud charges against Athena Diaz, the former controller of Cutter & Buck Inc., a sportswear company based in Seattle, Washington. The Commission's complaint alleges that Diaz assisted in a scheme by Cutter's management to fraudulently inflate its financial results for the fiscal quarter and year ended April 30, 2000. Diaz assisted in the scheme by allowing the improper revenue recognition of $5.7 million in shipments to distributors functioning as Company warehouses and concealing the improper transactions from the Company's auditors and shareholders. + Simultaneously with the filing of the complaint, Diaz agreed to settle the charges without admitting or denying the Commission's allegations, consenting to orders permanently enjoining her from violations of the antifraud and other provisions of the federal securities laws. + The Commission's complaint, filed in the United States District Court for the Western District of Washington, alleges that Cutter was encountering declining sales as it approached the final days of its fiscal year ended April 30, 2000. In late April, a vice president of sales negotiated deals with three distributors under which Cutter would ship them a total of $5.7 million in products, where they had no obligation to pay for any of the goods until customers located by Cutter paid the distributors. Because of Cutter's ongoing obligation to complete the sales, revenue recognition was improper under generally accepted accounting principles (known as "GAAP"). In press releases and in filings with the Commission that were distributed to the public, Cutter announced revenue of $54.6 million for the fourth quarter of Fiscal 2000 and $152.5 million for the entire fiscal year. However, because these figures included $5.7 million in improperly recognized revenue on the distributor sales, they overstated Cutter's true quarterly and annual revenue by 12% and 4%, respectively. + The complaint also charges that Diaz, age 47, of Seattle, Washington, knew or was reckless in not knowing that these distributors were operating as Cutter warehouses and that revenue recognition had been improper. Rather than take steps to ensure that revenue was not recognized, Diaz sought to conceal the agreements by hiding the distributor invoices from the Company's auditors. Diaz also divided product returns among multiple company sales divisions in order to hide the magnitude of the returns, knowing that this was improper. + Diaz was terminated by the Company in August 2002. On August 12, 2002, Cutter, which had undergone a change in management, announced that it would restate its financial statements for fiscal years 2000 and 2001 as a result of the improper distributor transactions. The announcement caused Cutter's stock price to drop from $4.02 to $3.44, or 14%, the following day. + The complaint charges Diaz with aiding and abetting securities fraud (Section 10(b) of the Securities Exchange Act of 1934 ("Exchange Act") and Rule 10b-5 thereunder), aiding and abetting Cutter's reporting of false financial information to the Commission (Section 13(a) of the Exchange Act and Rules 12b-20 and 13a-1) and aiding and abetting Cutter's failure to maintain accurate books and records and internal controls (Sections 13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act). The complaint additionally charges Diaz with lying to accountants (Rule 13b2-2 under the Exchange Act) and falsifying the company's books and records (Section 13(b)(5) of the Exchange Act and Rule 13b2-1 thereunder). + + + + SEC Complaint in this matter --> + + + + + + + + + + + + + + + + + + + + + + + + + + Return to top + + + + + SEC homepage + + + + + + + + + + + + + + About the SEC + + + + + + Budget & Performance + + + Careers + + + Commission Votes + + + Contact + + + Contracts + + + + + + + + Transparency + + + + + + Accessibility & Disability + + + Super Intelligence + + + FOIA + + + Inspector General + + + No FEAR Act Data + + + Ombuds + + + SEC Excess Personal Property Guidance + + + + + + + + Websites + + + + + + Investor.gov + + + Related Sites + + + USA.gov + + + + + + + + Site Information + + + + + + Plain Writing + + + Privacy & Security + + + Site Map + + + + + + + + + + + + + + + + + + Stay connected. 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Koenig + + + + + + + + + + + + Mark E. Koenig + + + + + + + + + + + + + + + + + + + + + Defendant Barred from Serving as Officer or Director of Public Company and Agrees to Pay $1.49 Million; Will Cooperate with Government Investigations + + The Securities and Exchange Commission today charged Mark E. Koenig, a former Executive Vice-President and Director of Investor Relations at Enron Corp., with violating the antifraud provisions of the federal securities laws. Without admitting or denying the allegations of the Complaint, Koenig has agreed to be enjoined permanently from violating Section 10(b) of the Securities Exchange Act of 1934 and Exchange Act Rule 10b-5, and to be barred from acting as an officer or director of a public company. As part of the settlement agreement, which is subject to the approval of the U.S. District Court, Koenig will pay disgorgement and a civil penalty totaling $1,493,572. The Commission brought this action in coordination with the U.S. Department of Justice Enron Task Force, which filed a related criminal charge against Koenig. Koenig agreed to enter into a guilty plea in connection with that charge and to cooperate with the government's continuing investigation. + + As alleged in the Complaint, Koenig participated in a scheme to defraud in violation of the federal securities laws when he disseminated, and approved the dissemination of, false and misleading information to the public about Enron's business in earnings releases and analyst calls. + + Specifically, the Commission's Complaint alleges that in his role as Executive Vice-President and Director of Investor Relations, Koenig was responsible for drafting and preparing portions of Enron's earnings releases and analyst call scripts. Koenig reviewed and edited Enron's First, Second and Third Quarter 2001 earnings releases, and scripts for the March 23, 2001 Analyst Call and the First, Second and Third Quarter 2001 Analyst Calls. During his efforts, Koenig learned specific information about Enron's retail energy business unit, Enron Energy Service (EES), and its telecommunications business unit, Enron Broadband Services (EBS), revealing that EES and EBS were not the successful business units described in the earnings releases and scripts, and as described by Enron in the analyst calls. Nevertheless, Koenig did not correct the false and misleading information provided to analysts and investors in the earnings releases and analyst calls, and affirmatively made false and misleading statements about these two businesses during the calls. + + The Commission's investigation is continuing. + + SEC Complaint in this matter + + + + +  + + + + + + + + + + + + + + + + + + + + + + + + + Return to top + + + + + SEC homepage + + + + + + + + + + + + + + About the SEC + + + + + + Budget & Performance + + + Careers + + + Commission Votes + + + Contact + + + Contracts + + + + + + + + Transparency + + + + + + Accessibility & Disability + + + Super Intelligence + + + FOIA + + + Inspector General + + + No FEAR Act Data + + + Ombuds + + + SEC Excess Personal Property Guidance + + + + + + + + Websites + + + + + + Investor.gov + + + Related Sites + + + USA.gov + + + + + + + + Site Information + + + + + + Plain Writing + + + Privacy & Security + + + Site Map + + + + + + + + + + + + + + + + + + Stay connected. 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Individuals (SALI) + + + + + Enforcement Data Delivery Standards + + + + + Small Businesses + + + + + Appellate Briefs + + + + + Amicus / Friend of the Court Briefs + + + + + + + + + + + + + + + + + + + + + + + + + + Enforcement & Litigation + + + + + + + Litigation Releases + + + + + Administrative Proceedings + + + + + Administrative Law Judge Orders and Initial Decisions + + + + + Trading Suspensions + + + + + Distributions to Harmed Investors + + + + + Receiverships + + + + + Electronic Filings in Administrative Proceedings (eFAP) + + + + + Rules of Practice + + + + + Applications for Reentry + + + + + Reports of Investigations + + + + + Whistleblower Program + + + + + Public Alert: Unregistered Soliciting Entities (PAUSE) + + + + + SEC Action Lookup - Individuals (SALI) + + + + + Enforcement Data Delivery Standards + + + + + Small Businesses + + + + + Appellate Briefs + + + + + Amicus / Friend of the Court Briefs + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + Home + + + Enforcement and Litigation + + + Litigation Releases + + + Aurora Foods, Inc., et al. + + + + + + + + + + + + Aurora Foods, Inc., et al. + + + + + + + + + + + + + + + + + + + + + SECURITIES AND EXCHANGE COMMISSION V. AURORA FOODS INC., ET AL. , Case No. 01 CIV 0554 (AKH) S.D.N.Y. + + The Securities and Exchange Commission announced that on August 3, 2004, the United States District Court for the Southern District of New York entered Final Judgments of Permanent Injunction and Other Relief against defendants Ian R. Wilson (Wilson), Ray Chung (Chung), M. Laurie Cummings (Cummings) and Timothy B. Andersen (Andersen), and on August 12, 2004, it entered a Final Judgment of Permanent Injunction and Other Relief against Dirk Grizzle (Grizzle). Wilson, the former Chief Executive Officer of Aurora Foods, Inc. (Aurora), Cummings, the former Chief Financial Officer, and Chung, the former Executive Vice-President, were each enjoined from future violations of Sections 10(b) and 13(b)(5) of the Securities Exchange Act of 1934 (Exchange Act) and Rules 10b-5, 13b2-1 and 13b2-2 thereunder, and from violations, as "control persons" pursuant to Section 20(a) of the Exchange Act, of Sections 13(a) and 13(b)(2) of the Exchange Act and Rules 12b-20, 13a-1 and 13a-13 thereunder. Andersen and Grizzle, both former division vice-presidents, were enjoined from violating Sections 10(b) and 13(b)(5) of the Exchange Act and Rules 10b-5 and 13b2-1 thereunder. All of the defendants consented to the entry of the final judgments without admitting or denying the allegations in the Commission's Complaint. + + In addition to the injunctive relief, Wilson, Chung, Cummings and Grizzle were permanently barred from serving as an officer or director of a public company. Wilson, Chung, Cummings and Grizzle were also ordered to pay disgorgement of their ill-gotten gains and prejudgment interest in the amounts of $420,000, $142,000, $75,000, $102,000, respectively. The final judgments impose civil penalties against Chung, Cummings, Andersen and Grizzle in the amounts of $125,000, $200,000, $125,000 and $75,000, respectively. + + These civil penalties are in addition to criminal penalties assessed against Wilson, Cummings, Chung and Grizzle, each of whom pled guilty to various securities counts in a related criminal case. In the criminal case, Wilson received a sentence of 33 months incarceration and was fined $1 million. Cummings received a sentence of 41 months incarceration. Chung was fined $500,000. Grizzle received a sentence of six months incarceration and was fined $100,000. Andersen was not a defendant in the criminal case. + + According to the Commission's Complaint, which was filed on January 23, 2001, Wilson, Chung, Cummings, Grizzle, Andersen, and other co-defendants perpetrated a brazen financial reporting fraud at Aurora in 1998 and 1999. The Complaint alleged that during the relevant period, Aurora under-reported its trade marketing expenses by more than $43 million which resulted in material misstatements of earnings in Aurora's financial statements. Aurora's senior management, consisting of Wilson, Chung, and Cummings, was aware that Aurora was not accurately reporting trade marketing expense. But instead of properly booking the expense, senior management tried to conceal it from the independent auditors by directing division level officers and employees, including Grizzle and Andersen, to make false entries in various accounts on Aurora's books. Grizzle and Andersen assisted in these efforts. As a result of the scheme, Aurora falsely and substantially inflated its financial results. + + Previously, defendants Aurora, Tammy Fancelli and James Elliott consented to the entry of final judgments that permanently enjoined them from future violations of the federal securities laws. In addition, Fancelli and Elliott were ordered to pay civil penalties in the amounts of $20,000 and $10,000, respectively. + + The litigation remains pending against defendant Keith Luechtefeld in the United States District Court for the Southern District of New York. + + For further information, see Litigation Release No. 16866 (January 23, 2001). + + + + +  + + + + + + + + + + + + + + + + + + + + + + + + + Return to top + + + + + SEC homepage + + + + + + + + + + + + + + About the SEC + + + + + + Budget & Performance + + + Careers + + + Commission Votes + + + Contact + + + Contracts + + + + + + + + Transparency + + + + + + Accessibility & Disability + + + Super Intelligence + + + FOIA + + + Inspector General + + + No FEAR Act Data + + + Ombuds + + + SEC Excess Personal Property Guidance + + + + + + + + Websites + + + + + + Investor.gov + + + Related Sites + + + USA.gov + + + + + + + + Site Information + + + + + + Plain Writing + + + Privacy & Security + + + Site Map + + + + + + + + + + + + + + + + + + Stay connected. 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Gregory Earls + + + + + + + + !function(){var e=navigator.userAgent,a=document.documentElement,n=a.className;n=n.replace("no-js","js"),/iPad|iPhone|iPod/.test(e)&&!window.MSStream&&(n+=" ua-ios"),a.className=n}(); + {"path":{"baseUrl":"\/","pathPrefix":"","currentPath":"node\/494841","currentPathIsAdmin":false,"isFront":false,"currentLanguage":"en"},"pluralDelimiter":"\u0003","suppressDeprecationErrors":true,"gtag":{"tagId":"","consentMode":false,"otherIds":[],"events":[],"additionalConfigInfo":[]},"ajaxPageState":{"libraries":"eJxdT0GOwzAI_JBdn_oei2DkeINNZLC22devlaZS2wtiBhhmcKNUTPo97jxyaXEH3GJpiZrFhQW38A4cMqgeYQGlV19JFTKpQ-kUmvQKXP7I0cO4tC2kPnbg2wVdFslM0SCHPMs3vsEPPD7J6hgOGdPCKJyoRxxqUuePHjLLAuzVjimenRJGSLW08NoBK9LUn6SHlrytVOlcpJShB63QLSpBx_WkOzHNePol4fRQo_qMPvQ36ZXsAmd99lMNr2t_GUR9n60EyX9a_wePd5ns","theme":"uswds_sec","theme_token":null},"ajaxTrustedUrl":[],"gtm":{"tagId":null,"settings":{"data_layer":"dataLayer","include_classes":false,"allowlist_classes":"","blocklist_classes":"","include_environment":false,"environment_id":"","environment_token":""},"tagIds":["GTM-TD3BKV"]},"data":{"extlink":{"extTarget":false,"extTargetAppendNewWindowDisplay":true,"extTargetAppendNewWindowLabel":"(opens in a new window)","extTargetNoOverride":false,"extNofollow":false,"extTitleNoOverride":false,"extNoreferrer":false,"extFollowNoOverride":false,"extClass":"0","extLabel":"(link is external)","extImgClass":false,"extSubdomains":true,"extExclude":".*\\.gov|http:\/\/www.xbrl.org\/utr\/2013-05-17\/utr.xml|http:\/\/www.xbrl.org\/dtr\/type\/numeric-2009-12-16.xsd|http:\/\/www.xbrl.org\/dtr\/type\/nonNumeric-2009-12-16.xsd|https:\/\/secir.secure.force.com\/ombudsman\/OMMSForm","extInclude":"","extCssExclude":".data-exempt","extCssInclude":"","extCssExplicit":"","extAlert":true,"extAlertText":"You are now leaving the SEC Website. 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And C. Gregory Earls + + + + + + + + + + + + U.S. Technologies, Inc. And C. Gregory Earls + + + + + + + + + + + + + + + + + + + + + The Securities and Exchange Commission ("Commission") announced today that on August 25, 2004, the Honorable James Robertson, United States District Court Judge for the District of Columbia, entered an Order of Final Judgment against U.S. Technologies, Inc. ("UST"). UST consented to entry of the Final Judgment, without admitting or denying the allegations in the Commission's complaint, to settle the civil action against UST filed on December 19, 2002. The Final Judgment enjoins UST from violating Section 17(a) of the Securities Act of 1933 ("Securities Act"), Sections 10(b), 13(a), 13(b)(2)(A), and 13(b)(2)(B) of the Securities Exchange Act of 1934 ("Exchange Act") and Rules 10b-5, 12b-20, 13a-1, 13a-11, and 13a-13 thereunder. + + In a related proceeding instituted on August 26, 2004, the Commission issued an Order Instituting Proceedings pursuant to Section 12(j) of the Exchange Act against UST. As part of its settlement with the Commission, UST consented to entry of the Commission's Order, which deregisters the company's common stock pursuant to Section 12(j) of the Exchange Act. [See SEC Administrative Proceedings Release No. 34-50273 , August 26, 2004]. + + The Commission's complaint in the case alleged that from June 1998 through August 2002, UST's Chief Executive Officer, C. Gregory Earls, misappropriated approximately $13.8 million from investors who believed they were giving Earls money to purchase preferred stock and warrants from UST. According to the complaint, Earls carried out this scam through a limited liability company he created called USV Partners LLC. The complaint charged that Earls falsely told investors in USV Partners that the entity was created solely to purchase and hold UST stock and warrants, and that he would not take any management fees. According to the complaint, Earls lured more than one hundred investors into giving him more than $20 million to purchase UST stock and warrants through USV Partners. Although UST badly needed the capital infusion, according to the complaint, Earls bought only a small portion of the stock he promised investors. He then allegedly misappropriated $13.8 million of their money by paying himself $4.7 million in management fees and $9.1 million that he falsely classified as "Legal and Accounting" expenses. As alleged in the complaint, neither UST nor Earls has ever publicly disclosed Earls' diversion of these investor funds. + + On April 23, 2004, in a related criminal proceeding, a jury convicted Earls of 22 counts of securities fraud, mail fraud and wire fraud arising out of the same events and activities alleged in the Commission's complaint. United States v. C. Gregory Earls , No. 02-MAG-531 (S.D.N.Y.). + + For further information regarding this case, see Litigation Release No. 17904 (December 19, 2002) and Litigation Release No. 18031 (March 12, 2003). + + + + +  + + + + + + + + + + + + + + + + + + + + + + + + + Return to top + + + + + SEC homepage + + + + + + + + + + + + + + About the SEC + + + + + + Budget & Performance + + + Careers + + + Commission Votes + + + Contact + + + Contracts + + + + + + + + Transparency + + + + + + Accessibility & Disability + + + Super Intelligence + + + FOIA + + + Inspector General + + + No FEAR Act Data + + + Ombuds + + + SEC Excess Personal Property Guidance + + + + + + + + Websites + + + + + + Investor.gov + + + Related Sites + + + USA.gov + + + + + + + + Site Information + + + + + + Plain Writing + + + Privacy & Security + + + Site Map + + + + + + + + + + + + + + + + + + Stay connected. 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Hannon, et al. + + + + + + + + + + + + Kevin P. Hannon, et al. + + + + + + + + + + + + + + + + + + + + + The Securities and Exchange Commission ("Commission") today settled civil fraud charges filed against Kevin P. Hannon, former Chief Operating Officer of Enron Broadband Services ("EBS"). The complaint, filed on May 1, 2003 in the U.S. District Court in Houston, charged Hannon and other executives from EBS with fraud and insider trading. Without admitting or denying the allegations in the Commission's complaint, Hannon has agreed to be enjoined permanently from violating Section 10(b) of the Securities Exchange Act of 1934 and Exchange Act Rule 10b-5, and to be barred permanently from acting as an officer or director of a public company. The Commission settled its action in coordination with the Justice Department's Enron Task Force, which entered into a plea agreement with Hannon on related criminal charges. In resolving the parallel civil and criminal proceedings, Hannon has agreed to pay disgorgement and a civil penalty totaling $3.2 million and to cooperate with the government's continuing investigation. + + As alleged in the Commission's complaint, Hannon and other EBS executives engaged in a wide-ranging fraudulent scheme to, among other things, inflate the value of Enron stock through a series of false and misleading statements and the omission of material information in such public statements about the technology, financial condition, performance and value of EBS. The false and misleading statements by Hannon and others were made in press releases over a two-year period as well as in presentations and statements made at Enron's annual analyst conferences in January 2000 and 2001. As a result of the false statements, Enron's stock price was artificially inflated. Hannon then sold large amounts of Enron stock at the inflated levels, at a time when he knew that the statements were false and misleading and when he was in possession of material non-public information concerning the true status of EBS' technology and commercial success. + + The Commission acknowledges the assistance of the Enron Task Force. The Commission's investigation is continuing. For additional information see + + SEC v. Kevin A. Howard, Michael W. Krautz, Kenneth D. Rice, Joseph Hirko, Kevin P. Hannon, Rex T. Shelby, and F. Scott Yeager , - Litigation Release 18122 (May 1, 2003) + + +  + + + + + + + + + + + + + + + + + + + + + + + + + Return to top + + + + + SEC homepage + + + + + + + + + + + + + + About the SEC + + + + + + Budget & Performance + + + Careers + + + Commission Votes + + + Contact + + + Contracts + + + + + + + + Transparency + + + + + + Accessibility & Disability + + + Super Intelligence + + + FOIA + + + Inspector General + + + No FEAR Act Data + + + Ombuds + + + SEC Excess Personal Property Guidance + + + + + + + + Websites + + + + + + Investor.gov + + + Related Sites + + + USA.gov + + + + + + + + Site Information + + + + + + Plain Writing + + + Privacy & Security + + + Site Map + + + + + + + + + + + + + + + + + + Stay connected. Sign up for email updates. + + + + + + Your email address + + Sign Up + + + + + + + + + + + + X + + + + + + + + Facebook + + + + + + + + Instagram + + + + + + + + RSS + + + + + + + + YouTube + + + + + + + + Email Updates + + + + + + + + + + + + + + + + + + + diff --git a/raw/aaer/2004/AAER-2092.txt b/raw/aaer/2004/AAER-2092.txt new file mode 100644 index 0000000000000000000000000000000000000000..0e3822365cdf05b269e1a68bbf68e4a886b702d6 --- /dev/null +++ b/raw/aaer/2004/AAER-2092.txt @@ -0,0 +1,1366 @@ + + + + + + + + + + + + + + + + SEC.gov | Eric L. Mattson and James W. 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Mattson and James W. Harris + + + + + + + + + + + + Eric L. Mattson and James W. Harris + + + + + + + + + + + + + + + + + + + U.S. SECURITIES AND EXCHANGE COMMISSION + Litigation Release No. 18863 \ September 1, 2004 + + Accounting and Auditing Enforcement +Release No. 2092 / September 1, 2004 + + SECURITIES AND EXCHANGE COMMISSION v. ERIC L. MATTSON AND JAMES W. HARRIS, Civil Action No. H-01-3106 (S.D. Tex.)(filed September 11, 2001) + + SEC ACTION AGAINST BAKER HUGHES INCORPORATED'S FORMER CHIEF FINANCIAL OFFICER AND CONTROLLER IS CONCLUDED + + On September 11, 2001, the Commission filed a complaint against Eric Mattson and James Harris alleging that they violated Sections 30A and 13(b)(5) of the Securities Exchange of 1934 ("Exchange Act") and Rule 13b2-1 thereunder, and aided and abetted Baker Hughes Incorporated's violations of Sections 13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act. Specifically the Commission alleged that Eric L. Mattson, the former Chief Financial Officer of Baker Hughes, and James W. Harris, Baker Hughes' former Controller, authorized the payment of a bribe of $75,000, through KPMG-Siddharta Siddharta & Harsono ("KPMG-SSH"), Baker Hughes' agent and accountant in Indonesia, to a local government official in Indonesia. + On September 9, 2002, the United States District Court for the Southern District of Texas, Houston Division, dismissed the Commission's Section 30A antibribery claim. On January 28, 2003, on joint motion of the parties, the court dismissed the Commission's remaining books and records and internal controls claims with prejudice and rendered its "final judgment." On March 25, 2003, the Commission filed a notice of appeal from this order dismissing the Commission's Section 30A antibribery claim. + Pursuant to the Commission's unopposed motion filed on July 13, 2004, the Fifth Circuit Court of Appeals on July 14, 2004, dismissed the appeal filed by the Commission, and the litigation in this matter was concluded. 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Individuals (SALI) + + + + + Enforcement Data Delivery Standards + + + + + Small Businesses + + + + + Appellate Briefs + + + + + Amicus / Friend of the Court Briefs + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + Home + + + Enforcement and Litigation + + + Administrative Proceedings + + + John Gorman and Patrick Gentile + + + + + + + + + + + + John Gorman and Patrick Gentile + + + + + + + + + + + + + + + + + + + + + SECURITIES ACT OF 1933 +Release No. 8481 / September 8, 2004 + + SECURITIES EXCHANGE ACT OF 1934 +Release No. 50329 / September 8, 2004 + + ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 2093 / September 8, 2004 + + ADMINISTRATIVE PROCEEDING +File No. 3-11635 + + + + In the Matter of + JOHN GORMAN +and +PATRICK GENTILE, + Respondent. + + : : : : : : : : : : + + ORDER INSTITUTING CEASE-AND-DESIST PROCEEDINGS, MAKING FINDINGS AND IMPOSING A CEASE-AND-DESIST ORDER PURSUANT TO SECTION 8A OF THE SECURITIES ACT OF 1933 AND SECTION 21C OF THE SECURITIES EXCHANGE ACT OF 1934 I. + + The Securities and Exchange Commission ("Commission") deems it appropriate that cease-and-desist proceedings be, and hereby are, instituted pursuant to Section 8A of the Securities Act of 1933 ("Securities Act") and Section 21C of the Securities Exchange Act of 1934 ("Exchange Act") against John Gorman ("Gorman") and Patrick Gentile ("Gentile") (collectively, "Respondents"). + + II. + + In anticipation of the institution of these proceedings, Respondents have submitted Offers of Settlement (the "Offers"), which the Commission has determined to accept. Solely for the purpose of these proceedings and any other proceedings brought by or on behalf of the Commission, or to which the Commission is a party, and without admitting or denying the findings herein, except as to the Commission's jurisdiction over them and the subject matter of these proceedings, which are admitted, Respondents consent to the entry of this Order Instituting Cease-and-Desist Proceedings, Making Findings and Imposing a Cease-and-Desist Order Pursuant to Section 8A of the Securities Act of 1933 and Section 21C of the Securities Exchange Act of 1934 ("Order"), as set forth below. + + III. + + On the basis of this Order and Respondents' Offers, the Commission finds 1 that: + + Respondents + + 1. John Gorman, age 59, is a resident of East Windsor, New Jersey. He retired from American Banknote Corporation ("ABN") in August 1999. He served as Executive Vice President and Chief Financial Officer ("CFO") of ABN until mid-1998, at which point he became the general manager of American Bank Note Company, a wholly-owned ABN subsidiary. During relevant times in 1998, Gorman also held a position as Executive Vice President of American Banknote Holographics, Inc. ("ABNH"), a wholly-owned ABN subsidiary. At all times relevant to the Order, Gorman was a Certified Public Accountant ("CPA"), whose license from the state of Pennsylvania expired in 1986. + + 2. Patrick Gentile, age 45, is a resident of Darien, Connecticut. Gentile served as the Corporate Controller of ABN from 1990 to July 1998, and from 1995 to July 1998, also served as a Vice President of ABN. From July 1998 to October 2001, Gentile served as ABN's Chief Accounting Officer and Senior Vice President. From October 2001 to the present, Gentile has been an Executive Vice President and the CFO of ABN. During relevant times in 1998, Gentile also held a position as Senior Vice President - Finance for ABNH. At all times relevant to the Order, Gentile was a CPA, licensed by the state of New York. + + Relevant Entities + + 3. ABN is a holding company incorporated in Delaware with its principal executive offices located in Englewood Cliffs, New Jersey. During the relevant time period, ABN, through its subsidiaries, provided, among other things, stored-value telephone cards and magnetic-strip transaction cards, printed business forms, checks, and counterfeit-resistant documents of value such as money orders, passports, foreign currency, and stock and bond certificates. During the relevant time period, ABN's stock was registered with the Commission pursuant to Section 12(b) of the Exchange Act and traded on the New York Stock Exchange ("NYSE"). ABN filed for Chapter 11 bankruptcy on December 8, 1999, and emerged from bankruptcy on October 1, 2002. ABN's common stock currently trades on the OTC Bulletin Board. On July 31, 2001, a Final Judgment was entered as to ABN pursuant to which ABN consented to an order permanently restraining and enjoining it from violating the antifraud, periodic reporting, record keeping and internal controls provisions of the federal securities laws. The Complaint alleged ABN engaged in fraudulent revenue recognition practices in its fiscal years 1996, 1997 and 1998 by, among other things, improperly recognizing revenue on consignment sales, unusable work in process, product that was not completed by the end of the fiscal year, product that was never shipped and product that was returned. + + 4. ABNH is a Delaware corporation with its principal executive offices located in Elmsford, New York. ABNH is engaged in the origination, production, and marketing of mass-produced secure holograms. Until July 1998, ABNH was a wholly-owned subsidiary of ABN. On or about July 15, 1998, ABNH became a public company and, thereafter, ABNH's stock was registered pursuant to Section 12(b) of the Exchange Act and traded on the NYSE. In August 1999, ABNH's stock was suspended from trading. ABNH's common stock started to trade again on the OTC Bulletin Board, where it currently trades, in March 2000. On July 18, 2001, the Commission instituted and simultaneously settled an administrative proceeding against ABNH pursuant to which ABNH consented to an order requiring it to cease and desist from, among other things, committing or causing any violations, and any future violations, of the antifraud, periodic reporting, record keeping and internal control provisions of the federal securities laws based upon the fraudulent revenue recognition practices mentioned above. + + Facts + + Summary + + 5. This proceeding involves violations of the federal securities laws arising from improper revenue recognition at ABN and its then wholly-owned subsidiary ABNH. + + 6. Gorman and Gentile overstated ABN's fiscal year 1996 revenue and net income by causing ABNH improperly to record revenue on two "bill and hold" transactions. Gorman and Gentile knew, or should have known, that ABN reported this overstated revenue and income on the financial statements that were included in the company's Annual Report on Form 10-K for its fiscal years ended December 31, 1996, and December 31, 1997. Gorman and Gentile supervised the preparation of, reviewed, and approved these filings, and Gorman signed them. + + 7. On or about July 15, 1998, ABNH became a public company through an initial public offering ("IPO"). ABNH raised approximately $107 million (pricing shares at $8 ½ per share) through a Registration Statement on Form S-1 filed with the Commission in which the company registered 13,636,000 shares of common stock for sale to the public. ABN, which received the proceeds of the offering, used most of the proceeds to reduce its debt. Gorman and Gentile participated in the preparation and review of ABNH's registration statement, and each of them knew that the registration statement filed with the Commission, or relied upon in determining the price at which ABNH shares would be offered and purchased, included financial statements for ABNH for fiscal years ended December 31, 1996 and December 31, 1997. As a result, Gorman and Gentile knew, or should have known, that the Registration Statement on Form S-1 that ABNH filed in connection with its IPO contained materially false and misleading financial information for fiscal year 1996 because the financial statements included improperly recognized revenue and net income resulting from two "bill and hold" transactions. + + 8. In January 1999, ABNH announced that it would restate its financial results for each of the first three quarters of fiscal year 1998, and that its annual financial statements as of December 31, 1996, and December 31, 1997, should no longer be relied upon. The prices of the securities of both ABNH and ABN dropped substantially as a result of these announcements. + + 9. ABNH's restated financial numbers for fiscal year 1996, reported in December 1999, resulted in a material decrease in ABNH's quarterly and annual revenue and net income, which also resulted in material changes to ABN's operating results for that year. As a result of the conduct described above, ABNH improperly recognized approximately $635,250 of revenue, resulting in approximately a $254,290, or 5.86%, overstatement of ABNH's net income, and a 6.61% overstatement of ABN's net income, and ABN's and ABNH's public investors were misled into believing that ABN's net income, and ABNH's revenue and net income, for fiscal year 1996 were materially better than they were. + + Gorman and Gentile Cause ABNH To +Improperly Recognize Revenue on Two "Bill and Hold" Sales + + 10. During the time that ABNH was a wholly-owned subsidiary of ABN, ABNH's operations contributed materially to ABN's net income. + + 11. Under Generally Accepted Accounting Principles ("GAAP"), revenue from products is typically not recognized until the seller has substantially fulfilled the terms of the arrangement, which usually occurs upon delivery of the goods or product or performance of services, unless it is a "bill and hold" transaction or meets some other exception to the general rule. 2 + + 12. "Bill and hold" sales, by which a sale is made but the goods are retained by the seller at the customer's request, may be recognized as revenue by the seller before delivery to the buyer if certain stringent conditions set forth in the Commission's Accounting and Auditing and Enforcement Release ("AAER") Number 108 3 are met. If these conditions are not met, the seller may not recognize the sales as revenue until the goods are shipped to the customer. + + 13. In mid to late January 1997, ABNH closed its books and sent preliminary results to ABN's independent auditors, Deloitte & Touche LLP ("Deloitte"). Shortly thereafter, Gorman and Gentile learned that ABNH failed to meet its fourth quarter budget and forecasts for revenue. + + 14. Gorman and Gentile, with the knowledge and/or participation of other former senior officers of ABN and ABNH, then caused ABNH, on or about January 30, 1997, improperly to record revenue on two "bill and hold" sales for December 1996 to two customers in the total amount of $635,250. + + 15. Accruing the revenue for 1996 for the two "bill and hold" transactions was improper because as Gorman and Gentile knew, or should have known, ABNH and the customers had not entered into these sales on or before December 31, 1996. In addition, Gorman and Gentile knew, or should have known, that the two transactions did not meet the conditions set forth for recognizing revenue for "bill and hold" sales under AAER Number 108 and, therefore, did not comply with GAAP. For example, ABNH, not the customers, had requested that the transaction occur on a "bill and hold" basis. Also, the holograms had not been segregated from ABNH's inventory and identified as belonging to the customers as of December 31, 1996. + + 16. Gorman and Gentile, as ABN's CFO and Corporate Controller, respectively, supervised the preparation of and reviewed ABN's financial statements, approved all relevant annual reports, and supervised ABN's accounting department. Their responsibilities for the accounting department included establishing and implementing policies and procedures for ABN and its subsidiaries. Gorman and Gentile supervised the preparation of and approved ABN's Annual Report on Form 10-K for its fiscal year ended December 31, 1996, and Gorman signed this filing. This filing was materially false and misleading because it overstated ABN's net income, which included ABNH's net income, for fiscal year 1996. + + 17. Gorman and Gentile also supervised the preparation of and approved ABN's Annual Report on Form 10-K for its fiscal year ended December 31, 1997, and Gorman signed this filing. This filing was materially false and misleading because it overstated ABN's net income, which included ABNH's net income, for fiscal year 1996, which was also reported in this filing. + + Gorman and Gentile Cause ABNH to File a Registration Statement that Contained Materially False and Misleading Financial Information in Connection with ABNH's IPO + + 18. On or about July 15, 1998, ABNH became a public company through an IPO that raised approximately $107 million. ABN, which sold all of its shares in the offering, received all of the proceeds of the offering and used most of them to pay down its debt. The ABNH public offering took place pursuant to a Registration Statement ABNH filed on Form S-1 with the Commission, which included financial statements for ABNH for the fiscal years ended December 31, 1996, and December 31, 1997. + + 19. Gorman and Gentile participated in the preparation and review of ABNH's registration statement. Gorman and Gentile knew that the registration statement filed with the Commission, and disseminated to investors in conjunction with the offering, included financial statements for ABNH for its fiscal years 1996 and 1997. Gorman and Gentile knew, or should have known, that the Registration Statement on Form S-1 contained materially false and misleading financial information for ABNH's fiscal year 1996 because the financial statements in that filing reported revenue and net income for two improper "bill and hold" transactions. + + Legal Analysis + + Applicable Law + + 20. Section 17(a)(2) of the Securities Act provides that it is unlawful in the offer or sale of any security to obtain money or property by means of any untrue statement of a material fact or any omission to state a material fact necessary in order to make the statements made, in light of the circumstances under which they were made, not misleading. Section 17(a)(3) of the Securities Act provides that it is unlawful in the offer or sale of any security to engage in any transaction, practice, or course of business which operates, or would operate as a fraud or deceit upon the purchaser. + + 21. Section 13(a) of the Exchange Act requires all issuers with securities registered under Section 12 of the Exchange Act to file such periodic reports as the Commission shall prescribe by its rules and regulations. Exchange Act Rule 13a-1 requires issuers to file annual reports. Exchange Act Rule 12b-20 requires that periodic reports contain such further information as is necessary to make the required statements, in light of the circumstances under which they are made, not misleading. + + 22. Section 13(b)(2)(A) of the Exchange Act requires that reporting companies registered pursuant to Section 12 of the Exchange Act make and keep books, records, and accounts, which, in reasonable detail, accurately and fairly reflect its transactions and disposition of assets. + + 23. Section 13(b)(2)(B) of the Exchange Act requires reporting companies to devise and maintain a system of internal accounting controls sufficient to provide reasonable assurances that transactions are recorded as necessary to permit preparation of financial statements in conformity with GAAP. + + Gorman's and Gentile's Violations + + 24. During 1998, Gorman and Gentile violated Sections 17(a)(2) and 17(a)(3) of the Securities Act by making statements in the offer or sale of securities which they knew, or should have known, were materially false and misleading. Gorman and Gentile participated in the preparation and review of ABNH's registration statement. Gorman and Gentile knew that the registration statement filed with the Commission, and disseminated to investors in conjunction with the offering, included financial statements for ABNH for its fiscal years 1996 and 1997. Gorman and Gentile knew, or should have known, that the Registration Statement that ABNH filed on Form S-1 in connection with its IPO contained materially false and misleading financial statements for fiscal year 1996 because the financial statements in that filing reported revenue and net income for the two improper "bill and hold" transactions. + + 25. From 1996 through 1998, ABN had securities registered with the Commission pursuant to Section 12(b) of the Exchange Act. As a result, ABN was required under Sections 13(a) and 13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act and Exchange Act Rules 12b-20 and 13a-1 to file annual and other reports and statements with the Commission which did not contain untrue statements of material facts or omissions of material facts, and to make and keep books, records, and accounts, which, in reasonable detail, accurately and fairly reflected the transactions and dispositions of ABN assets. ABN also was required to devise and maintain a system of internal accounting controls sufficient to provide reasonable assurances that transactions were recorded as necessary to permit preparation of financial statements in conformity with GAAP or any other criteria applicable to such statements. + + 26. As a result of the conduct described above, ABN violated Sections 13(a), 13(b)(2)(A), and 13(b)(2)(B) of the Exchange Act and Exchange Act Rules 12b-20 and 13a-1. + + 27. Gorman, as ABN's CFO, and Gentile, as ABN's Corporate Controller, supervised the preparation of, reviewed, and approved ABN's Annual Reports on Form 10-K for its fiscal years ended December 31, 1996, and December 31, 1997. Gorman and Gentile knew, or should have known, that ABN's net income, which included ABNH's net income, was materially overstated for ABN's fiscal year 1996 financial statements filed with the Commission in fiscal years 1996 and 1997. By reason of this and the foregoing, Gorman and Gentile caused ABN to file materially false or misleading annual reports during fiscal years 1996 and 1997. As a result, Gorman and Gentile caused ABN's violations of Section 13(a) of the Exchange Act, and Exchange Act Rules 12b-20 and 13a-1. + + 28. Gorman, as ABN's CFO, and Gentile, as ABN's Corporate Controller, were responsible for the accuracy of ABN's books and records and its accounting policies and procedures. As set forth above, ABN's books and records did not accurately and fairly reflect the transactions and disposition of its assets and its internal controls had been circumvented. By reason of this and the foregoing conduct, Gorman and Gentile caused ABN's violations of Sections 13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act. + + Undertakings + + Respondents have undertaken to: + + Agree that in connection with this action and any related judicial or administrative proceeding or investigation commenced by the Commission or to which the Commission is a party, Respondents: (i) agree to appear and be interviewed by Commission staff at such times and places as the staff requests upon reasonable notice; (ii) will accept service by mail or facsimile transmission of notices or subpoenas for documents or testimony at depositions, hearings or trials, or in connection with any related investigation by Commission staff; (iii) appoint counsel for Gorman, Kevin Rover, Esq., and counsel for Gentile, Robert Romano, Esq., as agents to receive service of such notices and subpoenas; (iv) with respect to such notices and subpoenas, waive the territorial limits on service contained in Rule 45 of the Federal Rules of Civil Procedure and any applicable local rules, provided that the party requesting the testimony reimburses Respondents' travel, lodging and subsistence expenses at the then-prevailing U.S. Government per diem rates; and (v) consent to personal jurisdiction over Respondents in any United States District Court for purposes of enforcing any such subpoena. + + In determining whether to accept the Offers, the Commission has considered these undertakings. + + IV. + + In view of the foregoing, the Commission deems it appropriate to impose the sanctions agreed to in the Offers. + + Accordingly, it is hereby ORDERED that: + + Pursuant to Section 8A of the Securities Act and Section 21C of the Exchange Act, Respondents Gorman and Gentile shall cease and desist from committing or causing any violations, and any future violations, of Sections 17(a)(2) and 17(a)(3) of the Securities Act and Respondents Gorman and Gentile shall further cease and desist from causing any violations, and any future violations, of Sections 13(a), 13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act and Exchange Act Rules 12b-20 and 13a-1. + + By the Commission. + + +Jonathan G. Katz +Secretary + + Endnotes + 1    The findings herein are made pursuant to Respondents' Offers and are not binding on any other person or entity in this or any other proceeding. + + 2    Paragraphs 84(a), (b) and (d) of Statement of Financial Accounting Concepts No. 5. Revenue is realizable and earned when (1) persuasive evidence of an arrangement exists, (2) delivery has occurred or services have been rendered, (3) the seller's price is fixed or determinable, and (4) collectability is reasonably assured. + + 3    Staff Accounting Bulletin 101, issued on December 3, 1999, reiterates these conditions. + + +  + + + + + + + + + + + + + + + + + + + + + + + + + Return to top + + + + + SEC homepage + + + + + + + + + + + + + + About the SEC + + + + + + Budget & Performance + + + Careers + + + Commission Votes + + + Contact + + + Contracts + + + + + + + + Transparency + + + + + + Accessibility & Disability + + + Super Intelligence + + + FOIA + + + Inspector General + + + No FEAR Act Data + + + Ombuds + + + SEC Excess Personal Property Guidance + + + + + + + + Websites + + + + + + Investor.gov + + + Related Sites + + + USA.gov + + + + + + + + Site Information + + + + + + Plain Writing + + + Privacy & Security + + + Site Map + + + + + + + + + + + + + + + + + + Stay connected. 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Individuals (SALI) + + + + + Enforcement Data Delivery Standards + + + + + Small Businesses + + + + + Appellate Briefs + + + + + Amicus / Friend of the Court Briefs + + + + + + + + + + + + + + + + + + + + + + + + + + Enforcement & Litigation + + + + + + + Litigation Releases + + + + + Administrative Proceedings + + + + + Administrative Law Judge Orders and Initial Decisions + + + + + Trading Suspensions + + + + + Distributions to Harmed Investors + + + + + Receiverships + + + + + Electronic Filings in Administrative Proceedings (eFAP) + + + + + Rules of Practice + + + + + Applications for Reentry + + + + + Reports of Investigations + + + + + Whistleblower Program + + + + + Public Alert: Unregistered Soliciting Entities (PAUSE) + + + + + SEC Action Lookup - Individuals (SALI) + + + + + Enforcement Data Delivery Standards + + + + + Small Businesses + + + + + Appellate Briefs + + + + + Amicus / Friend of the Court Briefs + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + Home + + + Enforcement and Litigation + + + Litigation Releases + + + John Gorman and Patrick Gentile + + + + + + + + + + + + John Gorman and Patrick Gentile + + + + + + + + + + + + + + + + + + + + + The Commission announced the filing of a civil penalty action against Patrick Gentile, American Banknote Corporation's ("ABN") current Chief Financial Officer ("CFO") and former corporate controller, and John Gorman, ABN's former CFO. The Commission's Complaint alleged that Gentile and Gorman overstated ABN's fiscal year 1996 revenue and net income by causing American Bank Note Holographics ("ABNH"), a then wholly-owned subsidiary of ABN, to improperly record revenue on two "bill and hold" transactions which they knew, or should have known, had not been entered into on or before December 31, 1996 and did not comply with generally accepted accounting principles. According to the Complaint, Gentile and Gorman knew, or should have known, that ABN reported this overstated revenue and income on the financial statements that were included in ABN's Annual Report on Form 10-K for its fiscal years ended December 31, 1996, and December 31, 1997. + + The Complaint further alleged that Gentile and Gorman made statements in the offer or sale of securities which they knew, or should have known, were materially false or misleading. According to the Complaint, Gentile and Gorman participated in the preparation and review of ABNH's registration statement filed with the Commission in connection with its July 1998 initial public offering, and they knew that the registration statement included financial statements for ABNH for its fiscal years 1996 and 1997. The Complaint alleged that Gorman and Gentile knew, or should have known, that the registration statement contained materially false and misleading financial information for ABNH's fiscal year 1996 because the financial statements in that filing reported revenue and net income for the two improperly recorded "bill and hold" transactions. + + Without admitting or denying the allegations in the Commission's Complaint, Gentile and Gorman each consented to pay a civil penalty of $25,000. In addition, on September 8, 2004, the Commission also instituted and simultaneously settled an administrative cease-and-desist proceeding against Gentile and Gorman based on the same conduct. (In the Matter of John Gorman and Patrick Gentile Administrative Proceeding File No. 3-11635) ("Order"). Gentile and Gorman agreed to settle this proceeding without admitting or denying the findings in the Order. The Order requires Gentile and Gorman to cease and desist from committing and/or causing any violation, and any future violation, of the antifraud, periodic reporting, record keeping, and internal controls provisions of the federal securities laws, Sections 17(a)(2) and 17(a)(3) of the Securities Act of 1933 ("Securities Act") and Sections 13(a), 13(b)(2)(A) and 13(b)(2)(B) of the Securities Exchange Act of 1934 ("Exchange Act") and Exchange Act Rules 12b-20 and 13a-1. + + For additional information see Litigation Releases 17068A, 18081 and 18283. + + The Commission's investigation that led to this action was conducted in cooperation with the United States Attorney's Office for the Southern District of New York. + + + + +  + + + + + + + + + + + + + + + + + + + + + + + + + Return to top + + + + + SEC homepage + + + + + + + + + + + + + + About the SEC + + + + + + Budget & Performance + + + Careers + + + Commission Votes + + + Contact + + + Contracts + + + + + + + + Transparency + + + + + + Accessibility & Disability + + + Super Intelligence + + + FOIA + + + Inspector General + + + No FEAR Act Data + + + Ombuds + + + SEC Excess Personal Property Guidance + + + + + + + + Websites + + + + + + Investor.gov + + + Related Sites + + + USA.gov + + + + + + + + Site Information + + + + + + Plain Writing + + + Privacy & Security + + + Site Map + + + + + + + + + + + + + + + + + + Stay connected. 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Individuals (SALI) + + + + + Enforcement Data Delivery Standards + + + + + Small Businesses + + + + + Appellate Briefs + + + + + Amicus / Friend of the Court Briefs + + + + + + + + + + + + + + + + + + + + + + + + + + Enforcement & Litigation + + + + + + + Litigation Releases + + + + + Administrative Proceedings + + + + + Administrative Law Judge Orders and Initial Decisions + + + + + Trading Suspensions + + + + + Distributions to Harmed Investors + + + + + Receiverships + + + + + Electronic Filings in Administrative Proceedings (eFAP) + + + + + Rules of Practice + + + + + Applications for Reentry + + + + + Reports of Investigations + + + + + Whistleblower Program + + + + + Public Alert: Unregistered Soliciting Entities (PAUSE) + + + + + SEC Action Lookup - Individuals (SALI) + + + + + Enforcement Data Delivery Standards + + + + + Small Businesses + + + + + Appellate Briefs + + + + + Amicus / Friend of the Court Briefs + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + Home + + + Enforcement and Litigation + + + Litigation Releases + + + Clayton Chan, Gregory Antoniono and Geoffrey Infeld + + + + + + + + + + + + Clayton Chan, Gregory Antoniono and Geoffrey Infeld + + + + + + + + + + + + + + + + + + + + + SEC additionally files a settled action against a former Homestore manager for fraudulently assisting in inflating Homestore's advertising revenue + + The United States Securities and Exchange Commission, the United States Attorney's Office for the Central District of California, and the Federal Bureau of Investigation announced yesterday that a former senior vice president of Homestore, Inc. and the owner of several Homestore vendors have agreed to plead guilty to criminal charges and to settle civil fraud charges for their roles in Homestore's scheme to inflate advertising revenues through fraudulent round-trip transactions in 2001. The SEC also charged a former manager of Homestore for assisting in the fraudulent scheme. Homestore, Inc. is a Westlake Village, Calif. company that provides real estate listings and related services on the Internet. + + With these charges, the SEC has sued a total of 14 individuals for their roles in the scheme, nine of whom have been criminally charged by the United States Attorney in Los Angeles. + + The SEC's civil complaint and the United States Attorney's criminal informations, filed yesterday in United States District Court in Los Angeles, charge the following two defendants. + + Clayton Chan , 39, of San Francisco, California, was the vice president of Homestore's Strategic Alliances Group (SAG) from January 2001 until July 2001 and was later promoted to senior vice president of SAG. + + Geoffrey Infeld , 36, of Thousand Oaks, California, is currently an officer and part-owner of Cyberhorse, Inc., a private sales and marketing company involved in the fraudulent transactions. He was formerly a SAG salesperson at Homestore. Infeld owned or controlled several private Internet companies that he used to assist Homestore in its fraud. + In addition, the SEC's civil complaint also charges the following defendant, who is not named in the criminal case: + + Gregory Antoniono , 42, of Thousand Oaks, California, was the contracts manager at Homestore during 2001. He later became Homestore's director of contracts. + The civil and criminal actions allege that the defendants participated in or assisted in negotiating, implementing and executing the fraudulent "round-trip" transactions. The purpose of these transactions was to artificially inflate Homestore's on-line advertising revenues. All of the defendants knew that the essence of these transactions was a circular flow of money by which Homestore recognized its own cash as revenue. Chan and Antoniono took steps to conceal the round-trip nature of the transactions from Homestore's auditors. Infeld used his companies as intermediaries in the round-trip transactions, knowing that Homestore's revenues would be inflated as a result. + + The SEC charged Chan with violating numerous provisions of the federal securities laws, including the antifraud provisions, Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder; reporting provisions, Section 13(a) of the Exchange Act and Rules 12b-20 and 13a-13 thereunder; record-keeping provisions, Section 13(b)(2)(A) of the Exchange Act and Rule 13b2-1 thereunder; internal controls provisions, Section 13(b)(5) of the Exchange Act; and lying to the auditors provisions, Rule 13b2-2 under the Exchange Act. Antoniono and Infeld were charged with aiding and abetting Homestore or Homestore management's violations of the above provisions. Additionally, the SEC alleged that Chan violated Section 17(a) of the Securities Act of 1933. + + The United States Attorney's Office's criminal action, based upon a joint investigation by the SEC, United States Attorney's Office and FBI, charges Clayton Chan with one count of securities fraud in violation of Title 15, United States Code, Sections 78j(b) and 78ff, and Title 17, Code of Federal Regulations, Section 240.10b-5 and Geoffrey Infeld with one count of wire fraud in violation of Title 18, United States Code, Section 1343. + + The Settlements and Guilty Pleas + + Chan and Infeld have agreed to settle the SEC's lawsuit, to plead guilty to the criminal charges, and to cooperate with the government in its ongoing investigations. Antoniono has agreed to settle the SEC's lawsuit. All three defendants settled the SEC lawsuit without admitting or denying the allegations, simultaneously with the filing of the complaint. + + In the SEC case, Chan will be enjoined from committing future violations of the charged federal securities laws, will repay $179,124 in profits from his exercise of Homestore stock options and commissions he earned during the fraud, plus interest, and will pay a $50,000 civil penalty. Chan will also be barred from serving as an officer or director of a public company for a period of ten years. In the criminal action, Chan will plead guilty to securities fraud, carrying a maximum sentence of ten years. + + In the SEC case, Infeld will be enjoined from committing future violations of the charged federal securities laws, will repay $17,400 representing profits from the fraudulent transaction with Homestore, plus interest, and will pay a civil penalty of $35,000. In the criminal case, Infeld has agreed to plead guilty to one count of wire fraud and faces up to five years in prison. + + As part of his SEC settlement, Antoniono will be enjoined from committing future violations of the charged federal securities laws, will repay $69,013 in profits from his exercise of Homestore stock options, plus interest, and will pay a civil penalty of $25,000. + + The civil case is the product of an ongoing investigation by the SEC. The criminal investigation by the Federal Bureau of Investigation is also ongoing. + + + + +  + + + + + + + + + + + + + + + + + + + + + + + + + Return to top + + + + + SEC homepage + + + + + + + + + + + + + + About the SEC + + + + + + Budget & Performance + + + Careers + + + Commission Votes + + + Contact + + + Contracts + + + + + + + + Transparency + + + + + + Accessibility & Disability + + + Super Intelligence + + + FOIA + + + Inspector General + + + No FEAR Act Data + + + Ombuds + + + SEC Excess Personal Property Guidance + + + + + + + + Websites + + + + + + Investor.gov + + + Related Sites + + + USA.gov + + + + + + + + Site Information + + + + + + Plain Writing + + + Privacy & Security + + + Site Map + + + + + + + + + + + + + + + + + + Stay connected. 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Skinner, Jr. And American Television And Film Company F/K/A Winners Internet Network, Inc. + + + + + + + + !function(){var e=navigator.userAgent,a=document.documentElement,n=a.className;n=n.replace("no-js","js"),/iPad|iPhone|iPod/.test(e)&&!window.MSStream&&(n+=" ua-ios"),a.className=n}(); + {"path":{"baseUrl":"\/","pathPrefix":"","currentPath":"node\/494951","currentPathIsAdmin":false,"isFront":false,"currentLanguage":"en"},"pluralDelimiter":"\u0003","suppressDeprecationErrors":true,"gtag":{"tagId":"","consentMode":false,"otherIds":[],"events":[],"additionalConfigInfo":[]},"ajaxPageState":{"libraries":"eJxdT0GOwzAI_JBdn_oei2DkeINNZLC22devlaZS2wtiBhhmcKNUTPo97jxyaXEH3GJpiZrFhQW38A4cMqgeYQGlV19JFTKpQ-kUmvQKXP7I0cO4tC2kPnbg2wVdFslM0SCHPMs3vsEPPD7J6hgOGdPCKJyoRxxqUuePHjLLAuzVjimenRJGSLW08NoBK9LUn6SHlrytVOlcpJShB63QLSpBx_WkOzHNePol4fRQo_qMPvQ36ZXsAmd99lMNr2t_GUR9n60EyX9a_wePd5ns","theme":"uswds_sec","theme_token":null},"ajaxTrustedUrl":[],"gtm":{"tagId":null,"settings":{"data_layer":"dataLayer","include_classes":false,"allowlist_classes":"","blocklist_classes":"","include_environment":false,"environment_id":"","environment_token":""},"tagIds":["GTM-TD3BKV"]},"data":{"extlink":{"extTarget":false,"extTargetAppendNewWindowDisplay":true,"extTargetAppendNewWindowLabel":"(opens in a new window)","extTargetNoOverride":false,"extNofollow":false,"extTitleNoOverride":false,"extNoreferrer":false,"extFollowNoOverride":false,"extClass":"0","extLabel":"(link is external)","extImgClass":false,"extSubdomains":true,"extExclude":".*\\.gov|http:\/\/www.xbrl.org\/utr\/2013-05-17\/utr.xml|http:\/\/www.xbrl.org\/dtr\/type\/numeric-2009-12-16.xsd|http:\/\/www.xbrl.org\/dtr\/type\/nonNumeric-2009-12-16.xsd|https:\/\/secir.secure.force.com\/ombudsman\/OMMSForm","extInclude":"","extCssExclude":".data-exempt","extCssInclude":"","extCssExplicit":"","extAlert":true,"extAlertText":"You are now leaving the SEC Website. 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Johnson, Michael Johnson & Co., Llc, David C. Skinner, Jr. And American Television And Film Company F/K/A Winners Internet Network, Inc. + + + + + + + + + + + + Michael B. Johnson, Michael Johnson & Co., Llc, David C. Skinner, Jr. And American Television And Film Company F/K/A Winners Internet Network, Inc. + + + + + + + + + + + + + + + + + + + U.S. Securities and Exchange Commission + + LITIGATION RELEASE NO. 18879 / September 10, 2004 + + ACCOUNTING AND AUDITING ENFORCEMENT +RELEASE NO. 2096 / September 10, 2004 + + SECURITIES AND EXCHANGE COMMISSION v. MICHAEL B. JOHNSON, MICHAEL JOHNSON & CO., LLC, DAVID C. SKINNER, JR. AND AMERICAN TELEVISION AND FILM COMPANY f/k/a WINNERS INTERNET NETWORK, INC. , No. 04-RB-0626 (USDC D. Colorado). + + The United States Securities and Exchange Commission (Commission) announced that on April 2, 2004, the United States District Court for the District of Colorado entered an injunction by consent against American Television and Film Company (American Television). The court's order permanently enjoins American Television from violating Sections 10(b), 13(a) and 13(b)(2) of the Securities Exchange Act of 1934 and Rules 10b-5, 12b-20, 13a-1, 13a-11 and 13a-13 thereunder. + + The Commission's complaint alleged that between December 1999 and December 1999 and December 2000, American Television, then known as Winners Internet Network, Inc. (Winners), carried out a scheme to defraud investors by filing reports and a registration statement with the Commission containing false financial statements that fraudulently overstated Winners' revenues, income, assets and cash inflows and understated expenses. Further, between January and October 2000, Winners reviewed or disseminated three promotional analyst reports containing baseless financial projections. +American Television consented to the court's order without admitting or denying the Commission's allegations. + + + + +  + + + + + + + + + + + + + + + + + + + + + + + + + Return to top + + + + + SEC homepage + + + + + + + + + + + + + + About the SEC + + + + + + Budget & Performance + + + Careers + + + Commission Votes + + + Contact + + + Contracts + + + + + + + + Transparency + + + + + + Accessibility & Disability + + + Super Intelligence + + + FOIA + + + Inspector General + + + No FEAR Act Data + + + Ombuds + + + SEC Excess Personal Property Guidance + + + + + + + + Websites + + + + + + Investor.gov + + + Related Sites + + + USA.gov + + + + + + + + Site Information + + + + + + Plain Writing + + + Privacy & Security + + + Site Map + + + + + + + + + + + + + + + + + + Stay connected. Sign up for email updates. + + + + + + Your email address + + Sign Up + + + + + + + + + + + + X + + + + + + + + Facebook + + + + + + + + Instagram + + + + + + + + RSS + + + + + + + + YouTube + + + + + + + + Email Updates + + + + + + + + + + + + + + + + + + + diff --git a/raw/aaer/2004/AAER-2097.pdf b/raw/aaer/2004/AAER-2097.pdf new file mode 100644 index 0000000000000000000000000000000000000000..46abfd4479fcfa1e045215fee045c1b59fe93eb6 Binary files /dev/null and b/raw/aaer/2004/AAER-2097.pdf differ diff --git a/raw/aaer/2004/AAER-2097.txt b/raw/aaer/2004/AAER-2097.txt new file mode 100644 index 0000000000000000000000000000000000000000..4218477620c075c1c2789af0fb4db60c1acf59f6 --- /dev/null +++ b/raw/aaer/2004/AAER-2097.txt @@ -0,0 +1,494 @@ +UNITED STATES OF AMERICA + B efore the + SECURITIES AND EXCHANGE COMMISSION + +SECURITIES ACT OF 1933 +Release No. 8482 / September 14, 2004 + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 50365 / September 14, 2004 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 2097 / September 14, 2004 + +ADMINISTRATIVE PROCEEDING +File No. 3-11653 + + + : O RDER INSTITUTING +In the Matter of : PROCEEDINGS PURSUANT TO + : SECTION 8A OF THE SECURITIES +Fleming Companies, Inc. : ACT OF 1933 AND SECTION 21C OF + : THE SECURITIES EXCHANGE ACT + : OF 1934, MAKING FINDINGS AND +Respondent. : IMPOSING A CEASE-AND-DESIST + : ORDER + + +I. + + The Securities and Exchange Commission (“Commission”) deem s it appropriate to +institute cease-and-desist proceedings pursuant to Section 8A of the Se curities Act of 1933 (the +“Securities Act”) and Section 21C of the Securities Exchange Act of 1934 (the “Exchange Act”) +against Fleming Companies, Inc. (“Fleming” or “Respondent”). + +II. + + In anticipation of the institution of these proceedings, Respondent has submitted an Offer +of Settlement (“Offer”) that the Commission has determined to accept. Solely for the purpose of +these pro ceedings or an y other pro ceeding b rought by or on behalf of the Commission, o r to +which the Comm ission is a par ty, and witho ut admitting or deny ing the f indings conta ined +herein, except that Respondent admits the Commission’s jurisdiction over it and over the subject +matter of these proceedings, Respondent consen ts to the entry of this Order Instituting +Proceedings Pursuant to Section 8 A of the Securities Act of 1933 a nd Section 21C of the +Securities Exchange Act of 1934, Making Findings and Imposing a Cease-and-Desist Order. + + + + + + 2 + + +III. + +On the basis of this Order and Respondent’s Offer, the Commission finds that:1 + +A. Respondent + + Fleming is an Oklahoma corporation hea dquartered in Lewisville, Texas, which +currently is in Chapter 11 bankruptcy. Before its April 2003 bankruptcy filing, Fleming’s stock +traded on the New York Stock Exchange. At one time, Fleming was the nation’s largest supplier +of consumer packaged goods to retailers, including supermar kets, convenience stores and +supercenters, with approximately 50 major distribution centers (“DCs”) across the country, and a +sizable retail grocery operator as well, with more than 100 stores throughout the Midwest and +West. Fleming’s 2001 and 2002 reported revenues were approximately $15.6 billion and $15.5 +billion, respectively.2 But its earnings were relatively much smaller, with only a $23.3 million +profit and an $84 million loss, respectively, in those years. Fleming recently announced its intent +to emerge from bankruptcy reorganized around its subsidiary Coremark International, Inc., a +convenience store distributor it acquired in June 2002. + +B. Background + +In late 2001 and the firs t half of 2002, Fleming improperly recorded numerous +transactions to address anticipat ed earnings shortfalls stemming from a variety of business and +financial challenges. Chief among these challenges was its February 2001 agreement to be +Kmart Corporation’s sole supplier. Fleming in itially announced this arrangement as a major +victory and substantially expande d its facilities (and debt load) to handle the new business. +Fleming hoped that this agreement and concomitant expansion would provide economies of scale +and greater purchasing power, whic h would result in greater retu rns for its overall wholesale +business. The Kmart arrangement, however, fa iled to yield the efficiencies Fleming had +expected, and, when Kmart filed bankruptcy in January 2002, Fleming’s future viability came +under scrutiny. + +Simultaneously, Fleming’s primary wholesale cu stomer base, the small to medium-sized +independent grocer, faced adversity on a numbe r of fronts, including a depressed national +economy and heightened competition from low-cost supercenter chains encroaching into the +rural and suburban areas the independents had long dominated. As these and other pressures +drove these grocers out of business or into merg ers with larger, self-s upplying grocery chains, +Fleming found it harder to generate its historical returns from this business. + +1 The findings herein are made pursuant to Respondent’s Offer and are not binding on any other person or entity in +these or any other proceedings. + +2 The 2001 reported revenues were for Fleming’s wholesale and retail operations. The 2002 reported revenues were +for Fleming's continuing wh olesale operations only, in accordance with Statement of Financial Accounting +Standards No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets. The Fleming financial +information specified in this document does not incorporate the proposed restatements and revisions publicly +announced by Fleming in its April and June 2003 press releases. + + + + 3 + + + +Fleming experienced other earnings pressure s as well. In early 2000, Fleming began +centralizing many of its business functions, including its procurement department. Traditionally, +Fleming’s DCs handled most of their own procur ement, which provided a substantial part of +each DCs’ internal margin. By centralizing this function and purchasing on a national rather +than local or regional scale, Fleming hoped to obtain better prices from vendors and thereby +improve its overall margins. These anticipated benefits did not materialize, and, instead, +Fleming was increasingly at odds with the vendor community. + +Fleming’s retail operations, known internally as Fleming Retail Group or “FRG,” also +pressured Fleming’s bottom line. Securities analys ts referred to FRG as a “growth vehicle” for +the future, based largely on the strong same store sales figures Fleming reported during 2001. As +discussed below, however, these same store sales figures were misleading, as FRG’s real same +store sales performance began to decline in the third quarter of 2001. + +C. Fleming implements “initiatives” impr operly to address anticipated earnings +shortfalls + +1. Fourth Quarter 2001 + +When earnings pressures increased in the f ourth quarter of 2001, Fleming implemented a +series of transactions and programs, described internally as “initiatives,” designed to increase +earnings to help “fill the gap” between actual and projected results. These initiatives ordinarily +were itemized on initiative li sts circulated among senior Fl eming management and sometimes +within Fleming’s procurement department. Alth ough the initiatives, in a nd of themselves, were +not improper, Fleming executed some of the in itiatives improperly to boost Fleming’s bottom +line. + +One way Fleming improperly executed initiativ es was to obtain misleading side letters +from certain vendors to justify accelerating earn ings. Grocery industry vendors routinely pay +wholesalers and retailers up-front monies to secure such advantages as favorable product +positioning or exclusive supplier status. To the ex tent these are future advantages, generally +accepted accounting principles (“GAAP”) required th e wholesaler or retailer to recognize the +payments over time either as revenue or as cost-of-goods-sold offsets, rather than up-front.3 + +Four vendors 4 were asked to provide side letters in December 2001 that were used to +accelerate Fleming’s earnings under contemporane ous forward-looking agreements with those + +3 See Statement of Financial Accounting Concepts No. 5, ¶¶83-84; Staff Accounting Bulletin No. 101, Revenue +Recognition in Financial Statements, Question 5. Under Emerging Issues Task Forc e Abstract (“EITF”) 02-16, +Accounting by a Customer (Including a Reseller) for Certain Consideration Received from a Vendor , Fleming is +now required to recognize these up-front payments as offsets to cost of goods sold ratably over the term of the +concomitant forward-looking agreements. However, this EITF was not effective when Fleming entered into these +transactions. + +4 Certain vendors and vendor personnel have settled Commission charges arising from these and later vendor +transactions. See In re Kemps LLC f/k/a Marigold Foods, LLC, James Green and Christopher Thorpe , Exch. Act + + + 4 + + +same vendors, in violation of G AAP. Each of these letters characterized up-front payments as +rebates or other compensation for alleged past performance. The paym ents, however, actually +induced some future performance by Fleming or secured some future right for the vendor. + + a. Kemps LLC, f/k/a Marigold Foods, LLC (“Marigold”) + +Marigold, a privately held dairy supplier, pr ovided Fleming with such a side letter in +connection with an agreement to supply ice cr eam to Fleming’s wholesale business for three +years beginning March 2002 (the “Marigold Supply Agreement”). Fleming was willing to grant +this agreement to Marigold only in return for an up-front payment of $2 million. Though +extremely reluctant to make this payment, Ma rigold eventually viewed it as the “ante” to +retaining and expanding the Fleming business. + +At the 11 th hour of negotiations, Fleming demanded a side letter – the terms of which +Fleming dictated – describing the payment as a “non-refundable” “rebate” for “2001 purchases.” +Fleming knew the rebate had not been earned and that the $2 million was specifically linked to +the Marigold Supply Agreement. Marigold ultimately agreed to this arrangement but required a +penalty provision in the Marigold Supply Agre ement obligating Fleming to repay the $2 million +on a pro rata basis if Fleming failed to buy a certain volume of Marigold product during the +agreement’s term. + +Using the side letter as justification, Fleming recorded the entire $2 million as an offset to +expenses, which increased earnings in the fourth quarter of 2001 in violation of GAAP. + +b. Digital Exchange Systems, Inc. (“Dexsi”) + +Dexsi is a privately held diverting services supplier. 5 In late 2001, Fleming hired Dexsi +to handle part of its diverting business. Fleming was by far Dexsi’s biggest customer. +Accordingly, Dexsi expended significant capital ramping up to handle the Fleming business, +such as by purchasing equipment and hiring employees to work on-site at Fleming’s +headquarters. + +Fleming demanded that Dexsi pay $2 million and provide a side letter attributing the +payment to past performance. Simultaneously, Fleming agreed to allow Dexsi to recoup the $2 +million by charging Fleming a higher-than-normal price on diverting purchases.6 In short, the $2 + +Rel. No. 34-50369; In re Digital Exchange Systems, Inc., Rosario Coniglio and Steven Schmidt , Exch. Act Rel. No. +34-50366; In re Bruce Keith Jensen , Exch. Act Rel. No. 34-50370; In re John K. Adams , Exch. Act Rel. No. 34- +50367; and In re Dean Foods Company and John D. Robinson, Exch. Act Rel. No. 34-50368. + +5 “Diverting” occurs when a wholesaler overbuys from a vendor at a special discount, and then sells the excess +product to buyers at a higher price. + +6 To illustrate, if Fleming wanted to purchase a product with a list cost of $1 per unit, Dexsi normally would sell that +product to Fleming for, hypothetically, $.90. Under their agreement, however, Fleming allowed Dexsi to charge $1 +for that product, with the additional $.10 per unit credited against the $2 million. This mechanism remained in place +until Dexsi recovered the entire $2 million. + + + 5 + +million was an advance on future diverting savi ngs Fleming otherwise would not have received +until later, when it actually purchased goods thr ough Dexsi. Fleming insinuated that it would +terminate the relationship if Dexsi refused. De xsi agreed to Fleming’s demand and the parties +kept a running tab of Dexsi’s recovery of the $2 million, which Dexsi did not fully recoup until +the first quarter of 2002. + +Although Fleming had not earned the entire pa yment during the fourth quarter of 2001, +Fleming nonetheless recorded the entire $2 million as an offset to expenses, which increased its +earnings in violation of GAAP. + +c. Frito-Lay, Inc. + +Frito-Lay, a subsidiary of PepsiCo Inc., is a leading snack manufacturer. In December +2001, Fleming and Frito-Lay negotiated an agr eement that would pay Fleming for achieving +certain sales targets during 2002. The agreem ent included a $400,000 incentive for Fleming to +set up certain new product store displays by Fe bruary 2002. Wanting to recognize the $400,000 +immediately, Fleming asked its Frito-Lay contact to execute a side letter characterizing the +$400,000 payment as “non-refundable” compensation. The Frito-Lay employee provided the +requested letter. + +Fleming knew it had not earned the $400,000 dur ing 2001 but nevertheless recorded the +full amount as an offset to expenses, which im properly increased its earnings in the fourth +quarter of 2001 in violation of GAAP. + +d. Kraft Foods Inc. + +Kraft is the largest U.S. branded foods and drink manufacturer. During 2001, Fleming +and Kraft executed two agreements pertinent to this matter. Fi rst, in April 2001, the parties +entered into a no-divert agreement, under which Kraft was to pay $7.5 million for Fleming’s +promise to waive certain promotional fees and to refrain from diverting Kraft products. Then, in +June 2001, the parties agreed to a one-year preferred vendor agreement (the “Kraft PVA”), under +which Kraft was to pay $10.7 million in exchange for Fleming’s commitment to eliminate +several prior practices an d fees and to cooperate in the reso lution of certain disputed deductions +made by Fleming. Although these disputed deduc tions generally declin ed following this +agreement, they nonetheless continued and, by early 2002, had amounted to at least $4 million. + +In December 2001, Fleming approached Kraf t about accelerating $1.65 million payable +under the no-divert agreement. Th ese funds were subject to certain criteria, such as that they +would “pass through” to Fleming’s retail cust omers to help promote Kraft products. At +Fleming’s request, the Kraft employee responsib le for the Fleming acc ount signed a letter +representing that the $1.65 million was an “offse t to administrative costs” under the no-divert +agreement. However, as Fleming knew, there we re no administrative costs to offset. Instead, +Fleming requested the letter solely to justify recording the $1.65 million as an offset to expenses, +which improperly increased its earnings in the fourth quarter in violation of GAAP. + + + 6 + + +e. Reduction of reserve balances + +Fleming also released portions of previous ly established bad de bt and other reserve +balances while closing its f ourth quarter 2001 books. Thes e reserve reductions totaled +approximately $12.7 million, the vast majority of which pertained to bad debts owed by +Fleming’s wholesale division customers. Of these reductions, $7.8 million was to increase +earnings, not because of new information, greater experience or change in circumstance that +would justify a lesser reserve balance. See Accounting Principles Board Opinion No. 20, +Accounting Changes (“APB 20”). Fleming never disclose d to investors that it was reducing +these reserves. See APB 20, ¶ 33 (recommending disclosure if a change in estimate is material). + +Fleming also released portions of previously established reserves relating to its exposure +to vendors for disputed deductions. Historically , Fleming had relied on vendor deductions to +contribute to profit margins. In some cases, af ter negotiating with a particular vendor, Fleming +paid back some or all of the deductions attribut able to that vendor. Thus, some level of vendor +paybacks was probable and, based on Fleming’s experience, reasonably estimable. Fleming +therefore was obligated to reserve for these paybacks. See Statement of Financial Accounting +Standards (“SFAS”) No. 5, Accounting for Contingencies. + +By November 2001, Fleming’s disputed deduction balance had grown beyond $60 +million and Fleming procurement personnel recognized that as much as $20 million of this +amount likely would have to be repaid. Flem ing’s reserve for these paybacks, however, was +only $8.8 million, which was insufficient. Yet, rath er than increase the reserve to meet its +anticipated payback obligations, Fleming reduced the rate at which it reserved against such +anticipated paybacks. + +f. Fleming’s misstated annual a nd quarterly financial results + +Together, these improperly recorded tr ansactions totaled $25.05 million. Fleming +reported fourth quarter 2001 pre-tax earnings of approximately $26.9 million, and net earnings of +$5.7 million. Had Fleming properly accounted for these transactions, it would have reported +materially reduced earnings for the fourth quarter of 2001. + +Fleming’s 2001 annual results likewise would have been materially different. Fleming +reported pre-tax annual earnings of $62.8 mil lion and net earnings of $23.3 million. Had +Fleming properly accounted for these transacti ons, its annual pre-tax earnings would have +declined almost 40%. + +2. First Quarter 2002 + +Fleming’s earnings pressures did not relent in 2002. To the contrary, Kmart’s January +2002 bankruptcy increased the pressure on Fleming to perform well, as analysts and investors +scrutinized how the company responded to the Kmart situation. As it approached the end of the +first quarter 2002, however, Fleming again was falli ng short of analysts’ expected earnings and +therefore improperly recorded several transactions to address the anticipated earnings shortfall. + + + 7 + + +a. Dean Foods Company + +Dean is a dairy products manufacturer. Beginning in early 2002, Fleming and Dean +began negotiating a supply agreement under which Dean would provide Fleming’s retail +operations with dairy products for three years. Throughout the negotiations, Fleming made clear +that, to receive the supply agreement, Dean woul d make an up-front payment, which the parties +ultimately agreed would be $2.5 million. + +At the end of negotiations, however, Fleming demanded that Dean provide a side letter, +dictated by Fleming, describing the payment as a rebate for past performance. Fleming knew the +letter mischaracterized the payment’s true purpose, but needed to recognize the payment +immediately. Dean acquiesced to Fleming’s demand, but did seek to protect its investment by +requiring a penalty provision in the supply agreement that obligated Fleming to repay the $2.5 +million if it breached. + +Although Fleming had not earned the entire payment during the first quarter of 2002, +Fleming used the side letter to justify recognizing the entire $2.5 million as an offset to expenses, +which increased earnings in violation of GAAP. + +b. Dexsi + +In April 2002, Fleming again turned to Dexsi, demanding that it pay $4 million and provide +a side letter describing the payment as reimbursement of “warehouse expenses” that Fleming +purportedly had incurred on Dexsi’s behalf during the quarter. Fleming knew this description was +inaccurate. In return, Fleming allowed Dexsi to charge higher diverting prices to recoup its +payment. + +Fearing that it would be expe lled from Fleming, Dexsi made the payment and signed the +letter. Fleming improperly used this letter to justify recording the full $4 million as an offset to +expenses, which improperly increased its earnings for the first quarter. + +c. Kraft + +In April 2002, Kraft and Fleming negotiate d a $5.6 million extension of the no-divert +agreement to year-end 2002. At Fleming’s reque st, the Kraft employee responsible for the +Fleming account signed a side letter describing the $5.6 million as payment of a “shortfall” under +the Kraft PVA. Fleming knew that no such shortfall existed and that the $5.6 million was +intended to extend the no-divert agreement. Although Fleming had not earned the entire amount, +Fleming relied on the letter to justify improperly r ecording the entire payment as an offset to +expenses, which increased earnings in the first quarter in violation of GAAP. + +d. Excessive inventory purchases + +In the first quarter of 2002, Fleming senior management concluded that Fleming was +carrying too much inventory and directed that invent ory levels be reduced as quickly and + + + 8 + + +efficiently as possible. Despite this directiv e, however, Fleming executed a series of large +forward buys7 of inventory during the quart er’s final weeks to generate discounts or rebates that +it could record immediately. 8 These purchases added more than $50 million of merchandise to +Fleming’s inventory balance, and generated rebates or discounts of $5.6 million. Although +Fleming had not earned all of the rebates or disc ounts during the quarter, Fleming nonetheless +recorded the entire $5.6 million as an offset to expenses in the first quarter of 2002. Fleming +never disclosed to investors that it was genera ting earnings in the quar ter through these large +inventory purchases. + +e. Fleming’s first quarter fina ncial results were misstated + + Together, these improperly recorded transa ctions totaled $17.7 million and materially +overstated Fleming’s reported pre-tax and net ea rnings for the quarter, which were $41.2 million +and $24.6 million, respectively. + +3. Second Quarter 2002 + +To meet earnings targets for the second qua rter 2002, Fleming made additional forward +buys of inventory (some of which was perishable and close to expiration), filling its warehouses +with excessive inventory. These purchases approximated $110 million and generated +approximately $8.1 million of rebates or discounts. Although Fleming had not earned all of the +rebates or discounts during the quarter, Flemi ng nonetheless recorded the entire $8.1 million as +an offset to expenses in the second quarter of 2002. Fleming also recognized $2.1 million in +revenues from an intracompany transfer of ag ed inventory, and established a $900,000 reserve +against it for a net increase in earnings of $1.2 million for the second quarter of 2002. These +transactions, which totaled $9.3 million, overstated Fleming’s reported second quarter 2002 pre- +tax and net earnings (before extraordinar y charge) of $15.4 million and $10.1 million, +respectively. + +D. Fleming also manipulated reta il division same store sales + +During 2001 and the first quarter of 2002, Fleming presented FRG as a growth vehicle for +the future. Grocery industry analysts took up this theme, focusing in part on FRG’s positive same +store sales growth during this period, which is a key industry performance metric. Fleming reported +same store sales in periodic filings with the Commission and in public earnings releases. + + +7 A “forward” buy is an inventory purchase that excee ds the usual quantity the purchaser normally would make, +generally to take advantage of special pricing offered by vendors. For example, if Fleming normally purchased a +six-week supply of a given product, it would “forward” buy, hypothetically, a ten-week supply at the special pricing. +Fleming also used the term “block” buy to describe these types of transactions. + +8 This approach was arguably permissible at the time, but is not permitted currently under EITF 02-16, which +dictates that such discounts or rebate s be recognized as the inventory is sold to customers, not at the time of +purchase. This EITF was not effective when Fleming entered into these transactions. + + + + 9 + + +Although there is no fixed in dustry standard, many retailers calculate same store sales by +comparing a store’s current period sales against its sales for the corresponding period in the prior +year. Fleming followed this methodology through the end of 2000. From the first quarter of 2001 +through the first quarter of 2002, however, Fleming began changing the methodology (sometimes +quarter to quarter) to allow FRG to report positive same store sales growth. At different times, +Fleming included in its calculations stores open less than a full reporting period; stores under +remodel; stores operated by different owners; and sometimes compared different stores if they were +located in close proximity to one another. Fle ming never disclosed these periodic changes to its +same store sales methodology. Instead, Fleming continued to compare the positive figures reported +in 2001 with less favorable prior period figures calculated under different methodology. + +Fleming also included in its calculations several financing transactions that should not have +been treated as sales. In several transactions from April 2001 through April 2002, Fleming provided +short-term financing to fund inventory acqui sitions by an opportunity goods vendor. 9 F l e m i n g +executed documentation reflecting its “purchase” of the inventory from the vendor at one price and +a simultaneous sale of the goods to the vendo r’s related company at a slightly higher price. 10 In +these transactions, Fleming wired the “purchase” price to the vendor in return for a promissory note +from the related company (sometimes guaranteed by the vendor) reflecting the “sale” price. The +same person signed all documents on behalf of the vendor and the related company. Fleming had +no role in locating either the goods or the vendor’s customer. + +Fleming used these transactions to improve it s same store sales picture. For example, +Fleming reported same store sales growth of 0.7% for the fourth quarter of 2001. Fleming was able +to achieve this growth, however, only by recording “sales” of more than $17 m illion from two of +the sales transactions. But for these transactions, Fleming would have reported same store sales +decline of 3.0%. + +Under GAAP, Fleming should not have recorded these transactions as sales. Instead, it +should only have recorded as interest income or other revenu e the net difference between the +promissory note and the amount Fleming had wired the vendor. See EITF 99-19, Reporting +Revenue Gross as a Principal versus Net as an Agent . Had Fleming excluded these transactions +from its calculations, same store sales would have been materially worse throughout 2001 and the +first quarter of 2002. + +In the second quarter of 2002, Fleming return ed to its original same store sales +methodology and same store sales dropped steeply from the prior quarter. + + +9 This vendor typically bought liquidation merchandise at deep discounts, which it then sold to its stable of +customers. + +10 The documentation for some of these transactions was poor; for example, some of the transaction documents +reflected that Fleming bought from and sold to the exact sa me entity at the exact same time. Fleming still recorded +these transactions as sales. + + + + 10 + +E. Fleming includes these misstatements in Commission filings and public earnings +releases + +Fleming included the misstatements and omissions described above in its periodic filings +on Forms 10-K and 10-Q. These filings were inco rporated into multiple registration statements +on Forms S-3, S-8 and S-4 Fleming filed with the Commission during 2002. Fleming also +included these misstatements and omissions in pub lic earnings releases covering the relevant +periods. + +F. Cooperation + + In determining to accept the Offer, the Commission considered remedial acts promptly +undertaken by Fleming and cooperation afforded the Commission staff. + +G. Conclusion + + As a result of the foregoing, the Commission finds that Fleming violated Section 17(a) of +the Securities Act and Sections 10(b), 13(a), 13(b)(2) and 13(b)(5) of the Exchange Act and +Rules 10b-5, 12b-20, 13a-1, 13a-13 and 13b2-1 thereunder. + +IV. + + In view of the foregoing, the Commission deems it appropriate to impose the sanctions +agreed to in the Offer. + + Accordingly, IT IS HEREBY ORDERED, pursu ant to Section 8A of the Securities Act +and Section 21C of the Exchange Act, that Respondent Fleming cease and desist from +committing or causing any violations and any future violations of Section 17(a) of the Securities +Act and Sections 10(b), 13(a), 13(b)(2) and 13 (b)(5) of the Exchange Act and Rules 10b-5, 12b- +20, 13a-1, 13a-13 and 13b2-1 thereunder. + + + By the Commission. + + + J o n a t h a n G . K a t z + S e c r e t a r y + \ No newline at end of file diff --git a/raw/aaer/2004/AAER-2099.pdf b/raw/aaer/2004/AAER-2099.pdf new file mode 100644 index 0000000000000000000000000000000000000000..bbaf4b336c8c4a2a606ff13d3016a6b9797c149b Binary files /dev/null and b/raw/aaer/2004/AAER-2099.pdf differ diff --git a/raw/aaer/2004/AAER-2099.txt b/raw/aaer/2004/AAER-2099.txt new file mode 100644 index 0000000000000000000000000000000000000000..817015f549cfc412d46526f6a9a7e0214e82d84e --- /dev/null +++ b/raw/aaer/2004/AAER-2099.txt @@ -0,0 +1,225 @@ + + + + UNITED STATES OF AMERICA + Before the + SECURITIES AND EXCHANGE COMMISSION + +SECURITIES ACT OF 1933 +Release No. 8483 / September 14, 2004 + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 50366 / September 14, 2004 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 2099 / September 14, 2004 + +ADMINISTRATIVE PROCEEDING +File No. 3-11654 + + + + : O R D E R I N S T I T U T I N G +In the Matter of : PROCEEDINGS PURSUANT TO + : S E C T I O N 8 A O F T H E S E C U R I T I E S +Digital Exchange Systems, : ACT OF 1933 AND SECTION 21C OF +Inc., Rosario Coniglio and : THE SECURITIES EXCHANGE ACT +Steven Schmidt, : OF 1934, MAKING FINDINGS AND + : IMPOSING A CEASE-AND-DESIST +Respondents. : ORDER + : + + + +I. + + The Securities and Exchange Commission (“Commission”) deems it appropriate to +institute cease-and-desist proceedings pursuant to Section 8A of the Securities Act of 1933 (the +“Securities Act”) and Section 21C of the Securities Exchange Act of 1934 (the “Exchange Act”) +against Digital Exchange Systems, Inc. (“Dexsi” ), Rosario Coniglio (“Coniglio”) and Steven +Schmidt (“Schmidt”) (collectively, “Respondents”). + + 2 + +II. + + In anticipation of the institution of thes e proceedings, Respondents have submitted an +Offer of Settlement (“Offer”) that the Commission has determined to accept. 1 Solely for the +purpose of these proceedings or any other proceeding brought by or on behalf of the +Commission, or to which the Commission is a party, and w ithout admitting or denying the +findings contained herein, except that Respon dents admit the Commission’s jurisdiction over +them and over the subject matter of these procee dings, Respondents consent to the entry of this +Order Instituting Proceedings Purs uant to Section 8A of the S ecurities Act of 1933 and Section +21C of the Securities Exchange Act of 1934, Making Findings and Imposing a Cease-and-Desist +Order. + +III. + +On the basis of this Order and Respondents’ Offer, the Commission finds that:2 + +A. Respondents and Fleming Co mpanies, Inc. (“Fleming”) + +1. Respondents + + Dexsi is a privately held Dela ware corporation based in Tampa, Florida. Rosario Coniglio, +age 47, of North Caldwell, New Jersey, is Dexsi’s majority owner. He is not a Dexsi officer or +employee but participates in the company’s high-level business decisions. Steven Schmidt, age 35, +of Tampa, Florida, is Dexsi’s President and one of its founders. + +Dexsi is what is known in the grocery industry as a “diverter.” Diverters scour the market +for special deals, typically buying from other wholesale or retail companies, or from inventory +liquidators, who have too much inventory of a given product and sell the excess at deep discounts +to the manufacturer’s list price. Dexsi buys the inventory at the discount and then sells to its +customer (in this case, Fleming) with a small markup, which is still lower than list price. Dexsi’s +customer thereby lowers its cost of goods sold, while Dexsi makes money on the markup. + +2. Fleming + + Fleming is an Oklahoma corporation headquarte red in Lewisville, Texas that currently is in +Chapter 11 bankruptcy. Before its April 2003 bankruptcy filing, Fleming’s stock traded on the +New York Stock Exchange. At one time, Flemin g was the nation’s largest grocery wholesaler, +with about 50 major distribution centers across the country, and a sizable retail grocery operator as + +1 Simultaneously with this proceeding, the Co mmission has filed the following settled actions: In re Fleming +Companies, Inc., Exch. Act Rel. No. 34-50365; In re Dean Foods Company and John D. Robinson , Exch. Act Rel. +No. 34-50368; In re Kemps LLC f/k/a Marigold Foods, LLC, James Green and Christopher Thorpe , Exch. Act Rel. +No. 34-50369; In re Bruce Keith Jensen, Exch. Act Rel. No. 34-50370; and In re John K. Adams, Exch. Act Rel. No. +34-50367. + +2 The findings herein are made pursuant to Respondents’ Of fer and are not binding on any other person or entity in +these or any other proceedings. + 3 + +well, with more than 100 stores throughout th e Midwest and West. Fleming’s 2001 and 2002 +reported revenues were approximately $15.6 b illion and $15.5 billion, respectively. But its +earnings relatively were much sm aller, with only a $23.3 million pr ofit and an $8 4 million loss, +respectively, in those years. + +B. Facts + + 1. Fleming uses fraudulent “initiatives” to meet earnings expectations. + +During 2001 and the first half of 2002, Flem ing improperly executed a series of +transactions, called “initiatives,” to fabricate earnings to “bridge the gap” between actual +operating results and Wall Street expectations. In these initiatives, Fleming fraudulently +structured otherwise ordinary tr ansactions in forms that, on paper, justified and maximized an +immediate increase in earnings. One type of ini tiative that Fleming used frequently during this +period was accelerating recognition of up-front payments received under forward-looking vendor +agreements. On multiple occasions, Fleming pe rsuaded vendors to provide side letters that +described up-front payments – which Fleming and the vendors plainly inte nded to secure future +rights and services – as compensation for some past event, such as a rebate or expense item. +Fleming then used these letters to justify recogniz ing the entire up-front payment as an offset to +expenses immediately, rather than over time as generally accepted accounting principles +(“GAAP”) required. These illicit bookings enabled Fleming to meet securities analysts’ earnings +expectations. Respondents provided Fleming two such side letters, one in the fourth quarter of +2001 and a second in the first quarter of 2002. + +2. Dexsi mischaracterizes an up-fr ont payment at Fleming’s request. + + In late 2001, Fleming hired Dexsi to handle part of its diverting business. Fleming was, by +far, Dexsi’s biggest customer. Accordingly, De xsi expended significant capital ramping up to +handle the Fleming business, such as by purchasing equipment and hiring employees to work on- +site at Fleming’s headquarters. + +In December 2001, Fleming realized that its earnings would fall short of analysts’ +expectations. To fill some of that shortfall, Fleming turned to Dexs i, demanding a $2 million +payment and a side letter falsely attributing the payment to past performance. Fleming insinuated +that, if Dexsi refused, it woul d terminate their relationship. Knowing that th e letter Fleming +wanted was false, but recognizing their precario us position, Coniglio and Schmidt acquiesced to +Fleming’s demands. In return, however, they secured a separate agreement from Fleming allowing +Dexsi to recoup the $2 million by charging Flem ing a higher-than-normal price on diverting +purchases. +3 This second agreement was never shown to Fleming’s internal accountants or external +auditor. The parties kept a running tab of Dexsi’s recovery of the $2 million, which Dexsi did not + +3 To illustrate, if Fleming wanted to purchase a product with a list cost of $1 per unit, Dexsi normally would sell that +product to Fleming for, hypothetically, $.90. Under thei r secret agreement, however, Fleming allowed Dexsi to +charge $1 for that product, with the additional $.10 per unit credited against the $2 million. This mechanism +remained in place until Dexsi recovered the entire $2 million. + + 4 + +fully recoup until February 2002. The $2 million overstated Fleming’s earnings for the fourth +quarter by approximately 15%. Fleming included these misstated earnings in its 2001 Form 10-K, +and in publicly disseminated press releases. + + 3. Dexsi provides Fleming’s auditor with a misleading confirmation letter. + + In February 2002, Fleming’s external auditor sent Dexsi a letter requesting confirmation +that “Fleming earned a $2,000,000 rebate for purc hases by Fleming from Dexsi in 2001. This +rebate is not connected to any future commitmen ts made by Fleming and is not refundable.” +Although he knew the payment was in fact an ad vance against future Fleming purchases and had +not been earned in 2001, Schmidt signed the confirmation letter. + + 4. Dexsi provides Fleming a second misleading side letter. + + In April 2002, Fleming again demanded Dexsi’s help in filling its earnings shortfall for +the fiscal first quarter. 4 This time, Fleming demanded that Dexsi pay $4 million. As before, +Fleming insisted that Dexsi provide a side lett er describing the payment as reimbursement of +“warehouse expenses” that Dexsi purportedly ha d incurred during the quarter. In return, +Fleming allowed Dexsi to charge higher diverting prices to recoup its payment. + +Dexsi was loath to pay such a large amount, and knew that it owed Fleming no +warehouse expenses, but still feared that refusal would cost it th e Fleming business. Therefore, +on or about April 10, 2002, Dexs i made the payment and signed the false “warehouse expense” +letter. Dexsi immediately began charging Fl eming the agreed-upon hi gher price on diverting +purchases, and the parties again tr acked Dexsi’s recovery of its payment. Unlike the December +payment, however, Dexsi does not appear to have fully recouped the $4 million because Fleming +stopped all diverting in the summer of 2002. + +Fleming relied on Dexsi’s letter to justify recording the $4 million as an offset to +expenses, which equaled nearly 10% of the ear nings Fleming reported for the first quarter. +Indeed, Fleming’s recognition of the entire $4 m illion violated GAAP. Both parties understood +the payment was an advance payment on future diverting purchases by Fleming. Fleming +therefore was required to recognize the payment ratably as Fleming made the diverting purchases. +See Statement of Financial Accounting Concepts No. 5, ¶¶ 83-84; Staff Accounting Bulletin No. +101, Revenue Recognition in Financial Statements , Question 5. Fleming included these +misleading figures in its Form 10-Q for the fi rst fiscal quarter ended April 20, 2002, and in +publicly disseminated press releases. Fleming fu rther incorporated the first quarter Form 10-Q +into registration statements on Forms S-3, S-8, and S-4 filed during the summer of 2002. + + +4 Fleming operated on a retail calendar with a fiscal first quarter consisting of four four-week periods, followed by +three fiscal quarters consisting of three four-week periods each. Fleming’s 2002 first fiscal quarter ended on April +20, 2002. + + 5 + +C. Conclusion + +As a result of the foregoing, the Commission finds: + +(1) Dexsi caused Fleming’s violations of Sections 17(a)(2) and 17(a)(3) of the +Securities Act and Sections 13(a) and 13(b)(2)(A) of the Exchange Act and Rules 12b-20, 13a-1, +13a-13 and 13b2-1 thereunder; + +(2) Rosario Coniglio caused Fleming’s viola tions of Sections 17(a)(2) and 17(a)(3) of +the Securities Act and Sections 13(a) and 13(b)(2)(A) of the Exchange Act and Rules 12b-20, 13a- +1, 13a-13 and 13b2-1 thereunder; and + +(3) Steven Schmidt caused Fleming’s viola tions of Sections 17(a)(2) and 17(a)(3) of +the Securities Act and Sections 13(a) and 13(b)(2)(A) of the Exchange Act and Rules 12b-20, 13a- +1, 13a-13 and 13b2-1 thereunder. + +IV. + + In view of the foregoing, the Commission deems it appropriate to impose the sanctions +agreed to in the Offer.5 + + Accordingly, IT IS HEREBY ORDERED, pursu ant to Section 8A of the Securities Act +and Section 21C of the Exchange Act, that Respondents Dexsi, Coniglio and Schmidt cease and +desist from committing or causing any violations and any future violations of Section 17(a)(2) +and 17(a)(3) of the Securities Ac t, and causing any violations and any future violations of +Sections 13(a) and 13(b)(2)(A) of the Exchange Act and Rules 12b-20, 13a-1, 13a-13 and 13b2-1 +thereunder. + + By the Commission. + + + J o n a t h a n G . K a t z + S e c r e t a r y + + + +5 Dexsi has agreed to pay a $100,000 civil penalty, and Coni glio and Schmidt each have agreed to pay $75,000 civil +penalties, in connection with a parallel civil action. \ No newline at end of file diff --git a/raw/aaer/2004/AAER-2100.pdf b/raw/aaer/2004/AAER-2100.pdf new file mode 100644 index 0000000000000000000000000000000000000000..b042333cd0a6dedbf539c4bf17a92685e071ef96 Binary files /dev/null and b/raw/aaer/2004/AAER-2100.pdf differ diff --git a/raw/aaer/2004/AAER-2100.txt b/raw/aaer/2004/AAER-2100.txt new file mode 100644 index 0000000000000000000000000000000000000000..e9b08ec5819123ac982e18a1ba1c8f483e7d54ab --- /dev/null +++ b/raw/aaer/2004/AAER-2100.txt @@ -0,0 +1,195 @@ +UNITED STATES OF AMERICA + B efore the + SECURITIES AND EXCHANGE COMMISSION + +SECURITIES ACT OF 1933 +Release No. 8486 / September 14, 2004 + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 50368 / September 14, 2004 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 2100 / September 14, 2004 + +ADMINISTRATIVE PROCEEDING +File No. 3-11657 + + + : O RDER INSTITUTING +In the Matter of : PROCEEDINGS PURSUANT TO + : SECTION 8A OF THE SECURITIES +Dean Foods Company and : ACT OF 1933 AND SECTION 21C OF +John D. Robinson, : THE SECURITIES EXCHANGE ACT + : OF 1934, MAKING FINDINGS AND +Respondents. : IMPOSING A CEASE-AND-DESIST + : ORDER + + +I. + + The Securities and Exchange Commission (“Commission”) deem s it appropriate to +institute cease-and-desist proceedings pursuant to Section 8A of the Se curities Act of 1933 (the +“Securities Act”) and Section 21C of the Securities Exchange Act of 1934 (the “Exchange Act”) +against Dean Foods Com pany (“Dean”) and J ohn D. Robinson (“Robinson”) (collectively, +“Respondents”). + +II. + + In anticipation of the institution of these proceedings, Respondents have submitted Offers +of Settlement (“Offers”) that th e Commission has determ ined to accept.1 Solely f or the purpose +of these p roceedings or any ot her proceeding brought by o r on behalf of the Comm ission, or to +which the Comm ission is a par ty, and witho ut admitting or deny ing the f indings conta ined +herein, except that Respondents adm it the Co mmission’s jurisdiction over them and over the + +1 Si multaneously with th is p roceeding, t he Co mmission h as filed the fo llowing settled actio ns: In re Flem ing +Companies, Inc., Exch. Act Rel. No. 34-50365; In re Bruce Keith Jensen, Exch. Act Rel. No. 34-50370; In re Kemps +LLC f/k/a Marigold Foods, LLC, James Green and Christopher Thorpe, Exch. Act Rel. No. 34-50369; In re Digital +Exchange Systems, Inc., Rosario Coniglio and Steven Schmidt, Exch. Act Rel. No. 34-50366; In re John K. Adams, +Exch. Act Rel. No. 34-50367. + + + + + + 2 + + +subject matter of these proceedings, Respondents consent to the entry of this Order Instituting +Proceedings Pursuant to Section 8A of the Securities Act of 1933 a nd Section 21C of the +Securities Exchange Act of 1934, Making Findings and Imposing a Cease-and-Desist Order. + +III. + +On the basis of this Order and Respondents’ Offers, the Commission finds that:2 + +A. Respondents and Fleming Companies, Inc. (“Fleming”) + +1. Respondents + +Dean, a Delaware corporation headquartered in Dallas, Texas, is a leading processor and +distributor of milk and other dairy products. During the relevant times, John Robinson of Dallas, +Texas, was Senior Vice Presid ent of Sales and Marketing for the Dean Dairy Group, a business +unit of Dean. During the relevant periods, Flem ing was a sizable customer of Dean’s dairy +operations. + +2. Fleming + +Fleming is an Oklahoma corporation headquartered in Lewisville, Texas that currently is +in Chapter 11 bankruptcy. Before its April 20 03 bankruptcy filing, Fleming’s stock traded on +the New York Stock Exchange. At one time , Fleming was the nation’s largest grocery +wholesaler, with about 50 major distribution centers across the country, and a sizable retail +grocery operator as well, with more than 100 stores throughout th e Midwest and West. +Fleming’s 2001 and 2002 reported revenues were approximately $15.6 billion and $15.5 billion, +respectively. But its earnings relatively were much smaller, with only a $23.3 million profit and +an $84 million loss, respectively, in those years. + +B. Facts + + 1. Fleming used fraudulent “initiativ es” to meet earnings expectations. + +During 2001 and the first half of 2002, Flem ing improperly executed a series of +transactions, called “initiatives,” to fabricate earnings to “bridge the gap” between actual +operating results and Wall Street expectations. In these initiatives, Fleming fraudulently +structured otherwise ordinary tr ansactions in forms that, on paper, justified and maximized an +immediate increase in earnings. One type of ini tiative that Fleming used frequently during this +period was accelerating recognition of up-front payments received under forward-looking vendor +agreements. On multiple occasions, Fleming pe rsuaded vendors to provide side letters that +described up-front payments – which Fleming and the vendors plainly inte nded to secure future +rights and services – as compensation for some past event, such as a rebate or expense item. +Fleming then used these letters to justify recogniz ing the entire up-front payment as an offset to + +2 The findings herein are made pursuant to Respondents’ Offers and are not binding on any other person or entity in +these or any other proceedings. + + + 3 + +expenses immediately, rather than over time as generally accepted accounting principles +(“GAAP”) required. These illicit bookings enabled Fleming to meet securities analysts’ earnings +expectations. + +2. Dean and Robinson were a cause of Flem ing’s inflated earnings in violation +of GAAP. + +In early 2002, Fleming and Dean began negotiating a supply agreement under which +Dean would provide Fleming’s retail operations with fluid milk for three years. Robinson was +principally responsible for negotiating the suppl y agreement on Dean’s behalf. Throughout the +negotiations, Fleming had made it clear that, to receive the supply agreement, Dean would make +an “up-front” payment in the $2 million range. An initial draft of the supply agreement required +Dean to pay Fleming up-front dollars in return for supply rights. Ultimat ely, the parties agreed +that the amount of the up-front payment would be $2.5 million. + +As the negotiations were concluding, howev er, Fleming demanded that the payment +provision be removed from the supply agreement and supplied Dean with a form of letter +describing the payment as a “rebate” for “past performance.” While rebates for past +performance are not uncommon in the industry, Fleming knew it had not earned any such rebate +in this instance and, up to that point in the negotiat ions, the up-front payment was understood to +be consideration for the future business being negotiated. Thus, Fleming knew that the letter +mischaracterized the payment’s true purpose, but needed to recognize the payment immediately +to help meet an impending earnings shortfall. At the time of negotiations, Fleming had been a +sizable customer of Dean’s da iry operations, but Dean knew it had no existing obligation to pay +Fleming any such rebate. Indeed, Dean knew that it was paying the $2.5 million to secure the +supply agreement. Dean acquiesced to Fleming’s demand because it feared that Fleming would +choose a different dairy supplier. Dean did seek to protect its investment, however, by requiring +a penalty provision in the supply agreement that obligated Fleming to repay a prorated portion of +the $2.5 million if Fleming breached its contractual obligations. + +On or about March 26, 2002, Dean provided Fl eming the requested side letter and up- +front payment, but only after Flem ing signed the supply agreement. Fleming used the side letter +to justify recognizing the entire $2.5 million as an offset to expenses in the first quarter of 2002, +which accounted for approximately $.03 of the $.52 per share Fleming reported as earnings for +the quarter. + +Fleming’s recognition of the entire $2.5 million pa yment as an offset to expenses in the +first quarter 2002 violated GAAP. Both parties understood that the payment was an inducement +to the supply agreement; that is, Dean would no t have made the payment but for receiving the +supply agreement and Fleming would not have awarded the supply agreement absent the +payment and side letter. This understanding is consistent w ith the express pena lty provision in +the agreement, which was intended to require Fleming to repay the $2.5 million on a prorated +basis if it breached the agreement. Fleming therefore was required to recognize the up-front +payment ratably over the agreement’s term. See Statement of Financia l Accounting Concepts +No. 5, ¶¶ 83-84; Staff Accounting Bulletin No. 101, Revenue Recognition in Financial +Statements, Question 5. + + + 4 + + + +Fleming’s recognition of the entir e up-front payment as an offset to expenses in the first +quarter of 2002 materially misstated Fleming’s ear nings for the quarter. Fleming included these +misstated earnings in its Form 10-Q for the first fiscal quarter ended April 20, 2002, and in +publicly disseminated press releas es. Fleming further incorporated the misstated first quarter +Form 10-Q into registration statements on Form s S-3, S-8 and S-4 file d during the summer of +2002. + +C. Conclusion + +As a result of the foregoing, the Commission finds that Dean and Robinson were a cause of +Fleming’s violations of Sections 17(a)(2) and 17(a)(3) of the Securities Act and Sections 13(a) and +13(b)(2)(A) of the Exchange Act and Rules 12b-20, 13a-13 and 13b2-1 thereunder. + + +IV. + + In view of the foregoing, the Commission deems it appropriate to impose the sanctions +agreed to in the Offers.3 + + Accordingly, IT IS HEREBY ORDERED, pursu ant to Section 8A of the Securities Act +and Section 21C of the Exchange Act, that Respondent Dean cease and desist from committing +or causing any violations and an y future violations of Section 17(a)(2) and 17(a)(3) of the +Securities Act and Sections 13( a) and 13(b)(2)(A) of the Ex change Act and Rules 12b-20, 13a- +13 and 13b2-1 thereunder, and that Respondent Robinson cease and desist from committing or +causing any violations and any future violations of Section 17(a)(2) and 17(a)(3) of the Securities +Act, and causing any violations and any future violations of S ections 13(a) and 13(b)(2)(A) of +the Exchange Act and Rules 12b-20, 13a-13 and 13b2-1 thereunder,. + + By the Commission. + + + J o n a t h a n G . K a t z + S e c r e t a r y + + +3 Dean has agreed to pay a $400,000 civil penalty and Robinson has agreed to pay a $50,000 civil penalty, in +connection with a parallel civil action. \ No newline at end of file diff --git a/raw/aaer/2004/AAER-2101.pdf b/raw/aaer/2004/AAER-2101.pdf new file mode 100644 index 0000000000000000000000000000000000000000..7d269b91965d54b958358cb14e8716d856d59412 Binary files /dev/null and b/raw/aaer/2004/AAER-2101.pdf differ diff --git a/raw/aaer/2004/AAER-2101.txt b/raw/aaer/2004/AAER-2101.txt new file mode 100644 index 0000000000000000000000000000000000000000..841f38cb5c87c7344a8948366f8cfd6d6a343eec --- /dev/null +++ b/raw/aaer/2004/AAER-2101.txt @@ -0,0 +1,179 @@ + + + UNITED STATES OF AMERICA + Before the + SECURITIES AND EXCHANGE COMMISSION + +SECURITIES ACT OF 1933 +Release No. 8485 / September 14, 2004 + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 50369 / September 14, 2004 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 2101 / September 14, 2004 + +ADMINISTRATIVE PROCEEDING +File No. 3-11656 + + + : O R D E R I N S T I T U T I N G +In the Matter of : PROCEEDINGS PURSUANT TO + : S E C T I O N 8 A O F T H E S E C U R I T I E S +Kemps LLC, f/k/a Marigold Foods, : ACT OF 1933 AND SECTION 21C OF +LLC, James Green and : THE SECURITIES EXCHANGE ACT +Christopher Thorpe, : OF 1934, MAKING FINDINGS AND + : IMPOSING A CEASE-AND-DESIST +Respondents. : ORDER + + +I. + + The Securities and Exchange Commission (“Commission”) deems it appropriate to +institute cease-and-desist proceedings pursuant to Section 8A of the Securities Act of 1933 (the +“Securities Act”) and Section 21C of the Securities Exchange Act of 1934 (the “Exchange Act”) +against Kemps LLC, f/k/a Mari gold Foods, LLC (“Marigold”) , James Green (“Green”) and +Christopher Thorpe (“Thorpe”) (collectively “Respondents”). + +II. + + In anticipation of the institution of thes e proceedings, Respondents have submitted an +Offer of Settlement (“Offer”) that the Commission has determined to accept. 1 Solely for the + +1 Simultaneously with this proceeding, the Co mmission has filed the following settled actions: In re Fleming +Companies, Inc., Exch. Act Rel. No. 34-50365; In re Dean Foods Company and John D. Robinson , Exch. Act Rel. +No. 34-50368; In re Digital Exchange Systems, Inc., Rosario Coniglio and Steven Schmidt , Exch. Act Rel. No. 34- +50366; In re John K. Adams , Exch. Act Rel. No. 34-50367; and In re Bruce Keith Jensen , Exch. Act Rel. No. 34- +50370. + 2 + +purpose of these proceedings or any other proceeding brought by or on behalf of the +Commission, or to which the Commission is a party, and w ithout admitting or denying the +findings contained herein, except that Respon dents admit the Commission’s jurisdiction over +them and over the subject matter of these procee dings, Respondents consent to the entry of this +Order Instituting Proceedings Purs uant to Section 8A of the S ecurities Act of 1933 and Section +21C of the Securities Exchange Act of 1934, Making Findings and Imposing a Cease-and-Desist +Order. + +III. + +On the basis of this Order and Respondents’ Offer, the Commission finds that:2 + +A. Respondents and Fleming Co mpanies, Inc. (“Fleming”) + + 1. Respondents + +Marigold is a Delaware limited liability company headquartered in Minneapolis that +produces and supplies dairy products. +James Green of Chanhassen, Minnesota, is Marigold’s President and Chief Executive +Officer. Christopher Thorpe of Eden Prairie, Minnesota, is Marigold’s Vice President of Financial +Services. + 2. Fleming + +Fleming is an Oklahoma corporation headquartered in Lewisville, Texas that currently is in +Chapter 11 bankruptcy. Before its April 2003 bankruptcy filing, Fleming’s stock traded on the +New York Stock Exchange. At one time, Flemin g was the nation’s largest grocery wholesaler, +with about 50 major distribution centers across the country, and a sizable retail grocery operator as +well, with more than 100 stores throughout th e Midwest and West. Fleming’s 2001 and 2002 +reported revenues were approximately $15.6 b illion and $15.5 billion, respectively. But its +earnings were much smaller, with only a $23.3 million profit and an $84 million loss, respectively, +in those years. +B. Facts + + 1. Fleming uses fraudulent “initiatives” to meet earnings expectations. + +During 2001 and the first half of 2002, Fl eming improperly executed a series of +transactions, called “initiatives,” to fabricate earnings to “bridge the gap” between actual operating +results and Wall Street expectations. In these initiatives, Fleming fraudulently structured otherwise +ordinary transactions in forms that, on paper, would justify and maximize an immediate increase in + + +2 The findings herein are made pursuant to Respondents’ Offer and are not binding on any other person or entity in +these or any other proceedings. + 3 +earnings. One type of initiative that Fleming used frequently during this period was accelerating +recognition of up-front payments received under forward-looking vendor agreements. On multiple +occasions, Fleming persuaded vendors to provide si de letters that described up-front payments - +which Fleming and the vendors plainly intended to secure future rights and services - as +compensating some form of past performance, such as a rebate or expense item. Fleming then +used these letters to justify booking the entir e up-front payment as an offset to expenses +immediately, rather than over time as generally accepted accounting principles (“GAAP”) +required. These illicit bookings enabled Fleming to meet securities analysts’ earnings +expectations. Marigold, Green and Thorpe did not know of Fleming’s initiatives. + 2. Respondents are a cause of Fleming’s inflated earnings in violation of GAAP. + + Marigold provided Fleming with such a side letter in the fourth quarter of 2001, in +connection with an agreement to supply ice cream to Fleming’s wholesale business for three years +beginning March 2002 (the “Su pply Agreement”). Marigold and Fleming negotiated the Supply +Agreement during 2001. Fleming was willing to grant the Supply Agreement in return for an +up-front payment of $2 million. Though it was extremely reluctant to make any such payment to +Fleming, Marigold eventually viewed it as the “an te” or necessary first step to retaining and +expanding the Fleming business. Indeed, Fle ming was Marigold’s largest customer. Marigold +would not have agreed to such payment but fo r Fleming’s willingness to continue the existing +business between the two companies and to consider entering into a new Supply Agreement that +would expand that business. + + While the parties were finalizing the Supp ly Agreements, Fleming, at the 11th hour of +negotiations, demanded a side letter describing th e payment as a “non-refundable” “rebate” for +“2001 purchases.” Fleming provided Marigold the precise language it needed in the letter. As +Green and Thorpe understood th e existing contracts between Marigold and Fleming, they knew +Marigold did not owe Fl eming any such rebate ; indeed, a $2 million rebate represented a +significant percentage of Marigold’s margin from its total 2001 ice cream sales to Fleming. +Marigold was hesitant to pay that amount as a “rebate” because doing so would require Marigold +to currently expense the entire amount. Marigold consulted with its accountants in this regard and +was advised that the entire amount, if characterized as a “rebate,” would have to be fully expensed +in 2001 on Marigold’s books. + +Hesitant to provide the side letter because of the impact on its own books, yet still desiring +to maintain and expand the lucrative Fleming business, Marigold acquiesced to Fleming’s demand. +As a condition to Marigold’s providing the letter, however, Marigold required a penalty provision +in the Supply Agreement that obligated Flem ing to pay $2 million, which included Marigold’s +other investment costs incurred in performing the contract, on a pro rata basis, if Fleming failed to +buy a certain volume of products during the agreem ent’s term. The penalty provision therefore +allowed Marigold to recoup the $2 million payment Marigold agreed was a “non-refundable” +“rebate” for “2001 purchases.” Sa tisfied that this penalty provision protected a large portion of +Marigold’s “ante,” Green signed and returned Fleming’s desired side letter. +Fleming accounting personnel accepted the letter and booked the entire payment as an +offset to expenses in the fourth quarter of 2001. However, under GAAP, Fleming was required to + 4 + +recognize the up-front payment ratably over the Supply Agreement’s term. See Statement of +Financial Accounting Concepts No. 5, ¶¶ 83-84; Staff Accountin g Bulletin No. 101, Revenue +Recognition in Financial Statements, Question 5. This improper recognition materially overstated +Fleming’s fourth quarter 2001 reported earnings, providing approximately $.02, or over 15%, of +the $.12 per share earnings Fleming reported for th at quarter. Fleming included these misstated +earnings in its 2001 Form 10-K, and in publicly disseminated press releases. Fleming further +incorporated the misstated Form 10-K into registration statements on Forms S-3, S-8 and S-4 filed +during the summer of 2002. +3. Marigold provides Fleming’s auditor with a confirmation letter. +As part of its audit of Fleming’s 2001 financial statements, Fleming’s external auditor sent +Marigold a letter requesting confirmation that the $2 million payment was a “rebate” for Fleming’s +“actual 2001 purchases,” was “not connected to any future commitments” and was “not +refundable.” Green signed and returned the letter without qualification. +C. Conclusion + +As a result of the foregoing, the Commission finds that Marigold, Green and Thorpe each +were a cause of Fleming’s violations of Sections 17(a)(2) and 17(a)(3) of the Securities Act and +Sections 13(a) and 13(b)(2)( A) of the Exchange Act an d Rules 12b-20, 13a-1 and 13b2-1 +thereunder. +IV. + + In view of the foregoing, the Commission deems it appropriate to impose the sanctions +agreed to in the Offer.3 + +Accordingly, IT IS HEREBY ORDERED, pursu ant to Section 8A of the Securities Act +and Section 21C of the Exchange Act, that Respondents Marigold, Green and Thorpe cease and +desist from committing or causing any violations and any future violations of Section 17(a)(2) +and 17(a)(3) of the Securities Ac t, and causing any violations and any future violations of +Sections 13(a) and 13(b)(2)( A) of the Exchange Act an d Rules 12b-20, 13a-1 and 13b2-1 +thereunder. + + By the Commission. + + J o n a t h a n G . K a t z + S e c r e t a r y + + + +3 Marigold has agreed to pay a $150,000 civil penalty, and Green and Thorpe have each agreed to pay $50,000 civil +penalties in connection with a parallel civil action. \ No newline at end of file diff --git a/raw/aaer/2004/AAER-2103.txt b/raw/aaer/2004/AAER-2103.txt new file mode 100644 index 0000000000000000000000000000000000000000..86e786fc6907c6d060d76dc709c7227c2119bdaa --- /dev/null +++ b/raw/aaer/2004/AAER-2103.txt @@ -0,0 +1,1511 @@ + + + + + + + + + + + + + + + + SEC.gov | McLeodUSA Incorporated + + + + + + + + !function(){var e=navigator.userAgent,a=document.documentElement,n=a.className;n=n.replace("no-js","js"),/iPad|iPhone|iPod/.test(e)&&!window.MSStream&&(n+=" ua-ios"),a.className=n}(); + {"path":{"baseUrl":"\/","pathPrefix":"","currentPath":"node\/366896","currentPathIsAdmin":false,"isFront":false,"currentLanguage":"en"},"pluralDelimiter":"\u0003","suppressDeprecationErrors":true,"gtag":{"tagId":"","consentMode":false,"otherIds":[],"events":[],"additionalConfigInfo":[]},"ajaxPageState":{"libraries":"eJxdT0GOwzAI_JBdn_oei2DkeINNZLC22devlaZS2wtiBhhmcKNUTPo97jxyaXEH3GJpiZrFhQW38A4cMqgeYQGlV19JFTKpQ-kUmvQKXP7I0cO4tC2kPnbg2wVdFslM0SCHPMs3vsEPPD7J6hgOGdPCKJyoRxxqUuePHjLLAuzVjimenRJGSLW08NoBK9LUn6SHlrytVOlcpJShB63QLSpBx_WkOzHNePol4fRQo_qMPvQ36ZXsAmd99lMNr2t_GUR9n60EyX9a_wePd5ns","theme":"uswds_sec","theme_token":null},"ajaxTrustedUrl":[],"gtm":{"tagId":null,"settings":{"data_layer":"dataLayer","include_classes":false,"allowlist_classes":"","blocklist_classes":"","include_environment":false,"environment_id":"","environment_token":""},"tagIds":["GTM-TD3BKV"]},"data":{"extlink":{"extTarget":false,"extTargetAppendNewWindowDisplay":true,"extTargetAppendNewWindowLabel":"(opens in a new window)","extTargetNoOverride":false,"extNofollow":false,"extTitleNoOverride":false,"extNoreferrer":false,"extFollowNoOverride":false,"extClass":"0","extLabel":"(link is external)","extImgClass":false,"extSubdomains":true,"extExclude":".*\\.gov|http:\/\/www.xbrl.org\/utr\/2013-05-17\/utr.xml|http:\/\/www.xbrl.org\/dtr\/type\/numeric-2009-12-16.xsd|http:\/\/www.xbrl.org\/dtr\/type\/nonNumeric-2009-12-16.xsd|https:\/\/secir.secure.force.com\/ombudsman\/OMMSForm","extInclude":"","extCssExclude":".data-exempt","extCssInclude":"","extCssExplicit":"","extAlert":true,"extAlertText":"You are now leaving the SEC Website. 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Individuals (SALI) + + + + + Enforcement Data Delivery Standards + + + + + Small Businesses + + + + + Appellate Briefs + + + + + Amicus / Friend of the Court Briefs + + + + + + + + + + + + + + + + + + + + + + + + + + Enforcement & Litigation + + + + + + + Litigation Releases + + + + + Administrative Proceedings + + + + + + + Information for Respondents in Administrative Proceedings  + + + + + Open Litigated Administrative Proceedings + + + + + Closed Litigated Administrative Proceedings + + + + + Commission Opinions and Adjudicatory Orders + + + + + Delinquent Filings + + + + + Stop Orders + + + + + + + + Administrative Law Judge Orders and Initial Decisions + + + + + Trading Suspensions + + + + + Distributions to Harmed Investors + + + + + Receiverships + + + + + Electronic Filings in Administrative Proceedings (eFAP) + + + + + Rules of Practice + + + + + Applications for Reentry + + + + + Reports of Investigations + + + + + Whistleblower Program + + + + + Public Alert: Unregistered Soliciting Entities (PAUSE) + + + + + SEC Action Lookup - Individuals (SALI) + + + + + Enforcement Data Delivery Standards + + + + + Small Businesses + + + + + Appellate Briefs + + + + + Amicus / Friend of the Court Briefs + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + Home + + + Enforcement and Litigation + + + Administrative Proceedings + + + McLeodUSA Incorporated + + + + + + + + + + + + McLeodUSA Incorporated + + + + + + + + + + + + + + + + + + + + + SECURITIES EXCHANGE ACT OF 1934 +Release No. 50385 / September 15, 2004 + + ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 2103 / September 15, 2004 + + ADMINISTRATIVE PROCEEDING +File No. 3-11662 + + + In the Matter of + McLeodUSA Incorporated, + Respondent. + + : : : : : : : : : : + + ORDER INSTITUTING CEASE-AND-DESIST PROCEEDINGS, MAKING FINDINGS, AND IMPOSING A CEASE-AND-DESIST ORDER PURSUANT TO SECTION 21C OF THE SECURITIES EXCHANGE ACT OF 1934 I. + + The Securities and Exchange Commission ("Commission") deems it appropriate that cease-and-desist proceedings be, and hereby are, instituted pursuant to 21C of the Securities Exchange Act of 1934 ("Exchange Act") against McLeodUSA Incorporated ("McLeod" or "Respondent"). + + II. + + In anticipation of the institution of these proceedings, Respondent has submitted an Offer of Settlement (the "Offer") which the Commission has determined to accept. Solely for the purpose of these proceedings and any other proceedings brought by or on behalf of the Commission, or to which the Commission is a party, and without admitting or denying the findings herein, except as to the Commission's jurisdiction over it and the subject matter of these proceedings, which are admitted, Respondent consents to the entry of this Order Instituting Cease-and-Desist Proceedings, Making Findings, and Imposing a Cease-and-Desist Order Pursuant to Section 21C of the Securities Exchange Act of 1934 ("Order"), as set forth below. + + + III. + + On the basis of this Order and Respondent's Offer, the Commission finds that: + + Respondent + + 1. McLeod, organized in 1993, is a Delaware corporation with its principal office in Cedar Rapids, Iowa. McLeod's Class A Common Stock is registered under Section 12(g) of the Exchange Act. McLeod files periodic and other reports with the Commission pursuant to Section 13(a) of the Exchange Act. Until it was delisted in December 2001, McLeod's stock traded on the NASDAQ National Markets System under the symbol MCLD. On January 31, 2002, McLeod commenced Chapter 11 bankruptcy proceedings. Its Plan of Reorganization was confirmed on April 5, 2002 and became effective April 16, 2002. McLeod implemented "fresh-start" accounting on April 16, 2002. The reorganized McLeod's stock trades on the NASDAQ SmallCap Market under the symbol MCLD. + + Summary + + 2. This case mainly involves McLeod's failure to disclose the likely non-recurring nature of revenue associated with sales of certain indefeasible rights of use ("IRUs") and, in particular, the importance of that revenue to earnings before interest, taxes, depreciation and amortization ("EBITDA"). During the relevant period, McLeod's primary business was providing integrated communications services to its customers, and McLeod also sold IRUs. An IRU is a long-term lease in which one company transfers rights of use to certain telecommunications network assets, typically fiber optic cable, to another company at a fixed price for an extended period of time. In 2001, IRU sales generated approximately 5.3% of McLeod's revenue and 30.8% of its EBITDA. McLeod provided EBITDA as an important non-GAAP performance measure in its publicly disseminated documents. McLeod did not generate a material amount of revenue or income from IRU sales before 2001 and, at the time it filed its third quarter 2001 Form 10-Q and 2001 Form 10-K, McLeod did not project significant IRU sales for 2002. However, in its third quarter and year ended December 31, 2001 periodic reports, McLeod failed to disclose the likely non-recurring nature of IRU sales and their proportionate contribution to the company's 2001 EBITDA. McLeod also erroneously recognized income on two IRU sales and made other minor accounting errors during 2001. The errors were not material to the financial statements individually or in the aggregate, but they did, however, impact EBITDA. + + Background + + 3. McLeod is a telecommunications company. McLeod provides integrated communications services to its customers in 25 states by packaging local, long distance, data and voice mail services on a single bill. McLeod provides its local and long distance services by using its own facilities and by leasing network capacity from other companies. Prior to 2002, McLeod planned to develop a nationwide network for its integrated communications services. As McLeod expanded its network, it obtained capacity by acquiring other companies and by installing extra fibers in routes it constructed for its own use. + 4. McLeod sold some of its excess network capacity to other companies in the form of IRUs. McLeod's auditors told McLeod that income from the sale of IRUs may be recognized at the time of sale (a "sales-type" lease) or over the term of the lease (an "operating" lease). McLeod relied on this guidance and on an industry White Paper drafted by its auditor when classifying its IRUs as sales-type leases. Prior to 2001, McLeod did not generate a material amount of revenue or income from IRU sales. + 5. In 2001, McLeod generated significant revenue from IRU sales, totaling 5.3% of McLeod's total revenue of $1.8 billion. McLeod's IRU sales, in turn, generated a significant amount of McLeod's 2001 earnings. 1 McLeod has not generated a similar amount of its revenue or income from IRU sales since 2001. + + McLeod Failed to Adequately Disclose its 2001 IRU Revenue and Income + + 6. McLeod's 2001 IRU sales revenue and income were likely non-recurring in nature. Consistent with the industry White Paper, McLeod categorized most of its IRUs as sales-type leases and recognized income on those IRUs at the time of sale rather than over the term of the lease. Income from individual sales-type leases is non-recurring. As part of its restructuring process in late 2001, McLeod developed a forecast that included lower levels of revenue or income from IRU sales (sales-type or operating) in future years. In October 2001, McLeod announced that it was abandoning its expansion plans, divesting non-core businesses and taking a significant restructuring charge. By that time, the telecommunications market had rapidly declined, resulting in a glut of excess capacity which made it difficult to predict future IRU sales activity. In its 2002 budget, prepared prior to the time McLeodUSA issued its 2001 Form 10-K, McLeodUSA projected that IRUs would only be 9.1% of total EBITDA in 2002 (compared to 30.8% in 2001 and 1.2% in 2000). + 7. McLeod's IRU sales had a higher gross profit margin than the rest of the company's core integrated telecommunications services business. Although McLeod did not treat IRU sales as a separate business segment, McLeod's IRU sales accounted for a larger share of the company's earnings than their share of the company's revenue. Without a reduction for selling, general and administrative expenses, which the company did not allocate to IRU sales, McLeod's IRU sales generated 30.8% of the company's 2001 EBITDA. + 8. McLeod did not disclose the likely non-recurring nature of its IRU revenue and income in its third quarter and year ended December 31, 2001 periodic reports. In its year ended December 31, 2001 10-K, filed on April 19, 2002, the company stated that its sales of network facilities through sales contracts and IRUs that qualified as sales-type leases represented less than 6% and 1% of total revenues for 2001 and 2000 respectively. McLeod made no disclosure regarding the significance of IRU revenues in the third quarter report. McLeod also briefly described its IRU revenue recognition policy as follows: + + revenue from indefeasible rights to use fiber optic telecommunications network facilities is recognized over the term of the related lease unless the lease qualifies as a sales-type lease, on which revenue is recognized at the time the sale criteria in SFAS No. 66, "Accounting for Sales of Real Estate" are met. These criteria include requirements that (1) specific fiber be identified and accepted by the customer, (2) at least 25% of the sale proceeds have been received and (3) all additional services provided by us are separable and the related revenue is recognized as those services are performed. + +McLeod, however, failed to mention that it classified most of its IRUs as sales-type leases and that it did not expect to generate a significant amount of IRU sales revenue or income in 2002. + + 9. McLeod also did not disclose the likely non-recurring nature of its IRU income in its 2001 earnings releases and conference calls. In its first quarter 2001 earnings release, McLeod stated that it had extended its "unbroken string of EBITDA positive quarters to 14" and exceeded its EBITDA forecast. In its second quarter 2001 earnings release, McLeod stated that its EBITDA, excluding one-time charges, had increased to $34.2 million, compared to $1.1 million for the second quarter of 2000 and that it had posted positive EBITDA for the 15th consecutive quarter. In its third quarter 2001 earnings release, McLeod stated that its EBITDA, excluding one-time non-cash charges, had increased 70% to $25.7 million from $15.1 million in the third quarter of 2000. In its fourth quarter and year 2001 earnings release, McLeod stated that its EBITDA, excluding restructuring and one-time charges, had increased 111% to $128.3 million from $60.8 million for the year 2000. McLeod did not indicate in its 2001 press releases and conference calls that IRU income contributed to its increasing EBITDA or that its IRU income was likely non-recurring. McLeod did mention other one-time gains, such as from sales of assets. McLeod also repeatedly disclosed that it had excluded certain one-time charges from its EBITDA calculations . + 10. McLeod's 2001 Form 10-K, its third quarter report for 2001 and the accompanying earnings releases failed to disclose that its IRU sales revenue and income were likely non-recurring. McLeod did not disclose that it had recognized revenue (and income) at the time of sale on the majority of its IRUs and that the revenue (and income) on those sales were likely non-recurring in nature. McLeod also did not disclose that it was projecting lower IRU sales for 2002. + 11. McLeod's 2001 Form 10-K, its third quarter report for 2001 and the accompanying earnings releases also failed to adequately communicate the effect of IRU sales on McLeod's 2001 operating results. McLeod recorded a higher gross profit margin on its IRU sales than on its core integrated telecommunications services. As a result, IRU sales constituted a higher percentage of McLeod's earnings than its revenues. Despite McLeod's reliance on EBITDA in its earnings releases and conference calls, McLeod did not break out its income from IRU sales in its 2001 earnings releases, conference calls or periodic reports. As a result, it was not possible to accurately measure the performance of the company's business. + + McLeod Made Other Accounting Errors + + 12. During 2001, McLeod erroneously recognized income on two significant IRU sales. On the first sale, McLeod erroneously included certain costs in calculating its income and, therefore, recognized $3.4 million more income than permitted by GAAP. On the second sale, McLeod erroneously determined that an agreement met the sales-type lease requirements, and therefore recognized $1.8 million of accelerated income in 2001. + 13. McLeod also made certain timing, contract interpretation and cost errors when it recognized income in 2001 for several less significant agreements. For example, in each quarter of 2001, McLeod erroneously recognized revenue and costs on several small IRU agreements, sales of fibers and sales of ducts, in some cases prematurely and in some cases belatedly. The aggregate effect of all errors on less significant agreements was an overstatement of 2001 EBITDA and an understatement of net loss of approximately $1.9 million. + 14. As a result of the errors referred to above, in the aggregate, McLeod overstated its revenues by approximately $11.2 million and understated its net loss and overstated its EBITDA, which was adjusted by certain one-time charges, by approximately $7.1 million. + + Violations of the Exchange Act + + 15. Section 13(a) of the Exchange Act and Rules 12b-20, 13a-1 and 13a-13 thereunder require issuers with securities registered under Section 12 of the Exchange Act to file quarterly and annual reports with the Commission and to keep this information current. The obligation to file such reports embodies the requirement that they be true and correct. See, e.g., SEC v. Savoy Indus., Inc., 587 F.2d 1149, 1165 (D.C. Cir. 1978). +16. As a result of the conduct described above, McLeod committed violations of Section 13(a) of the Exchange Act and Rules 12b-20, 13a-1 and 13a-13 thereunder by failing to disclose that its IRU sales revenue and income were likely non-recurring in nature and by failing to adequately communicate the significance of IRU sales to its third quarter and year-end 2001 EBITDA, a key measure it used during 2001 to describe its financial performance. + 17. Section 13(b)(2)(A) of the Exchange Act requires Section 12 registrants to make and keep books, records, and accounts that accurately and fairly reflect the issuer's transactions and dispositions of their assets. +18. As a result of the conduct described above, McLeod committed violations of Section 13(b)(2)(A) of the Exchange Act because its books and records failed to accurately and fairly reflect its revenues and income. McLeod's books and records inaccurately reflected revenue, expenses and income on two significant IRU agreements and a number of the other small IRU agreements, sales of fibers and sales of ducts. Since McLeod classified the IRU transactions as sales-type leases, these errors affected the timing of income recognition. + + IV. + + In view of the foregoing, the Commission deems it appropriate to impose the sanctions specified in Respondent's Offer. + + Accordingly, it is hereby ORDERED that: + + Respondent McLeod cease and desist from committing or causing any violations and any future violations of Sections 13(a), and 13(b)(2)(A) of the Exchange Act and Rules 12b-20, 13a-1 and 13a-13 promulgated thereunder. + + By the Commission. + + +Jonathan G. Katz +Secretary + + Endnotes + 1    Approximately half of McLeod's IRU sales revenue and income came from IRUs that McLeod obtained in its acquisition of another company in December 2000. Although the predecessor company had contracted to sell these IRUs, the closing of these sales did not occur until 2001, after McLeod acquired the company. + + + +  + + + + + + + + + + + + + + + + + + + + + + + + + Return to top + + + + + SEC homepage + + + + + + + + + + + + + + About the SEC + + + + + + Budget & Performance + + + Careers + + + Commission Votes + + + Contact + + + Contracts + + + + + + + + Transparency + + + + + + Accessibility & Disability + + + Super Intelligence + + + FOIA + + + Inspector General + + + No FEAR Act Data + + + Ombuds + + + SEC Excess Personal Property Guidance + + + + + + + + Websites + + + + + + Investor.gov + + + Related Sites + + + USA.gov + + + + + + + + Site Information + + + + + + Plain Writing + + + Privacy & Security + + + Site Map + + + + + + + + + + + + + + + + + + Stay connected. 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Individuals (SALI) + + + + + Enforcement Data Delivery Standards + + + + + Small Businesses + + + + + Appellate Briefs + + + + + Amicus / Friend of the Court Briefs + + + + + + + + + + + + + + + + + + + + + + + + + + Enforcement & Litigation + + + + + + + Litigation Releases + + + + + Administrative Proceedings + + + + + Administrative Law Judge Orders and Initial Decisions + + + + + Trading Suspensions + + + + + Distributions to Harmed Investors + + + + + Receiverships + + + + + Electronic Filings in Administrative Proceedings (eFAP) + + + + + Rules of Practice + + + + + Applications for Reentry + + + + + Reports of Investigations + + + + + Whistleblower Program + + + + + Public Alert: Unregistered Soliciting Entities (PAUSE) + + + + + SEC Action Lookup - Individuals (SALI) + + + + + Enforcement Data Delivery Standards + + + + + Small Businesses + + + + + Appellate Briefs + + + + + Amicus / Friend of the Court Briefs + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + Home + + + Enforcement and Litigation + + + Litigation Releases + + + Ed Johnson and Merl Holdings Inc.com + + + + + + + + + + + + Ed Johnson and Merl Holdings Inc.com + + + + + + + + + + + + + + + + + + + + + On August 27, 2004, the Honorable Garrett E. Brown, Jr. of the U.S. District Court for the District of New Jersey entered a final judgment of permanent injunction ("Final Judgment") against Ed Johnson, the former Chief Executive Officer, Chairman of the Board, and President of MERL Holdings Inc.com ("MERL"), in an accounting fraud, insider trading and false filing case. The Final Judgment permanently enjoins Johnson from violating the anti-fraud provisions of the federal securities laws, permanently bars Johnson from acting as an officer or director of any public company, permanently bars Johnson from participating in any offering of penny stock, orders Johnson to pay disgorgement in the amount of $42,262, plus prejudgment and postjudgment interest to be determined, orders Johnson to pay a civil insider trading penalty of $42,262, plus postjudgment interest to be determined, and orders Johnson to pay a civil monetary penalty in the amount of $120,000, plus postjudgment interest to be determined. + + On March 8, 2004, following a two-week trial, a federal jury in Trenton, New Jersey found for the Commission on all counts of its complaint against Johnson. In its complaint, the Commission alleged that Johnson inflated the assets and financial results of MERL in two registration statements filed by the company with the Commission and disseminated to the public. The jury found that Johnson violated Section 17(a) of the Securities Act of 1933, Section 10(b) of the Securities Exchange Act of 1934, and Rule 10b-5 promulgated thereunder, in connection with a multi-faceted fraud designed to raise $25 million in the public securities markets. + + Related Litigation Releases: + + No. 18618 , March 10, 2004   + + No. 18085 , April 14, 2003   + + No. 17846 , November 19, 2002 +  + + + + + + + + + + + + + + + + + + + + + + + + + Return to top + + + + + SEC homepage + + + + + + + + + + + + + + About the SEC + + + + + + Budget & Performance + + + Careers + + + Commission Votes + + + Contact + + + Contracts + + + + + + + + Transparency + + + + + + Accessibility & Disability + + + Super Intelligence + + + FOIA + + + Inspector General + + + No FEAR Act Data + + + Ombuds + + + SEC Excess Personal Property Guidance + + + + + + + + Websites + + + + + + Investor.gov + + + Related Sites + + + USA.gov + + + + + + + + Site Information + + + + + + Plain Writing + + + Privacy & Security + + + Site Map + + + + + + + + + + + + + + + + + + Stay connected. 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Bisschops; Alex De Ridder; Pearlrose Holdings International S.A.; Emerald Sea Marine, Inc.; Scott Investments S.A.; BDO International (Cyprus); Minas Ioannou; Christakis Ioannou (Defendants); and Scandinavian Car Carriers A/S; Pandora Shipping, S.A.; Sergui, Ltd.; Westbound Development Corp.; Maverick Commercial, Inc.; and DCC Limited (Relief Defendants) + + + + + + + + !function(){var e=navigator.userAgent,a=document.documentElement,n=a.className;n=n.replace("no-js","js"),/iPad|iPhone|iPod/.test(e)&&!window.MSStream&&(n+=" ua-ios"),a.className=n}(); + {"path":{"baseUrl":"\/","pathPrefix":"","currentPath":"node\/494996","currentPathIsAdmin":false,"isFront":false,"currentLanguage":"en"},"pluralDelimiter":"\u0003","suppressDeprecationErrors":true,"gtag":{"tagId":"","consentMode":false,"otherIds":[],"events":[],"additionalConfigInfo":[]},"ajaxPageState":{"libraries":"eJxdT0GOwzAI_JBdn_oei2DkeINNZLC22devlaZS2wtiBhhmcKNUTPo97jxyaXEH3GJpiZrFhQW38A4cMqgeYQGlV19JFTKpQ-kUmvQKXP7I0cO4tC2kPnbg2wVdFslM0SCHPMs3vsEPPD7J6hgOGdPCKJyoRxxqUuePHjLLAuzVjimenRJGSLW08NoBK9LUn6SHlrytVOlcpJShB63QLSpBx_WkOzHNePol4fRQo_qMPvQ36ZXsAmd99lMNr2t_GUR9n60EyX9a_wePd5ns","theme":"uswds_sec","theme_token":null},"ajaxTrustedUrl":[],"gtm":{"tagId":null,"settings":{"data_layer":"dataLayer","include_classes":false,"allowlist_classes":"","blocklist_classes":"","include_environment":false,"environment_id":"","environment_token":""},"tagIds":["GTM-TD3BKV"]},"data":{"extlink":{"extTarget":false,"extTargetAppendNewWindowDisplay":true,"extTargetAppendNewWindowLabel":"(opens in a new window)","extTargetNoOverride":false,"extNofollow":false,"extTitleNoOverride":false,"extNoreferrer":false,"extFollowNoOverride":false,"extClass":"0","extLabel":"(link is external)","extImgClass":false,"extSubdomains":true,"extExclude":".*\\.gov|http:\/\/www.xbrl.org\/utr\/2013-05-17\/utr.xml|http:\/\/www.xbrl.org\/dtr\/type\/numeric-2009-12-16.xsd|http:\/\/www.xbrl.org\/dtr\/type\/nonNumeric-2009-12-16.xsd|https:\/\/secir.secure.force.com\/ombudsman\/OMMSForm","extInclude":"","extCssExclude":".data-exempt","extCssInclude":"","extCssExplicit":"","extAlert":true,"extAlertText":"You are now leaving the SEC Website. 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Bisschops; Alex De Ridder; Pearlrose Holdings International S.A.; Emerald Sea Marine, Inc.; Scott Investments S.A.; BDO International (Cyprus); Minas Ioannou; Christakis Ioannou (Defendants); and Scandinavian Car Carriers A/S; Pandora Shipping, S.A.; Sergui, Ltd.; Westbound Development Corp.; Maverick Commercial, Inc.; and DCC Limited (Relief Defendants) + + + + + + + + + + + + A.C.L.N., Ltd.; Abderrazak "ALDO" Labiad; Joseph J.H. Bisschops; Alex De Ridder; Pearlrose Holdings International S.A.; Emerald Sea Marine, Inc.; Scott Investments S.A.; BDO International (Cyprus); Minas Ioannou; Christakis Ioannou (Defendants); and Scandinavian Car Carriers A/S; Pandora Shipping, S.A.; Sergui, Ltd.; Westbound Development Corp.; Maverick Commercial, Inc.; and DCC Limited (Relief Defendants) + + + + + + + + + + + + + + + + + + + + + On September 13, 2004, the U.S. District Court for the Southern District of New York signed final judgments by consent against Defendants A.C.L.N. Ltd. and its CEO Abderrazak "Aldo" Labiad and Relief Defendant Scandinavian Car Carriers requiring disgorgement of the balance of certain accounts frozen in Europe. The balance of these accounts totals approximately $27.6 million, money which the Commission intends to recommend be distributed to defrauded investors. A.C.L.N. is a Cyprus corporation headquartered in Antwerp, Belgium, which has ceased doing business. A.C.L.N. formerly claimed to ship used vehicles to North and West Africa and to sell new cars in that region. Following the SEC's imposition of a trading suspension in March 2002, the New York Stock Exchange de-listed A.C.L.N.'s securities, the first such action by the Exchange since 1975. The SEC alleged, in its complaint filed October 8, 2002, that from 1998 through the third quarter of 2001, A.C.L.N. operated an elaborate financial fraud resulting in losses totaling millions of dollars to investors in the U.S. and abroad. + + Without admitting or denying the allegations of the Commission's complaint, A.C.L.N., Labiad and Scandinavian Car Carriers consented to the entry of an order that they disgorge the balance of certain frozen bank accounts in Europe they controlled. The Court ordered that Labiad disgorge the equivalent of $332,222 (USD) held in bank accounts in Monaco; that A.C.L.N. disgorge about $3.3 million that the Commission successfully repatriated from the Netherlands to the United States in 2003; and that Scandinavian Car Carriers disgorge about $24 million in its bank account in Denmark. + + Labiad also consented to an order permanently barring him from acting as an officer or director of any public company whose securities are registered with the Commission and permanently enjoining him from further violations of the registration, anti-fraud, internal controls, and beneficial ownership provisions of the federal securities laws, Sections 5 and 17(a) of the Securities Act of 1933 ("Securities Act") and Sections 10(b), 13(b)(5) and 13(d) of the Securities Exchange Act of 1934 ("Exchange Act") and Exchange Act Rules 10b-5, 13b2-1, 13d-1 and 13d-2, and from aiding and abetting violations of the periodic reporting, books and records, and internal control provisions of the Exchange Act, Sections 13(a), 13(b)(2)(A) and 13(b)(2)(B) and Exchange Act Rules 12b-20, 13a-1 and 13a-16. + + A.C.L.N. consented to the entry of an order permanently enjoining it from violating the anti-fraud, periodic reporting, books and records, and internal controls provisions of the federal securities laws, Section 17(a) of the Securities Act and Sections 10(b), 13(a), 13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act and Exchange Act Rules 10b-5, 12b-20, 13a-1 and 13a-16. A.C.L.N. also consented to the entry of a Commission order revoking the registration of its securities. + + The Commission earlier settled its case against A.C.L.N.'s auditor, BDO International (Cyprus) ("BDO Cyprus"). Without admitting or denying the allegations of the Commission's complaint, BDO Cyprus consented to the entry of an order permanently enjoining it against any future violations of the anti-fraud provisions of the Exchange Act, and requiring it to disgorge $62,196.71 in compensation it received for performing its audit of ACLN. The Commission permanently barred BDO Cyprus and its two principals from appearing or practicing before the Commission as accountants. + + This litigation continues against other Defendants named in the complaint. + + See related Litigation Release No. 17776 (October 8, 2002) and Administrative Proceedings Release No. 34-46880 (November 21, 2002). + + + + +  + + + + + + + + + + + + + + + + + + + + + + + + + Return to top + + + + + SEC homepage + + + + + + + + + + + + + + About the SEC + + + + + + Budget & Performance + + + Careers + + + Commission Votes + + + Contact + + + Contracts + + + + + + + + Transparency + + + + + + Accessibility & Disability + + + Super Intelligence + + + FOIA + + + Inspector General + + + No FEAR Act Data + + + Ombuds + + + SEC Excess Personal Property Guidance + + + + + + + + Websites + + + + + + Investor.gov + + + Related Sites + + + USA.gov + + + + + + + + Site Information + + + + + + Plain Writing + + + Privacy & Security + + + Site Map + + + + + + + + + + + + + + + + + + Stay connected. 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Individuals (SALI) + + + + + Enforcement Data Delivery Standards + + + + + Small Businesses + + + + + Appellate Briefs + + + + + Amicus / Friend of the Court Briefs + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + Home + + + Enforcement and Litigation + + + Administrative Proceedings + + + Daniel S. Lezak + + + + + + + + + + + + Daniel S. Lezak + + + + + + + + + + + + + + + + + + + + + SECURITIES EXCHANGE ACT OF 1934 +Release No. 50424 / September 22, 2004 + + ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 2107 / September 22, 2004 + + ADMINISTRATIVE PROCEEDING +File No. 3-11675 + + In the Matter of + DANIEL S. LEZAK, + Respondent. + + : : : : : : : : : : + + ORDER INSTITUTING PUBLIC ADMINISTRATIVE PROCEEDINGS PURSUANT TO RULE 102(e)(3) OF THE COMMISSION'S RULES OF PRACTICE I. + + The Securities and Exchange Commission ("Commission") deems it appropriate and in the public interest to issue an order temporarily suspending Daniel S. Lezak pursuant to Rule 102(e)(3) of the Commission's Rules of Practice against Daniel S. Lezak ("Lezak" or "Respondent"). + + II. + + The Commission's public files disclose that: + + A. Respondent, age 70, is a certified public accountant, but has allowed his license to lapse. Respondent was the Chairman, President and Chief Executive Officer of Madera International, Inc. ("Madera") from its inception in February 1994 until March 1996. Lezak remained a director of Madera until May 1996 and thereafter was employed by Madera as a consultant. In his role as a consultant, Lezak provided accounting services to Madera until December 1999. Respondent is a resident of Nevada. + + B. Madera International, Inc., now defunct, was a Nevada corporation headquartered in Coral Gables, Florida. Its common stock was registered with the Commission pursuant to Section 12(g) of the Securities Exchange Act of 1934 ("Exchange Act"). On October 22, 2001, the registration of Madera's common stock was revoked pursuant to Section 12(j) of the Exchange Act. + + III. + + The Commission makes the following findings: + A. On September 19, 2001, the Commission brought an action in federal district court against Lezak and others alleging that he violated Section 10(b) of the Exchange Act and Rule 10b-5 thereunder; Section 13(b)(5) of the Exchange Act and Rules 13a-13, 13b2-1 and 13b2-2 thereunder; Section 13(a) of the Exchange Act and Rules 12b-20 and 13a-1 thereunder; and Sections 13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act. SEC v. Madera International, Inc., Ramiro M. Fernandez-Moris and Daniel S. Lezak, U.S. District Court for the District of Columbia, Civil Action No. 01-1985 (JR). + + B. On September 1, 2004, U.S. District Court Judge James Robertson granted the SEC's partial motion for summary judgment against Lezak and entered final judgment against Lezak permanently enjoining him from, directly or indirectly, violating Section 10(b) of the Exchange Act and Rule 10b-5 thereunder; Section 13(b)(5) of the Exchange Act and Rules 13b2-1 and 13b2-2 thereunder; Section 13(a) of the Exchange Act and Rules 12b-20 and 13a-1 thereunder; and Sections 13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act. + + C. The Court found, among other things, that Lezak "knowingly falsified financial statements filed with the SEC. . . ." The Court also determined that "Lezak knowingly failed to implement a system of internal accounting controls at Madera to prevent the misuse of its funds." The Court also found that Lezak violated Exchange Act Rules 13b2-1 and 13b2-2 as a result of signing a management representation letter in connection with the March 31,1995 audit of Madera's financial statements which stated that, to the best of Lezak's knowledge and belief, "the company has satisfactory title to all owned assets including all assets shown on the financial statements . . . ." + + IV. + + Based on the foregoing, the Commission finds that Lezak has been enjoined and has been found to have violated provisions of the federal securities laws within the meaning of Rule 102(e)(3) of the Commission's Rules of Practice. In view of this finding the Commission deems it necessary and appropriate and in the public interest that Lezak be temporarily suspended from appearing or practicing before the Commission. + + Accordingly, it is HEREBY ORDERED, effective immediately, that Lezak be and is hereby temporarily suspended from appearing or practicing before the Commission. + + It is FURTHER ORDERED that Lezak may within thirty days after service of this Order file a petition with the Commission to lift the temporary suspension. If no petition is received by the Commission within thirty days after service of the Order, the suspension shall become permanent pursuant to Rule l02(e)(3)(ii). + + If a petition is received within thirty days after service of this Order, the Commission shall either lift the temporary suspension, or set the matter down for a hearing at a time and place to be designated by the Commission, or both. If a hearing is ordered, following the hearing, the Commission may lift the suspension, censure the petitioner, or disqualify the petitioner from appearing or practicing before the Commission for a period of time or permanently pursuant to Rule 102(e)(3)(iii). + + This Order shall be served upon Lezak personally or by certified mail at his last known address. + + By the Commission. + + +Jonathan G. Katz +Secretary + + +  + + + + + + + + + + + + + + + + + + + + + + + + + Return to top + + + + + SEC homepage + + + + + + + + + + + + + + About the SEC + + + + + + Budget & Performance + + + Careers + + + Commission Votes + + + Contact + + + Contracts + + + + + + + + Transparency + + + + + + Accessibility & Disability + + + Super Intelligence + + + FOIA + + + Inspector General + + + No FEAR Act Data + + + Ombuds + + + SEC Excess Personal Property Guidance + + + + + + + + Websites + + + + + + Investor.gov + + + Related Sites + + + USA.gov + + + + + + + + Site Information + + + + + + Plain Writing + + + Privacy & Security + + + Site Map + + + + + + + + + + + + + + + + + + Stay connected. Sign up for email updates. + + + + + + Your email address + + Sign Up + + + + + + + + + + + + X + + + + + + + + Facebook + + + + + + + + Instagram + + + + + + + + RSS + + + + + + + + YouTube + + + + + + + + Email Updates + + + + + + + + + + + + + + + + + + + diff --git a/raw/aaer/2004/AAER-2108.txt b/raw/aaer/2004/AAER-2108.txt new file mode 100644 index 0000000000000000000000000000000000000000..8645c17d0361d22ed7332b7df65d18661a11c63a --- /dev/null +++ b/raw/aaer/2004/AAER-2108.txt @@ -0,0 +1,1484 @@ + + + + + + + + + + + + + + + + SEC.gov | John E. 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Isselmann, Jr. + + + + + + + + + + + + John E. Isselmann, Jr. + + + + + + + + + + + + + + + + + + + + + Securities Exchange Act of 1934 +Release No. 50428 / September 23, 2004 + + ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 2108 / September 23, 2004 + + Admin. Proc. File No. 3-11678 + + In the Matter of + JOHN E. ISSELMANN, JR., + Respondent. + + : : : : : : : : : : + ORDER INSTITUTING CEASE-AND-DESIST PROCEEDINGS, MAKING FINDINGS, AND IMPOSING A CEASE-AND-DESIST ORDER PURSUANT TO SECTION 21C OF THE SECURITIES EXCHANGE ACT OF 1934 + I. + The Securities and Exchange Commission ("Commission") deems it appropriate that cease-and-desist proceedings be, and hereby are, instituted pursuant to Section 21C of the Securities Exchange Act of 1934 ("Exchange Act"), against John E. Isselmann, Jr. ("Respondent" or "Isselmann"). + II. + In anticipation of the institution of these proceedings, Respondent has submitted an Offer of Settlement (the "Offer") which the Commission has determined to accept. Solely for the purpose of these proceedings and any other proceedings brought by or on behalf of the Commission, or to which the Commission is a party, and without admitting or denying the findings herein, except as to the Commission's jurisdiction over him and the subject matter of these proceedings, which are admitted, Respondent consents to the entry of this Order Instituting Cease-and-Desist Proceedings, Making Findings, and Imposing a Cease-and-Desist Order Pursuant to Section 21C of the Securities Exchange Act of 1934 ("Order"), as set forth below. + III. + On the basis of this Order and Respondent's Offer, the Commission finds 1 that: + A. Summary + Isselmann, the former General Counsel of Electro Scientific Industries, Inc. ("ESI" or "Company"), failed to provide important information to ESI's Audit Committee, Board of Directors, and auditors regarding a significant accounting transaction that enabled ESI to report a profit rather than a loss. Isselmann's failure to fulfill his gatekeeper role was a cause of the Company reporting materially false financial results for ESI's first quarter ended August 31, 2002. + ESI's former Chief Financial Officer and Controller had fraudulently decided to eliminate vested retirement and severance benefits for ESI's Asian employees in order to increase ESI's bottom line by $1 million. Isselmann later received written legal advice that the law prohibited the unilateral elimination of the benefits. Despite having opportunities to provide the advice to ESI's Audit Committee, Board of Directors, and auditors, Isselmann failed to do so. Isselmann's failure allowed the CFO and Controller to hide an ongoing fraud. Moreover, while in possession of the written legal advice stating that the law prohibited the unilateral elimination of the benefits, Isselmann was involved in the review process for ESI's quarterly report filed with the Commission describing the elimination of the benefits and the resulting impact on ESI's income. + B. Respondent + Isselmann, age 35, resides in Portland, Oregon, and is licensed to practice law in the State of Oregon. He served as General Counsel of ESI from May 2000 until his resignation in August 2003. ESI is a high technology manufacturer based in Portland, Oregon. 2 + C. Isselmann Is a Cause of ESI's Filing of a Materially Inaccurate Form 10-Q for the Quarter Ended August 31, 2002 + 1. ESI's Senior Management Artificially Inflates Quarterly Income + In order to meet external expectations that ESI would be profitable, the Company's CFO and Controller engaged in a scheme to fraudulently inflate ESI's financial results for its quarter ended August 31, 2002. ESI's CFO and Controller reduced expenses and increased ESI's bottom line by $1 million by secretly and unilaterally deciding to eliminate vested retirement and severance benefits in ESI's Asian offices (which included primarily Japan, but also Taiwan and Korea). This accounting transaction violated generally accepted accounting principles because ESI could not legally eliminate the benefits as it had purported to do. The accounting transaction enabled the CFO and the Controller to avoid a loss and report a profit in line with external expectations. Through this fraudulent accounting transaction, ESI artificially inflated its profits by 28% for the quarter. + Isselmann was not involved, present, or consulted when the CFO and the Controller made the accounting decision described above. + 2. Isselmann Becomes Aware of the Elimination of the Retirement and Severance Benefits + Isselmann participated in a September 17, 2002 meeting with ESI's Audit Committee and auditors to review the quarterly financial results, including the financial impact of eliminating the retirement and severance benefits. During the meeting, ESI's CFO told the Audit Committee that the Japanese benefits were not legally required and that the decision to eliminate them had been approved by legal counsel. During the same discussion, Isselmann identified ESI's legal counsel in Japan, causing an Audit Committee member to believe that outside legal counsel had reviewed the decision. Although Isselmann was unaware that the CFO had decided to eliminate the benefits in order to fraudulently inflate ESI's financial results, and did not question the CFO about his statements, Isselmann was aware that at that time he had not reviewed or approved the decision to eliminate benefits nor had he, as General Counsel, sought any outside legal review of the issue. At the conclusion of the meeting, the Audit Committee approved the inclusion of the $1 million transaction relating to the benefits in ESI's financial results for the quarter. + During the same time frame, Isselmann was informed that ESI's auditors had been told that the elimination of the benefits had legal support. In connection with the auditors' review of ESI's quarterly financial results, ESI provided the auditors with a written memorandum stating that the benefits had been eliminated because ESI was under "no legal obligation" to pay them and that the change was approved by ESI's CFO and CEO. Isselmann received a copy of this memorandum and was told that it had been written for the auditors. However, Isselmann did not speak directly with the auditors and did not inform them that he had not reviewed the retirement benefits issue and that he had not retained outside counsel to do so. + 3. Isselmann Receives Contradictory Written Legal Advice + On October 3, 2002, Isselmann sought legal advice from ESI's counsel in Japan on whether ESI could eliminate the benefits. On October 7, 2002, the outside counsel informed Isselmann in writing that ESI could not unilaterally eliminate its retirement and severance benefits in Japan and that if ESI wanted to terminate the benefits it was required to first consult with and obtain the consent of ESI's Japanese employees. As Isselmann was aware, ESI had neither consulted the Japanese employees nor obtained their consent to the elimination of their retirement benefits. Despite the contradiction with information Isselmann had been told had been written for ESI's auditors, Isselmann did not speak directly with the auditors. Nor did Isselmann provide the information to the Audit Committee, despite the fact that they had questioned the legal review of the matter. + 4. Isselmann's Involvement in the Filing of ESI's Form 10-Q + ESI's Disclosure Committee met on October 7, 2002 in order to review and ensure the accuracy of ESI's quarterly report to the Commission on Form 10-Q. Isselmann, other ESI officers and employees, ESI's external auditors, and its Portland-based outside corporate counsel attended the meeting, which had been arranged by Isselmann. During the meeting, Isselmann tried to raise the issue of the termination of the Asian retirement benefits. However, the CFO objected and, as a result, Isselmann provided no further detail and did not provide the written legal advice to the participants in the meeting. After the meeting, Isselmann spoke with the CFO and provided him with a copy of the written legal advice. The CFO subsequently signed the Form 10-Q, which included the $1 million increase to the bottom line resulting from the elimination of the benefits. + On October 15, 2002, ESI filed its Form 10-Q, reporting net income of $158,000 and earnings per share of $0.01 for the quarter. Before the Form 10-Q was filed with the Commission, an Audit Committee member questioned Isselmann about the language describing the elimination of the benefits and the $1 million accounting entry. Isselmann failed to convey the legal advice to the Audit Committee member in response. As a result, the Form 10-Q was not changed. + On March 31, 2003, Isselmann learned that the CFO (who had been promoted to CEO in December 2002) had eliminated the accrued liability for the benefits late at night after learning of an accounting error that negatively impacted earnings. On the night of March 31, 2003, Isselmann reported to ESI's outside counsel his suspicions that the CFO had engaged in misconduct. The next day, Isselmann informed the Audit Committee. + On April 1, 2003, after receiving the written legal advice, the Audit Committee commenced an internal investigation. In August 2003, following the completion of an internal investigation by its Audit Committee, ESI restated its financial results for the quarter ended August 31, 2002. The previously recorded accounting transaction was reversed and the accrued liability of $1 million for the payment of Asian retirement and severance benefits was restored. The restatement revealed that, as a result of the improper reversal of the accrued liability, ESI's originally reported net income was overstated by 28%. + D. Legal Discussion + Section 13(a) of the Exchange Act requires issuers such as ESI to file quarterly reports with the Commission containing such information as the Commission prescribes by rule. Exchange Act Rule 13a-13 requires issuers to file quarterly reports. Under Exchange Act Rule 12b-20, the reports must contain, in addition to disclosures expressly required by statute and rules, such other information as is necessary to ensure that the statements made are not, under the circumstances, materially misleading. The obligation to file reports includes the requirement that the reports be true and correct. The reporting provisions are violated if false and misleading reports are filed. Scienter is not an element of the violations alleged herein. + As described in Parts III(A) through (C) above, Isselmann's failure to convey written legal advice concerning the elimination of the Japanese retirement and severance benefits was a cause of ESI filing a materially false and misleading Form 10-Q for the period ended August 31, 2002. + ESI violated Section 13(a) and Rules 13a-13 and 12b-20 by filing with the Commission a Form 10-Q containing inaccurate financial statements for the quarter ended August 31, 2002. As a result of the conduct described above, Isselmann was a cause of ESI's violation of Section 13(a) and Rules 12b-20 and 13a-13. + IV. + In view of the foregoing, the Commission deems it appropriate to impose the sanctions agreed to in Respondent's Offer. + Accordingly, it is hereby ORDERED that: + A. Respondent cease and desist from causing any violations and any future violations of Section 13(a) of the Exchange Act and Rules 12b-20 and 13a-13 thereunder. + By the Commission. + + + + Jonathan G. Katz + Secretary + + + Endnotes + 1 The findings herein are made pursuant to Respondent's Offer of Settlement and are not binding on any other person or entity in this or any other proceeding. + 2 At all relevant times, ESI was an Oregon corporation with its principal place of business in Portland. ESI's common stock was registered with the Commission pursuant to Section 12(g) of the Exchange Act and traded on the Nasdaq National Market. + + + +See also the Order in this matter --> + + + + + + + + + + + + + + + + + + + + + + + + + + Return to top + + + + + SEC homepage + + + + + + + + + + + + + + About the SEC + + + + + + Budget & Performance + + + Careers + + + Commission Votes + + + Contact + + + Contracts + + + + + + + + Transparency + + + + + + Accessibility & Disability + + + Super Intelligence + + + FOIA + + + Inspector General + + + No FEAR Act Data + + + Ombuds + + + SEC Excess Personal Property Guidance + + + + + + + + Websites + + + + + + Investor.gov + + + Related Sites + + + USA.gov + + + + + + + + Site Information + + + + + + Plain Writing + + + Privacy & Security + + + Site Map + + + + + + + + + + + + + + + + + + Stay connected. 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Garg and Garg Data International, Inc. + + + + + + + + + + + + Sushil K. Garg and Garg Data International, Inc. + + + + + + + + + + + + + + + + + + + + + On September 28, 2004, the Securities and Exchange Commission filed a civil complaint in the United States District Court for the District of Columbia charging Sushil K. Garg ("Garg") and Garg Data International, Inc. ("Garg Data") with aiding and abetting violations of the antifraud and other provisions of the federal securities laws. According to the complaint, the defendants aided and abetted a fraudulent scheme to artificially inflate the first quarter 2001 ("Q1 2001") revenues of PurchasePro.com, Inc. ("PurchasePro" or the "Company"), a Las Vegas-based Internet company now known as Pro-After, Inc. Defendants Garg and Garg Data have agreed to settle the charges against them by consenting to the entry of final judgments, without admitting or denying the allegations in the Commission's complaint, that will impose full injunctive relief and that will, in the case of Garg, also impose a civil penalty of $50,000. + + The Commission's complaint against Garg and Garg Data alleges that the defendants aided and abetted PurchasePro's fraudulent inflation of its Q1 2001 reported revenues by knowingly: (i) engaging in a sham wash transaction with PurchasePro; (ii) signing a contract for the wash transaction after the close of Q1 2001 that used an earlier misleading effective date that Garg knew was designed to allow PurchasePro to improperly record the transaction in Q1 2001; and (iii) causing the return of a false and misleading confirmation of the transaction to PurchasePro's outside auditors. + + The complaint alleges that in the second quarter of 2001, Garg completed negotiations with PurchasePro for, and then executed a contract to buy, a $3.5 million marketplace license for PurchasePro software that Garg had no intention to use and that Garg Data could not afford. In fact, the complaint alleges, Garg Data already owned a marketplace license for PurchasePro's software that it had purchased several months earlier. The complaint further alleges that PurchasePro effectively funded its own revenues by agreeing to buy approximately $10 million of goods and services from Garg and forwarding $4 million to Garg -- which Garg then used to cover Garg Data's payment for the $3.5 million marketplace license. As alleged in the complaint, this $3.5 million sham sale was improperly booked by PurchasePro in Q1 2001 and alone accounted for over 20% of PurchasePro's reported revenues for the quarter. + + Based on these allegations, the Commission charged both Garg and Garg Data with aiding and abetting PurchasePro's violations of the antifraud provisions of the Securities Exchange Act of 1934 ("Exchange Act") (Section 10(b) and Rule 10b-5 thereunder), and the reporting, books and records, internal accounting controls, and lying-to-auditors provisions of the Exchange Act (Sections 13(a), 13(b)(2)(A) and 13(b)(2)(B), and Rules 12b-20, 13a-13, and 13b2-2). + + The Commission's investigation in this matter is continuing. + + + + +  + + + + + + + + + + + + + + + + + + + + + + + + + Return to top + + + + + SEC homepage + + + + + + + + + + + + + + About the SEC + + + + + + Budget & Performance + + + Careers + + + Commission Votes + + + Contact + + + Contracts + + + + + + + + Transparency + + + + + + Accessibility & Disability + + + Super Intelligence + + + FOIA + + + Inspector General + + + No FEAR Act Data + + + Ombuds + + + SEC Excess Personal Property Guidance + + + + + + + + Websites + + + + + + Investor.gov + + + Related Sites + + + USA.gov + + + + + + + + Site Information + + + + + + Plain Writing + + + Privacy & Security + + + Site Map + + + + + + + + + + + + + + + + + + Stay connected. 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McVay + + + + + + + + !function(){var e=navigator.userAgent,a=document.documentElement,n=a.className;n=n.replace("no-js","js"),/iPad|iPhone|iPod/.test(e)&&!window.MSStream&&(n+=" ua-ios"),a.className=n}(); + {"path":{"baseUrl":"\/","pathPrefix":"","currentPath":"node\/495076","currentPathIsAdmin":false,"isFront":false,"currentLanguage":"en"},"pluralDelimiter":"\u0003","suppressDeprecationErrors":true,"gtag":{"tagId":"","consentMode":false,"otherIds":[],"events":[],"additionalConfigInfo":[]},"ajaxPageState":{"libraries":"eJxdT0GOwzAI_JBdn_oei2DkeINNZLC22devlaZS2wtiBhhmcKNUTPo97jxyaXEH3GJpiZrFhQW38A4cMqgeYQGlV19JFTKpQ-kUmvQKXP7I0cO4tC2kPnbg2wVdFslM0SCHPMs3vsEPPD7J6hgOGdPCKJyoRxxqUuePHjLLAuzVjimenRJGSLW08NoBK9LUn6SHlrytVOlcpJShB63QLSpBx_WkOzHNePol4fRQo_qMPvQ36ZXsAmd99lMNr2t_GUR9n60EyX9a_wePd5ns","theme":"uswds_sec","theme_token":null},"ajaxTrustedUrl":[],"gtm":{"tagId":null,"settings":{"data_layer":"dataLayer","include_classes":false,"allowlist_classes":"","blocklist_classes":"","include_environment":false,"environment_id":"","environment_token":""},"tagIds":["GTM-TD3BKV"]},"data":{"extlink":{"extTarget":false,"extTargetAppendNewWindowDisplay":true,"extTargetAppendNewWindowLabel":"(opens in a new window)","extTargetNoOverride":false,"extNofollow":false,"extTitleNoOverride":false,"extNoreferrer":false,"extFollowNoOverride":false,"extClass":"0","extLabel":"(link is external)","extImgClass":false,"extSubdomains":true,"extExclude":".*\\.gov|http:\/\/www.xbrl.org\/utr\/2013-05-17\/utr.xml|http:\/\/www.xbrl.org\/dtr\/type\/numeric-2009-12-16.xsd|http:\/\/www.xbrl.org\/dtr\/type\/nonNumeric-2009-12-16.xsd|https:\/\/secir.secure.force.com\/ombudsman\/OMMSForm","extInclude":"","extCssExclude":".data-exempt","extCssInclude":"","extCssExplicit":"","extAlert":true,"extAlertText":"You are now leaving the SEC Website. 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Share sensitive information only on official, secure websites. + + + + + + + + + + + + + + + + + SEC homepage + + + + + + + Menu + + + + + + + + + + + + + + Close + + + + + + + + + + + + + Search SEC.gov & EDGAR + + + + + + Search + + + + + + + + + + + + + + + + + Search Filings + + + + + + + + + Search Filings + + + + + + + + + Full Text Search + + + + + + Latest Filings + + + + + + Mutual Fund Search + + + + + + Variable Insurance Products Search + + + + + + SIC Codes + + + + + + CIK Lookup + + + + + + Public Dissemination Service (PDS) + + + + + + Search Assistance + + + + + + + + + + + + + Submit Filings + + + + + + + + + Submit Filings + + + + + + + + + EDGAR Filer Management Portal + + + + + + EDGAR Filing Portal + + + + + + Online Forms Management Portal + + + + + + EDGAR Next + + + + + + Forms Index + + + + + + Filer Support & Resources + + + + + + + + + + + + + Data & Research + + + + + + + + + Data & Research + + + + + + + + + Data Library + + + + + + Statistics & Data Visualizations + + + + + + Structured Data + + + + + + Investment Management Data + + + + + + Open Data at the SEC + + + + + + + + + + + + + Rules, Enforcement, & Compliance + + + + + + + + + + + + + + + + + + + + Rules & Regulations + + + + + + + + + Rulemaking Activity + + + + + + Submit Public Comments + + + + + + Staff Guidance + + + + + + No-Action, Interpretive, and Exemptive Letters + + + + + + Self-Regulatory Organization Rulemaking + + + + + + Public Petitions for Rulemaking + + + + + + + + + + + + + + + + + Enforcement & Litigation + + + + + + + + + Litigation Releases + + + + + + Administrative Proceedings + + + + + + Administrative Law Judge Orders and Initial Decisions + + + + + + Trading Suspensions + + + + + + Distributions to Harmed Investors + + + + + + Receiverships + + + + + + + + + + + + + + + + + Compliance + + + + + + + + + Examination Priorities + + + + + + Risk Alerts + + + + + + Compliance Outreach Program + + + + + + + + + + + + + + + + + + + + + + + Proposed Rules + + + + + + What's New + + + + + + Whistleblower Program + + + + + + + + + + + + + + + + + + + Featured Topics + + + + + + + + + Featured Topics + + + + + + + + + Crypto Task Force + + + + + + Cybersecurity + + + + + + Market Structure Analytics + + + + + + Saving and Investing for Military Personnel + + + + + + Saving and Investing for Teachers + + + + + + SEC-CFTC Harmonization Initiative + + + + + + Treasury Clearing Implementation + + + + + + + + + + + + + About + + + + + + + + + About + + + + + + + + + Mission + + + + + + Commissioners + + + + + + Divisions & Offices + + + + + + Division & Office Directors + + + + + + Advisory Committees + + + + + + Budget & Performance + + + + + + Reports & Publications + + + + + + Commission Votes + + + + + + Contact the SEC + + + + + + Careers + + + + + + + + + + + + + Submit a Tip or Complaint + + + + + + + + + + + + + + + + + Newsroom + + + | + + + Investors + + + Small Businesses + + + Whistleblowers + + + + + + + + + + + + + + + Newsroom + + + | + + + Investors + + + Small Businesses + + + Whistleblowers + + + + + + + + + + + + + + + + + Search SEC.gov & EDGAR + + + + + + Search + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + More in this Section + + + + + + + + + + + + + Enforcement & Litigation + + + + + + + Litigation Releases + + + + + Administrative Proceedings + + + + + Administrative Law Judge Orders and Initial Decisions + + + + + Trading Suspensions + + + + + Distributions to Harmed Investors + + + + + Receiverships + + + + + Electronic Filings in Administrative Proceedings (eFAP) + + + + + Rules of Practice + + + + + Applications for Reentry + + + + + Reports of Investigations + + + + + Whistleblower Program + + + + + Public Alert: Unregistered Soliciting Entities (PAUSE) + + + + + SEC Action Lookup - Individuals (SALI) + + + + + Enforcement Data Delivery Standards + + + + + Small Businesses + + + + + Appellate Briefs + + + + + Amicus / Friend of the Court Briefs + + + + + + + + + + + + + + + + + + + + + + + + + + Enforcement & Litigation + + + + + + + Litigation Releases + + + + + Administrative Proceedings + + + + + Administrative Law Judge Orders and Initial Decisions + + + + + Trading Suspensions + + + + + Distributions to Harmed Investors + + + + + Receiverships + + + + + Electronic Filings in Administrative Proceedings (eFAP) + + + + + Rules of Practice + + + + + Applications for Reentry + + + + + Reports of Investigations + + + + + Whistleblower Program + + + + + Public Alert: Unregistered Soliciting Entities (PAUSE) + + + + + SEC Action Lookup - Individuals (SALI) + + + + + Enforcement Data Delivery Standards + + + + + Small Businesses + + + + + Appellate Briefs + + + + + Amicus / Friend of the Court Briefs + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + Home + + + Enforcement and Litigation + + + Litigation Releases + + + Michael Martin and Malcolm E. McVay + + + + + + + + + + + + Michael Martin and Malcolm E. McVay + + + + + + + + + + + + + + + + + + + U.S. Securities and Exchange Commission + + Litigation Release No. 18904 / September 28, 2004 + + Accounting and Auditing Enforcement Release No. 2111 / September 28, 2004 + + Securities and Exchange Commission v. Michael Martin and Malcolm E. McVay , United States District Court for the Northern District of Alabama, Civil Action No. CV-03-AR-2424-S + + On September 24, 2004, the Honorable William M. Acker, Jr., U. S. District Judge for the Northern District of Alabama, entered Final Judgments as to defendants Michael Martin and Malcolm E. McVay ("the defendants"), former Chief Financial Officers of HealthSouth Corporation. + + The Final Judgment as to Martin enjoined him from further violations of Section 17(a) of the Securities Act of 1933, Sections 10(b) and 13(b)(5) of the Securities Exchange Act of 1934 ("Exchange Act") and Rules 10b-5 and 13b2-1 thereunder, and from aiding and abetting violations of Sections 10(b), 13(a), 13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act and Rules 10b-5, 12b-20, 13a-1 and 13a-13 thereunder. The Final Judgment as to McVay enjoined him from further violations of Section 10(b) of the Exchange Act and Rule 10b-5 thereunder and from aiding and abetting violations of Section 13(a) of the Exchange Act and Rules 12b-20, 13a-13 and 13a-14 thereunder. The defendants were also permanently barred from serving as officers or directors of a public company. The defendants were not ordered to pay disgorgement and civil penalties in view of the forfeitures and fines ordered against them in the related criminal proceedings. The defendants consented to the entries of the judgments without admitting or denying any of the allegations of the Commission's Complaint. + + The Complaint alleged that the defendants directed lower level accounting personnel to make false entries to HealthSouth's accounting books and records so that HealthSouth's quarterly and annual earnings would meet or exceed Wall Street expectations. + + See also: +L.R. 18044 / March 20, 2003; +L. R. 18059 / April 1, 2003; +L. R. 18060 / April 1, 2003; +AAER No. 1749 / April 1, 2003; +L. R. 18070 / April 4, 2003; and +L. R. 18339 / September 10, 2003; +AAER No. 2004 / May 10, 2004; and +L.R. 18843 / August 23, 2004 + + + + +  + + + + + + + + + + + + + + + + + + + + + + + + + Return to top + + + + + SEC homepage + + + + + + + + + + + + + + About the SEC + + + + + + Budget & Performance + + + Careers + + + Commission Votes + + + Contact + + + Contracts + + + + + + + + Transparency + + + + + + Accessibility & Disability + + + Super Intelligence + + + FOIA + + + Inspector General + + + No FEAR Act Data + + + Ombuds + + + SEC Excess Personal Property Guidance + + + + + + + + Websites + + + + + + Investor.gov + + + Related Sites + + + USA.gov + + + + + + + + Site Information + + + + + + Plain Writing + + + Privacy & Security + + + Site Map + + + + + + + + + + + + + + + + + + Stay connected. 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Don-Allen Ruttenberg , United States District Court for the Northern District of Alabama, Civil Action No. CV-04-P-0371-S (NDAL) + + On September 24, 2004, the Honorable R. David Proctor, U. S. District Judge for the Northern District of Alabama, entered a Final Judgment as to defendant Don-Allen Ruttenberg, a former Executive Vice-President of Just for Feet, Inc., a large shoe and sports apparel retailer formerly headquartered in Birmingham, Alabama. The judgment enjoined Ruttenberg from further violations of Section 17(a) of the Securities Act of 1933, Sections 10(b) and 13(b)(5) of the Securities Exchange Act of 1934 and Rules 10b-5, 13b2-1 and 13b2-2 thereunder and his aiding and abetting violations of Sections 13(a), 13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act and Rules 12b-20, 13a-1 and 13a-13 thereunder. Ruttenberg consented to the entry of the judgment without admitting or denying any of the allegations of the Commission's Complaint. The court also ordered Ruttenberg to pay disgorgement of $40,000, together with prejudgment interest of $17,294.97. Ruttenberg was furthered ordered to pay a civil penalty of $50,000 and was prohibited from acting as an officer or director of any issuer that has a class of registered securities. + + The Complaint alleged that, in connection with the audit of Just for Feet, Inc.'s fiscal 1998 financial statements in the spring of 1999, Ruttenberg caused vendors to provide fraudulent confirmations used to confirm the validity of unearned receivables Just for Feet had recognized from its vendors. The complaint also alleged that Ruttenberg caused vendors to provide other confirmations that were fraudulently used to confirm the validity of income Just for Feet had improperly recognized through the acquisition of merchandise display booths from its vendors. The overstatement of income and assets resulting from this misconduct was reflected on Just for Feet's financial statements included in its Form 10-K filed for fiscal year 1998, Forms 10-Q filed for the first and second quarters of fiscal year 1999, and in its registration statements on Forms S-8 and S-4 filed in May and June of 1999, respectively. + + See also: L.R. 18139 / May 15, 2003; L.R. 18571 / February 6, 2004; L.R. 18575 / February 13, 2004; L.R. 18595 / February 25, 2004; and AAER No. 1964 / February 25, 2004 + + + + +  + + + + + + + + + + + + + + + + + + + + + + + + + Return to top + + + + + SEC homepage + + + + + + + + + + + + + + About the SEC + + + + + + Budget & Performance + + + Careers + + + Commission Votes + + + Contact + + + Contracts + + + + + + + + Transparency + + + + + + Accessibility & Disability + + + Super Intelligence + + + FOIA + + + Inspector General + + + No FEAR Act Data + + + Ombuds + + + SEC Excess Personal Property Guidance + + + + + + + + Websites + + + + + + Investor.gov + + + Related Sites + + + USA.gov + + + + + + + + Site Information + + + + + + Plain Writing + + + Privacy & Security + + + Site Map + + + + + + + + + + + + + + + + + + Stay connected. 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Stitt + + + + + + + + !function(){var e=navigator.userAgent,a=document.documentElement,n=a.className;n=n.replace("no-js","js"),/iPad|iPhone|iPod/.test(e)&&!window.MSStream&&(n+=" ua-ios"),a.className=n}(); + {"path":{"baseUrl":"\/","pathPrefix":"","currentPath":"node\/495111","currentPathIsAdmin":false,"isFront":false,"currentLanguage":"en"},"pluralDelimiter":"\u0003","suppressDeprecationErrors":true,"gtag":{"tagId":"","consentMode":false,"otherIds":[],"events":[],"additionalConfigInfo":[]},"ajaxPageState":{"libraries":"eJxdT0GOwzAI_JBdn_oei2DkeINNZLC22devlaZS2wtiBhhmcKNUTPo97jxyaXEH3GJpiZrFhQW38A4cMqgeYQGlV19JFTKpQ-kUmvQKXP7I0cO4tC2kPnbg2wVdFslM0SCHPMs3vsEPPD7J6hgOGdPCKJyoRxxqUuePHjLLAuzVjimenRJGSLW08NoBK9LUn6SHlrytVOlcpJShB63QLSpBx_WkOzHNePol4fRQo_qMPvQ36ZXsAmd99lMNr2t_GUR9n60EyX9a_wePd5ns","theme":"uswds_sec","theme_token":null},"ajaxTrustedUrl":[],"gtm":{"tagId":null,"settings":{"data_layer":"dataLayer","include_classes":false,"allowlist_classes":"","blocklist_classes":"","include_environment":false,"environment_id":"","environment_token":""},"tagIds":["GTM-TD3BKV"]},"data":{"extlink":{"extTarget":false,"extTargetAppendNewWindowDisplay":true,"extTargetAppendNewWindowLabel":"(opens in a new window)","extTargetNoOverride":false,"extNofollow":false,"extTitleNoOverride":false,"extNoreferrer":false,"extFollowNoOverride":false,"extClass":"0","extLabel":"(link is external)","extImgClass":false,"extSubdomains":true,"extExclude":".*\\.gov|http:\/\/www.xbrl.org\/utr\/2013-05-17\/utr.xml|http:\/\/www.xbrl.org\/dtr\/type\/numeric-2009-12-16.xsd|http:\/\/www.xbrl.org\/dtr\/type\/nonNumeric-2009-12-16.xsd|https:\/\/secir.secure.force.com\/ombudsman\/OMMSForm","extInclude":"","extCssExclude":".data-exempt","extCssInclude":"","extCssExplicit":"","extAlert":true,"extAlertText":"You are now leaving the SEC Website. 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Fitzpatrick and Thomas R. Stitt + + + + + + + + + + + + Donald M. Fitzpatrick and Thomas R. Stitt + + + + + + + + + + + + + + + + + + + U.S. SECURITIES AND EXCHANGE COMMISSION + Litigation Release No. 18911 / September 29, 2004 + + Accounting and Auditing Enforcement +Release No. 2114 / September 29, 2004 + + SECURITIES AND EXCHANGE COMMISSION v. Donald M. Fitzpatrick and Thomas R. Stitt, No. C 04 4120 BZ + + SEC CHARGES FORMER LIBERATE TECHNOLOGIES EXECUTIVES WITH FINANCIAL REPORTING FRAUD + + The Securities and Exchange Commission today announced financial reporting fraud charges against two former high-ranking executives of Liberate Technologies, a San Carlos, California-based company that sells software and services for interactive television. Alleged to have participated in a scheme to fraudulently inflate Liberate's revenue over four successive quarters in 2002 and 2003 are former Chief Operating Officer and head of sales Donald M. Fitzpatrick, of Sydney, Australia, and former sales vice president Thomas R. Stitt of Redwood City, California. Stitt has reached a settlement of the charges against him. + The Commission's complaint, which was filed in the United States District Court for the Northern District of California, alleges that Fitzpatrick, on his own and with assistance from Stitt on several deals, devised a series of fraudulent transactions to inflate Liberate's quarterly and year-end financial results. As a result, Liberate's quarterly revenue was artificially inflated by as much as 17% during the company's 2002 and 2003 fiscal years. Liberate ultimately restated its financial statements in September 2003 to reverse and defer revenue from the fraudulent transactions. + According to the complaint, Fitzpatrick employed various devices to inflate Liberate's reported results. For instance, Fitzpatrick, aided by Stitt, effectuated an improper "round-trip" deal whereby Liberate supplied its customer with the money to make the purchase. In this deal, Liberate received no net economic benefit, essentially using its own funds to create the false appearance of legitimate revenue. In another fraudulent transaction, Fitzpatrick negotiated a side agreement with a customer that granted the customer future financial concessions, and then hid the agreement from Liberate's finance department. The concessions Fitzpatrick secretly granted, if accounted for properly, would have wiped out the revenue Liberate reported to the public for the sale. + The complaint also alleges that Fitzpatrick and Stitt lied to Liberate's outside auditors and to Liberate's own financial group, which enabled the fraud to remain undetected. + The Commission's complaint charges Fitzpatrick with securities fraud and lying to accountants. The complaint seeks injunctive relief, civil monetary penalties, disgorgement of Fitzpatrick's ill-gotten gains (including commissions and bonuses), and an order barring Fitzpatrick from serving as an officer or director of a public company. + Stitt is charged in the Commission's complaint with violating the antifraud provisions of the federal securities laws and with aiding and abetting Liberate's reporting of false financial information to the Commission and Liberate's failure to maintain accurate books and records and internal controls. The complaint additionally charges him with lying to accountants, circumventing accounting controls, and falsifying the company's books and records. Without admitting or denying the allegations, Stitt agreed to pay a total of $78,000, including $28,000 in disgorgement and a $50,000 civil monetary penalty. Stitt also agreed to the entry of a court order barring him from serving as an officer or director of a public company for 10 years and enjoining him from future violations of these laws. + The Commission's district court complaint charges Fitzpatrick with securities fraud (Section 17(a) of the Securities Act of 1933 and 10(b) of the Securities Exchange Act of 1934 ("Exchange Act") and Rule 10b-5 thereunder) and lying to accountants (Rule 13b2-2). The Commission's action charges Stitt with the same Exchange Act violations as well as violations of other Exchange Act provisions and rules, specifically, aiding and abetting Liberate in filing false periodic reports under Section 13(b) of the Exchange Act and Rules 12b-20, 13a-1, and 13a-13; aiding and abetting Liberate in maintaining inaccurate books under Section 13(b)(2)(A) of the Exchange Act; aiding and abetting Liberate in having inadequate internal accounting controls under Section 13(b)(2)(B) of the Exchange Act; and circumventing internal accounting controls under Section 13(b)(5) of the Exchange Act and Rule 13b2-1. + The United States Attorney's Office for the Northern District of California, and the Federal Bureau of Investigation, today also announced criminal charges against Fitzpatrick for his role in the financial reporting fraud. + The Commission acknowledges the assistance of the Federal Bureau of Investigation and the United States Attorney's Office for the Northern District of California. + + + SEC Complaint in this matter + + + + + + + + + + + + + + + + + + + + + + + + + + Return to top + + + + + SEC homepage + + + + + + + + + + + + + + About the SEC + + + + + + Budget & Performance + + + Careers + + + Commission Votes + + + Contact + + + Contracts + + + + + + + + Transparency + + + + + + Accessibility & Disability + + + Super Intelligence + + + FOIA + + + Inspector General + + + No FEAR Act Data + + + Ombuds + + + SEC Excess Personal Property Guidance + + + + + + + + Websites + + + + + + Investor.gov + + + Related Sites + + + USA.gov + + + + + + + + Site Information + + + + + + Plain Writing + + + Privacy & Security + + + Site Map + + + + + + + + + + + + + + + + + + Stay connected. 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Marcy Wilson Roke, Case No. 04 CV 1966 H (POR) (S.D. Cal.) + + SEC CHARGES FORMER DIRECTOR OF ADVERTISING AT ADVANCED MARKETING SERVICES, INC. WITH SCHEMES TO INFLATE ADVERTISING EARNINGS + + The United States Securities and Exchange Commission today announced the filing of civil charges against Marcy Wilson Roke for her participation in schemes to improperly inflate the earnings of Advanced Marketing Services, Inc. (AMS). AMS is a San Diego-based wholesaler of general interest books that provides a variety of other services, including promotional and advertising services. Roke, age 37, of San Diego, California, was director of advertising at AMS from 1999 through 2004. + The Commission's complaint, filed today in U.S. District Court in San Diego, alleges that Roke participated in schemes to improperly manipulate AMS's earnings that were carried out primarily through AMS's advertising department. The complaint alleges that the fraudulent schemes caused AMS to overstate its pre-tax earnings by about 9% in fiscal year 2001, 10% in fiscal year 2002, and 19% in fiscal year 2003. + The complaint alleges that AMS fraudulently overstated its earnings through two schemes. The first scheme involved the production of fewer advertising vehicles than AMS had contracted with publishers to provide. One advertising service that AMS provides to publishers is to print and mail advertising vehicles - such as inserts, catalogs, and post-cards - for books the publishers produce. Through Roke's involvement, AMS improperly recognized revenue on the full quantity of advertising vehicles it had agreed to distribute, because it did not in fact produce the agreed-upon number of vehicles. As a result, AMS recorded revenue for these services contrary to generally accepted accounting principles, and thereby improperly overstated its earnings. + The complaint further alleges that Roke participated in a scheme to increase AMS's income by improperly reversing certain accrued liabilities relating to retail cooperative advertising. AMS recorded liabilities for credits that it expected retailers to take for certain advertising and promotional services that the retailers provided. When the retailers did not take the credits due to them, instead of contacting the retailers and reconciling amounts, Roke directed advertising and sales personnel to hide the discrepancies from the retailers, so that AMS could improperly reverse the liability and thereby decrease expenses and increase its income. + Roke profited from her participation in the fraudulent schemes from her receipt of annual bonuses and sales of AMS stock, which totaled more than $200,000. + The complaint alleges that Roke violated the antifraud provisions (Section 17(a) of the Securities Act of 1933 and Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder) and the books and records provisions of the federal securities laws (Section 13(b)(5) of the Exchange Act) as well as aiding and abetting violations of and violating the record-keeping provisions of the federal securities laws (Section 13(b)(2)(A) of the Exchange Act and Rule 13b2-1 thereunder). The SEC seeks a permanent injunction, disgorgement of all ill-gotten gains plus prejudgment interest, and a civil penalty against Roke. + The Commission acknowledges the cooperation and assistance of the United States Attorney's Office for the Southern District of California. + The Commission's investigation is continuing. + + + SEC Complaint in this matter --> + + + + + + + + + + + + + + + + + + + + + + + + + + Return to top + + + + + SEC homepage + + + + + + + + + + + + + + About the SEC + + + + + + Budget & Performance + + + Careers + + + Commission Votes + + + Contact + + + Contracts + + + + + + + + Transparency + + + + + + Accessibility & Disability + + + Super Intelligence + + + FOIA + + + Inspector General + + + No FEAR Act Data + + + Ombuds + + + SEC Excess Personal Property Guidance + + + + + + + + Websites + + + + + + Investor.gov + + + Related Sites + + + USA.gov + + + + + + + + Site Information + + + + + + Plain Writing + + + Privacy & Security + + + Site Map + + + + + + + + + + + + + + + + + + Stay connected. 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Chang + + + + + + + + !function(){var e=navigator.userAgent,a=document.documentElement,n=a.className;n=n.replace("no-js","js"),/iPad|iPhone|iPod/.test(e)&&!window.MSStream&&(n+=" ua-ios"),a.className=n}(); + {"path":{"baseUrl":"\/","pathPrefix":"","currentPath":"node\/495126","currentPathIsAdmin":false,"isFront":false,"currentLanguage":"en"},"pluralDelimiter":"\u0003","suppressDeprecationErrors":true,"gtag":{"tagId":"","consentMode":false,"otherIds":[],"events":[],"additionalConfigInfo":[]},"ajaxPageState":{"libraries":"eJxdT0GOwzAI_JBdn_oei2DkeINNZLC22devlaZS2wtiBhhmcKNUTPo97jxyaXEH3GJpiZrFhQW38A4cMqgeYQGlV19JFTKpQ-kUmvQKXP7I0cO4tC2kPnbg2wVdFslM0SCHPMs3vsEPPD7J6hgOGdPCKJyoRxxqUuePHjLLAuzVjimenRJGSLW08NoBK9LUn6SHlrytVOlcpJShB63QLSpBx_WkOzHNePol4fRQo_qMPvQ36ZXsAmd99lMNr2t_GUR9n60EyX9a_wePd5ns","theme":"uswds_sec","theme_token":null},"ajaxTrustedUrl":[],"gtm":{"tagId":null,"settings":{"data_layer":"dataLayer","include_classes":false,"allowlist_classes":"","blocklist_classes":"","include_environment":false,"environment_id":"","environment_token":""},"tagIds":["GTM-TD3BKV"]},"data":{"extlink":{"extTarget":false,"extTargetAppendNewWindowDisplay":true,"extTargetAppendNewWindowLabel":"(opens in a new window)","extTargetNoOverride":false,"extNofollow":false,"extTitleNoOverride":false,"extNoreferrer":false,"extFollowNoOverride":false,"extClass":"0","extLabel":"(link is external)","extImgClass":false,"extSubdomains":true,"extExclude":".*\\.gov|http:\/\/www.xbrl.org\/utr\/2013-05-17\/utr.xml|http:\/\/www.xbrl.org\/dtr\/type\/numeric-2009-12-16.xsd|http:\/\/www.xbrl.org\/dtr\/type\/nonNumeric-2009-12-16.xsd|https:\/\/secir.secure.force.com\/ombudsman\/OMMSForm","extInclude":"","extCssExclude":".data-exempt","extCssInclude":"","extCssExplicit":"","extAlert":true,"extAlertText":"You are now leaving the SEC Website. 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Chang + + + + + + + + + + + + Jerry S. Chang + + + + + + + + + + + + + + + + + + + + + The Securities and Exchange Commission announced that it has filed financial accounting fraud charges against the former Chief Executive Officer of a Redwood City, California-based Clarent Corporation. His misconduct, and that of another Clarent executive, led Clarent, a now-bankrupt provider of Internet telephone products, to overstate its revenue by 33% for the fourth quarter of 2000, and by 23% and 39% respectively for the first two quarters of 2001. + + The Commission sued former CEO Jerry S. Chang, 45, of Los Altos Hills, California, for allegedly inflating Clarent's revenue through fraudulent sales transactions and siphoning cash to a company in which the other Clarent executive and his family held influential positions. + + The complaint alleges that, in December 2000, Chang induced a Taiwanese technology firm to place separate orders totaling $15 million for Clarent hardware and software by promising that, if the firm could not resell the products, Clarent would arrange for a company associated with the family of the other Clarent executive to buy the goods (as in fact ultimately occurred). These side arrangements made it improper for Clarent to recognize revenue for the sales, but, according to the complaint, Chang concealed the secret deal terms from Clarent's finance personnel, causing the company to report phony revenue to the public. + + The complaint further alleges that, in June 2001, Chang directed the unauthorized release of $35 million from Clarent's Asia Pacific office to the entity related to the other Clarent executive and his family. Chang also arranged an additional $11 million loan guarantee for this entity. Neither the $35 million cash disbursement nor the $11 million loan guarantee was disclosed to Clarent's financial personnel or management. These improper payments caused Clarent to overstate its cash and to fail to disclose a liability. + + The Commission's complaint, filed in the U.S. District Court for the Northern District of California, charges Chang with violating the antifraud, corporate reporting, books and records and internal accounting control provisions of the federal securities laws, and seeks injunctions, disgorgement, monetary penalties, and orders barring them from serving as officers or directors of public companies. + + In particular, the Commission asserts claims against Chang for violations of Sections 10(b), 13(b)(5) of the Securities Exchange Act of 1934 ("Securities Act") and Rules 10b-5, 13b2-1 and 13b2-2 thereunder as well as for aiding and abetting violations of Sections 10(b), 13(a) and 13(b)(2)(A) of the Exchange Act and Rules 12b-20, 13a-1 and 13a-13 thereunder. + + In a related matter, the Commission filed a separate action against the former President of Clarent's Asia Pacific office, Matthew M Chiang, charging him with violating, or aiding and abetting violations of, the antifraud, corporate reporting, books and records and internal control provisions of the federal securities laws. (Sections 10(b), 13(a), 13(b)(2)(A), 13(b)(5) of the Exchange Act and Rules 12b-20, 13a-1, 13a-13, 13b2-1 and 13b2-2 thereunder.) In addition, the complaint alleges that Chiang aided and abetted Clarent's violations of certain of these provisions. + + + SEC Complaint in this matter + + + + + +  + + + + + + + + + + + + + + + + + + + + + + + + + Return to top + + + + + SEC homepage + + + + + + + + + + + + + + About the SEC + + + + + + Budget & Performance + + + Careers + + + Commission Votes + + + Contact + + + Contracts + + + + + + + + Transparency + + + + + + Accessibility & Disability + + + Super Intelligence + + + FOIA + + + Inspector General + + + No FEAR Act Data + + + Ombuds + + + SEC Excess Personal Property Guidance + + + + + + + + Websites + + + + + + Investor.gov + + + Related Sites + + + USA.gov + + + + + + + + Site Information + + + + + + Plain Writing + + + Privacy & Security + + + Site Map + + + + + + + + + + + + + + + + + + Stay connected. 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Chiang + + + + + + + + !function(){var e=navigator.userAgent,a=document.documentElement,n=a.className;n=n.replace("no-js","js"),/iPad|iPhone|iPod/.test(e)&&!window.MSStream&&(n+=" ua-ios"),a.className=n}(); + {"path":{"baseUrl":"\/","pathPrefix":"","currentPath":"node\/495131","currentPathIsAdmin":false,"isFront":false,"currentLanguage":"en"},"pluralDelimiter":"\u0003","suppressDeprecationErrors":true,"gtag":{"tagId":"","consentMode":false,"otherIds":[],"events":[],"additionalConfigInfo":[]},"ajaxPageState":{"libraries":"eJxdT0GOwzAI_JBdn_oei2DkeINNZLC22devlaZS2wtiBhhmcKNUTPo97jxyaXEH3GJpiZrFhQW38A4cMqgeYQGlV19JFTKpQ-kUmvQKXP7I0cO4tC2kPnbg2wVdFslM0SCHPMs3vsEPPD7J6hgOGdPCKJyoRxxqUuePHjLLAuzVjimenRJGSLW08NoBK9LUn6SHlrytVOlcpJShB63QLSpBx_WkOzHNePol4fRQo_qMPvQ36ZXsAmd99lMNr2t_GUR9n60EyX9a_wePd5ns","theme":"uswds_sec","theme_token":null},"ajaxTrustedUrl":[],"gtm":{"tagId":null,"settings":{"data_layer":"dataLayer","include_classes":false,"allowlist_classes":"","blocklist_classes":"","include_environment":false,"environment_id":"","environment_token":""},"tagIds":["GTM-TD3BKV"]},"data":{"extlink":{"extTarget":false,"extTargetAppendNewWindowDisplay":true,"extTargetAppendNewWindowLabel":"(opens in a new window)","extTargetNoOverride":false,"extNofollow":false,"extTitleNoOverride":false,"extNoreferrer":false,"extFollowNoOverride":false,"extClass":"0","extLabel":"(link is external)","extImgClass":false,"extSubdomains":true,"extExclude":".*\\.gov|http:\/\/www.xbrl.org\/utr\/2013-05-17\/utr.xml|http:\/\/www.xbrl.org\/dtr\/type\/numeric-2009-12-16.xsd|http:\/\/www.xbrl.org\/dtr\/type\/nonNumeric-2009-12-16.xsd|https:\/\/secir.secure.force.com\/ombudsman\/OMMSForm","extInclude":"","extCssExclude":".data-exempt","extCssInclude":"","extCssExplicit":"","extAlert":true,"extAlertText":"You are now leaving the SEC Website. 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Chiang + + + + + + + + + + + + Matthew M. Chiang + + + + + + + + + + + + + + + + + + + + + The Securities and Exchange Commission announced that it has filed financial accounting fraud charges against the former President of the Asia Pacific office of Redwood City, California-based Clarent Corporation. His misconduct, and that of another Clarent executive, led Clarent, a now-bankrupt provider of Internet telephone products, to overstate its revenue by 33% for the fourth quarter of 2000, and by 23% and 39% respectively for the first two quarters of 2001. + + The Commission sued Clarent's former President of Asia Pacific operations Matthew M. Chiang, 35, of Taipei, Taiwan, for allegedly inflating Clarent's revenue through fraudulent sales transactions and siphoning cash to a company in which Chiang and his family held influential positions. + + The complaint alleges that, in December 2000, Chiang induced a Taiwanese technology firm to place orders of approximately $7 million for Clarent hardware and software by promising that, if the firm could not resell the products, Clarent would arrange for a company associated with Chiang's family to buy the goods (as in fact ultimately occurred). These side arrangements made it improper for Clarent to recognize revenue for the sales, but, according to the complaint, Chiang concealed the secret deal terms from Clarent's finance personnel, causing the company to report phony revenue to the public. + + The Commission further alleges that, in June 2001, Chiang directed the unauthorized release of $35 million from Clarent's Asia Pacific office to the Chiang-related entity. The $35 million cash disbursement was not disclosed to Clarent's financial personnel or management. This improper payment caused Clarent to overstate its cash. + + The complaint additionally alleges that, between March 2001 and June 2001, he provided customers in Asia with undisclosed rights to cancel orders or return product to Clarent on another $31 million in purported sales, making it improper for Clarent to include revenue from the orders in its publicly reported financial statements. + + The Commission's complaint, filed in the U.S. District Court for the Northern District of California, charges Chiang with violating the antifraud, corporate reporting, books and records and internal accounting control provisions of the federal securities laws, and seeks injunctions, disgorgement, monetary penalties, and orders barring them from serving as officers or directors of public companies. + + In particular, the Commission asserts claims against Chiang for violations of Sections 10(b), 13(b)(5) of the Securities Exchange Act of 1934 ("Securities Act") and Rules 10b-5, 13b2-1 and 13b2-2 thereunder as well as for aiding and abetting violations of Sections 10(b), 13(a) and 13(b)(2)(A) and Rules 12b-20, 13a-1 and 13a-13 thereunder. + + In a related matter, the Commission filed a separate action against former Chief Executive Officer, Jerry S. Chang, charging him with violating, or aiding and abetting violations of, the antifraud, corporate reporting, books and records and internal control provisions of the federal securities laws. (Sections 10(b), 13(a), 13(b)(2)(A), 13(b)(5) of the Exchange Act and Rules 12b-20, 13a-1, 13a-13, 13b2-1 and 13b2-2 thereunder.) In addition, the complaint alleges that Chang aided and abetted Clarent's violations of certain of these provisions. + + + SEC Complaint in this matter + + + + + + +  + + + + + + + + + + + + + + + + + + + + + + + + + Return to top + + + + + SEC homepage + + + + + + + + + + + + + + About the SEC + + + + + + Budget & Performance + + + Careers + + + Commission Votes + + + Contact + + + Contracts + + + + + + + + Transparency + + + + + + Accessibility & Disability + + + Super Intelligence + + + FOIA + + + Inspector General + + + No FEAR Act Data + + + Ombuds + + + SEC Excess Personal Property Guidance + + + + + + + + Websites + + + + + + Investor.gov + + + Related Sites + + + USA.gov + + + + + + + + Site Information + + + + + + Plain Writing + + + Privacy & Security + + + Site Map + + + + + + + + + + + + + + + + + + Stay connected. 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Gardner, et al. + + + + + + + + !function(){var e=navigator.userAgent,a=document.documentElement,n=a.className;n=n.replace("no-js","js"),/iPad|iPhone|iPod/.test(e)&&!window.MSStream&&(n+=" ua-ios"),a.className=n}(); + {"path":{"baseUrl":"\/","pathPrefix":"","currentPath":"node\/495151","currentPathIsAdmin":false,"isFront":false,"currentLanguage":"en"},"pluralDelimiter":"\u0003","suppressDeprecationErrors":true,"gtag":{"tagId":"","consentMode":false,"otherIds":[],"events":[],"additionalConfigInfo":[]},"ajaxPageState":{"libraries":"eJxdT0GOwzAI_JBdn_oei2DkeINNZLC22devlaZS2wtiBhhmcKNUTPo97jxyaXEH3GJpiZrFhQW38A4cMqgeYQGlV19JFTKpQ-kUmvQKXP7I0cO4tC2kPnbg2wVdFslM0SCHPMs3vsEPPD7J6hgOGdPCKJyoRxxqUuePHjLLAuzVjimenRJGSLW08NoBK9LUn6SHlrytVOlcpJShB63QLSpBx_WkOzHNePol4fRQo_qMPvQ36ZXsAmd99lMNr2t_GUR9n60EyX9a_wePd5ns","theme":"uswds_sec","theme_token":null},"ajaxTrustedUrl":[],"gtm":{"tagId":null,"settings":{"data_layer":"dataLayer","include_classes":false,"allowlist_classes":"","blocklist_classes":"","include_environment":false,"environment_id":"","environment_token":""},"tagIds":["GTM-TD3BKV"]},"data":{"extlink":{"extTarget":false,"extTargetAppendNewWindowDisplay":true,"extTargetAppendNewWindowLabel":"(opens in a new window)","extTargetNoOverride":false,"extNofollow":false,"extTitleNoOverride":false,"extNoreferrer":false,"extFollowNoOverride":false,"extClass":"0","extLabel":"(link is external)","extImgClass":false,"extSubdomains":true,"extExclude":".*\\.gov|http:\/\/www.xbrl.org\/utr\/2013-05-17\/utr.xml|http:\/\/www.xbrl.org\/dtr\/type\/numeric-2009-12-16.xsd|http:\/\/www.xbrl.org\/dtr\/type\/nonNumeric-2009-12-16.xsd|https:\/\/secir.secure.force.com\/ombudsman\/OMMSForm","extInclude":"","extCssExclude":".data-exempt","extCssInclude":"","extCssExplicit":"","extAlert":true,"extAlertText":"You are now leaving the SEC Website. 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Gardner, et al. + + + + + + + + + + + + Stephen P. Gardner, et al. + + + + + + + + + + + + + + + + + + + + + On October 5, 2004, the Securities and Exchange Commission filed civil fraud and related charges against six former senior officers of San Diego-based Peregrine Systems, Inc. who orchestrated and attempted to cover up a massive accounting fraud at the company. + + According to the Commission's complaint filed in the United States District Court in San Diego, the Peregrine defendants fraudulently inflated the product revenue Peregrine reported in its filings with the Commission and elsewhere. The defendants employed deception and lies to portray Peregrine as a company with constantly growing sales while covering up Peregrine's persistent failure to fulfill revenue forecasts. At the same time, some of the Peregrine defendants unloaded Peregrine stock into an unsuspecting market, enriching themselves, in some instances by millions of dollars, at the expense of the investing public. + + In February 2003, Peregrine restated its financial results for eleven quarters during fiscal years 2000, 2001 and 2002, reducing previously-reported revenue of $1.34 billion by more than $507 million. + + The Commission's complaint names: Stephen P. Gardner, Peregrine's former Chairman and Chief Executive Officer; Gary L. Lenz, the former President and Chief Operating Officer; Douglas S. Powanda, the former Executive Vice President of Sales; Berdj J. Rassam, the former Controller; Joseph G. Reichner, the former Senior Vice President for Alliances and Business Development; and Peter J. O'Brien, the former Director of Strategic Alliances. + + The Commission also charged Daniel F. Stulac, a certified public accountant and former Arthur Andersen LLP engagement partner on the Peregrine audit, with fraud, and Larry A. Rodda and Michael D. Whitt, former principals of two Peregrine channel partners (customers), with aiding and abetting Peregrine's fraud. + + According to the Commission's complaint, the heart of Peregrine's fraud was the recording of millions of dollars in revenue on the improper basis of non-binding arrangements with resellers ("channel partners") - companies that purchased software from Peregrine for resale to end-users. Peregrine's senior management would determine near the ends of quarters how much additional revenue the company needed to meet or exceed analyst expectations. They would then enter into sham deals with channel partners (including backdated contracts and contracts made contingent by oral or written side agreements). Peregrine executives arranged a number of these fraudulent deals with defendants Rodda and Whitt. + + Peregrine improperly recorded the resulting "revenue" in order to mislead investors into believing that Peregrine's financial condition was significantly better than it was and to inflate artificially Peregrine's stock price. Gardner, the former CEO who was actively involved in the fraud, and Powanda, the former Executive VP of Sales who devised many of the sham deals, sold over $11 million and $24 million worth of Peregrine stock, respectively, during the fraud, resulting in millions of dollars in profits. + + The complaint further alleges that, as the uncollected receivables from the fake channel sales swelled on Peregrine's balance sheet, senior officers at the company devised a temporary solution to make it appear that Peregrine was collecting cash on a timely basis. Uncollectible receivables were purportedly sold to banks and removed from Peregrine's balance sheet. These receivable financing transactions, however, were in reality loans and not sales because, under the terms of the deals, the banks had recourse against Peregrine if the customers did not pay. Peregrine's removal of the receivables from its balance sheet was therefore fraudulent. + + According to the complaint, to prevent the banks from discovering that some of the channel "sales" underlying the receivables were bogus, Peregrine often repurchased the receivables from the banks. To remove the uncollectible receivables from Peregrine's books, Peregrine executives, including former Controller Rassam, with the knowledge of outside engagement partner Stulac, then improperly wrote off millions of dollars of the repurchased receivables (and other unpaid receivables) as acquisition costs, even though the receivables were wholly unrelated to acquisitions. The complaint also alleges that outside auditor Stulac permitted Peregrine to record revenue improperly. Stulac knew, or was reckless in not knowing, that Peregrine's fiscal 2001 financial statements were materially false and misleading. Despite Stulac's knowledge or reckless disregard of this improper accounting, he caused Arthur Andersen to issue an unqualified opinion attesting to the accuracy and completeness of Peregrine's fiscal 2001 financial statements. + + Based on this conduct, the Commission's complaint alleges the following: + + Defendants Gardner, Powanda, Lenz, Rassam and O'Brien violated Section 17(a) of the Securities Act of 1933 (Securities Act). + Defendants Gardner, Powanda, Lenz, Rassam, Reichner and O'Brien violated Sections 13(b)(5) and 10(b) of the Securities Exchange Act of 1934 (Exchange Act) and Exchange Act Rules 13b2-1 and 10b-5 and aided and abetted violations of Exchange Act Sections 13(a), 13(b)(2)(A) and 13(b)(2)(B) and Exchange Act Rules 12b-20, 13a-1 and 13a-13. + Defendants Gardner and Lenz violated Exchange Act Rule 13b2-2. + Defendant Stulac violated Exchange Act Section 10(b) and Exchange Act Rule 10b-5 and aided and abetted violations of Exchange Act Section 13(a) and Exchange Act Rules 13a-1 and 13a-13. + Defendants Rodda and Whitt aided and abetted violations of Exchange Act Section 10(b) and Exchange Act Rule 10b-5. + This is the fifth civil fraud action the Commission has filed in this investigation. In November 2002, the Commission filed a civil injunctive action against Ilse Cappel, the former Senior Treasury Manager at Peregrine (Litigation Release No. 17859A). In April 2003, the Commission filed a civil injunctive action against Matthew C. Gless, Peregrine's former Chief Financial Officer (Litigation Release No. 18093). In June 2003, the Commission filed a civil injunctive action against Steven S. Spitzer, a former Vice President of sales at Peregrine (Litigation Release No. 18191), and a partially-settled civil injunctive action against the company (Litigation Release No. 18205A). In August of 2003, the Commission announced that it had fully settled its case against Peregrine and that the United States District Court in San Diego had entered final judgment ( Litigation Release No. 18290 ). + + The United States Attorney's Office for the Southern District of California also announced criminal charges against the nine individuals named in the Commission's complaint, and others who participated in Peregrine's financial fraud. + + The Commission's investigation of the financial fraud is continuing. Former Peregrine officers and others are cooperating with the investigations. + + The Commission thanks the United States Attorney's Office for the Southern District of California and the Federal Bureau of Investigation for their cooperation in this matter. + + + SEC Complaint in this matter + + + + + +  + + + + + + + + + + + + + + + + + + + + + + + + + Return to top + + + + + SEC homepage + + + + + + + + + + + + + + About the SEC + + + + + + Budget & Performance + + + Careers + + + Commission Votes + + + Contact + + + Contracts + + + + + + + + Transparency + + + + + + Accessibility & Disability + + + Super Intelligence + + + FOIA + + + Inspector General + + + No FEAR Act Data + + + Ombuds + + + SEC Excess Personal Property Guidance + + + + + + + + Websites + + + + + + Investor.gov + + + Related Sites + + + USA.gov + + + + + + + + Site Information + + + + + + Plain Writing + + + Privacy & Security + + + Site Map + + + + + + + + + + + + + + + + + + Stay connected. 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Borman + + + + + + + + !function(){var e=navigator.userAgent,a=document.documentElement,n=a.className;n=n.replace("no-js","js"),/iPad|iPhone|iPod/.test(e)&&!window.MSStream&&(n+=" ua-ios"),a.className=n}(); + {"path":{"baseUrl":"\/","pathPrefix":"","currentPath":"node\/495161","currentPathIsAdmin":false,"isFront":false,"currentLanguage":"en"},"pluralDelimiter":"\u0003","suppressDeprecationErrors":true,"gtag":{"tagId":"","consentMode":false,"otherIds":[],"events":[],"additionalConfigInfo":[]},"ajaxPageState":{"libraries":"eJxdT0GOwzAI_JBdn_oei2DkeINNZLC22devlaZS2wtiBhhmcKNUTPo97jxyaXEH3GJpiZrFhQW38A4cMqgeYQGlV19JFTKpQ-kUmvQKXP7I0cO4tC2kPnbg2wVdFslM0SCHPMs3vsEPPD7J6hgOGdPCKJyoRxxqUuePHjLLAuzVjimenRJGSLW08NoBK9LUn6SHlrytVOlcpJShB63QLSpBx_WkOzHNePol4fRQo_qMPvQ36ZXsAmd99lMNr2t_GUR9n60EyX9a_wePd5ns","theme":"uswds_sec","theme_token":null},"ajaxTrustedUrl":[],"gtm":{"tagId":null,"settings":{"data_layer":"dataLayer","include_classes":false,"allowlist_classes":"","blocklist_classes":"","include_environment":false,"environment_id":"","environment_token":""},"tagIds":["GTM-TD3BKV"]},"data":{"extlink":{"extTarget":false,"extTargetAppendNewWindowDisplay":true,"extTargetAppendNewWindowLabel":"(opens in a new window)","extTargetNoOverride":false,"extNofollow":false,"extTitleNoOverride":false,"extNoreferrer":false,"extFollowNoOverride":false,"extClass":"0","extLabel":"(link is external)","extImgClass":false,"extSubdomains":true,"extExclude":".*\\.gov|http:\/\/www.xbrl.org\/utr\/2013-05-17\/utr.xml|http:\/\/www.xbrl.org\/dtr\/type\/numeric-2009-12-16.xsd|http:\/\/www.xbrl.org\/dtr\/type\/nonNumeric-2009-12-16.xsd|https:\/\/secir.secure.force.com\/ombudsman\/OMMSForm","extInclude":"","extCssExclude":".data-exempt","extCssInclude":"","extCssExplicit":"","extAlert":true,"extAlertText":"You are now leaving the SEC Website. 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Swanson, Stanley L. Swanson, R. Stephen Cavender, And Curtis A. Borman + + + + + + + + + + + + Safescript Pharmacies, Inc., f/k/a RTIN Holdings, Inc., Curtis A. Swanson, Stanley L. Swanson, R. Stephen Cavender, And Curtis A. Borman + + + + + + + + + + + + + + + + + + + + + SECURITIES AND EXCHANGE COMMISSION v. SAFESCRIPT PHARMACIES, INC., f/k/a RTIN HOLDINGS, INC., CURTIS A. SWANSON, STANLEY L. SWANSON, R. STEPHEN CAVENDER, AND CURTIS A. BORMAN +Civil Action No. 6:04-CV-455 (USDC/EDTX/Tyler Division) + + On October 5, 2004 the Securities and Exchange Commission ("SEC" or "the Commission") filed a civil action in the United States District Court for the Eastern District of Texas against the following entity and individuals: Safescript Pharmacies, Inc., f/k/a RTIN Holdings, Inc. ("RTIN" or "the company"), a Longview, Texas based, electronic prescription technology company; Stanley L. Swanson, RTIN's former CEO; his son, Curtis A. Swanson, also former RTIN CEO; R. Stephen Cavender, the company's former CFO; and Curtis A. Borman, a former RTIN director. + + The SEC simultaneously settled its action against RTIN in consideration for RTIN's consenting to a permanent injunction against violations of the antifraud, registration, reporting, books and records and internal controls provisions of the federal securities laws, and RTIN's consenting to the entry of an order by the SEC revoking the SEC registration of RTIN's securities. The SEC also simultaneously settled its action against Borman in consideration for Borman's agreeing to disgorge 106,000 options on RTIN common stock, a $25,000 civil penalty, and a permanent injunction against violations of the "deception of auditors" provisions, and against aiding and abetting violations of the antifraud and reporting provisions of the federal securities laws. + + In the civil action filed against Stanley Swanson, Curtis Swanson and Cavender, the SEC is seeking, against each of them, a permanent injunction, an officer and director bar, disgorgement plus prejudgment interest, an accounting, and a civil money penalty, based on violations by each of them of the registration, antifraud, falsification of records, deception of auditors, circumvention of controls and certification provisions, and on their each aiding and abetting RTIN's violations of the antifraud, reporting, books and records and internal controls provisions. + + According to the SEC's complaint, in 2002 and 2003, RTIN materially inflated its reported revenue by selling franchise agreements to start-up franchisees in exchange for worthless stock and promissory notes, and then immediately recognizing revenue from the transactions, despite the franchisees' known inability to pay. The SEC further alleges that the Swansons, together with Cavender, fraudulently supported the company's inflated revenue figures by recording fictitious payments by franchisees and by using funds from undisclosed, unregistered distributions of RTIN stock to pay RTIN's debts and management bonuses. The SEC further alleges that Borman, while he was a director of RTIN, assisted the company in misleading the company's auditors about the authenticity of a sham certificate of deposit, allegedly issued to pay for the purchase of an RTIN franchise license. The revenue-inflation scheme caused RTIN to overstate by material amounts its net income in periodic reports the company filed with the Commission throughout 2002 and 2003. + + In its complaint, the SEC alleges that RTIN, Stanley Swanson, Curtis Swanson, and Cavender violated Sections 5(a) and 5(c) of the Securities Act of 1933 (Securities Act), and Section 10(b) of the Securities Exchange Act of 1934 (Exchange Act) and Rule 10b-5 thereunder, and that Stanley Swanson, Curtis Swanson and Cavender violated Section 13(b)(5) of the Exchange Act and Rules 13b2-1, 13b2-2 and 13a-14 thereunder. The SEC further alleges that RTIN violated Sections 13(a), 13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act and Rules 12b-20, 13a-1, and 13a-13 thereunder, and that Stanley Swanson, Curtis Swanson and Cavender aided and abetted those violations. Finally, the Commission alleges that Borman violated Exchange Act Rule 13b2-2, and aided and abetted RTIN's violations of Sections 10(b) and 13(a) of the Exchange Act and Rules 10b-5, 12b-20 and 13a-1 thereunder. + + + SEC Complaint in this matter + + + + + +  + + + + + + + + + + + + + + + + + + + + + + + + + Return to top + + + + + SEC homepage + + + + + + + + + + + + + + About the SEC + + + + + + Budget & Performance + + + Careers + + + Commission Votes + + + Contact + + + Contracts + + + + + + + + Transparency + + + + + + Accessibility & Disability + + + Super Intelligence + + + FOIA + + + Inspector General + + + No FEAR Act Data + + + Ombuds + + + SEC Excess Personal Property Guidance + + + + + + + + Websites + + + + + + Investor.gov + + + Related Sites + + + USA.gov + + + + + + + + Site Information + + + + + + Plain Writing + + + Privacy & Security + + + Site Map + + + + + + + + + + + + + + + + + + Stay connected. 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Soulfood Concepts, Inc. and Markova Campbell, 1:04 CV01731 (JR) (D.D.C.) (October 12, 2004) + + SEC FILES FRAUD CHARGES AGAINST SOULFOOD CONCEPTS, INC. AND MARKOVA CAMPBELL + + The Commission announced today the filing of a civil action against Soulfood Concepts, Inc. and its President and Chief Executive Officer, Markova Campbell, in federal district court in Washington, D.C. The Commission alleges in its complaint that Soulfood filed with the Commission a materially false and misleading annual report and amended annual report for the year ended December 31, 2002, and materially false and misleading quarterly reports for the quarters ended September 30, 2002 and March 31, 2003. The Commission alleges that Campbell copied the financial statements included in the reports from prior Commission filings and altered the applicable dates to make the statements appear to be current. Campbell also is alleged to have included a fictitious independent auditor's report in the annual report and amended annual report. Soulfood's auditor had resigned prior to the filing and did not conduct an audit for 2002. + As a result, the Commission alleges that Soulfood and Campbell violated or aided and abetted violations of Sections 10(b) and 13(a) of the Securities Exchange Act of 1934 and Rules 10b-5, 12b-20, 13a-1 and 13a-13 thereunder. The Commission also alleges that Campbell violated Rule 13a-14 of the Exchange Act by falsely certifying two periodic reports. The Commission seeks permanent injunctions against Soulfood and Campbell and, against Campbell only, an officer and director bar and a civil penalty. + The Commission also instituted administrative proceedings against Soulfood pursuant to Section 12(j) of the Exchange Act to determine whether the registration of the company's securities should be suspended or revoked. In the Commission's Order, the Division of Enforcement alleges that Soulfood failed to comply with Section 13(a) of the Exchange Act and Rules 13a-1 and 13a-13 thereunder when it failed to file with the Commission its required annual report for the fiscal year ended December 31, 2003 and its quarterly reports for its fiscal quarters ended June 30 and September 30, 2003, and March 31 and June 30, 2004. + + + + SEC Complaint in this matter + + + + + + + + + + + + + + + + + + + + + + + + + + Return to top + + + + + SEC homepage + + + + + + + + + + + + + + About the SEC + + + + + + Budget & Performance + + + Careers + + + Commission Votes + + + Contact + + + Contracts + + + + + + + + Transparency + + + + + + Accessibility & Disability + + + Super Intelligence + + + FOIA + + + Inspector General + + + No FEAR Act Data + + + Ombuds + + + SEC Excess Personal Property Guidance + + + + + + + + Websites + + + + + + Investor.gov + + + Related Sites + + + USA.gov + + + + + + + + Site Information + + + + + + Plain Writing + + + Privacy & Security + + + Site Map + + + + + + + + + + + + + + + + + + Stay connected. 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Proc. File No. 3-11707 + + In the Matter of + TURE ROLAND FAHLIN, + Respondent. + + : : : : : : : : : + ORDER INSTITUTING CEASE-AND-DESIST PROCEEDINGS, MAKING FINDINGS, AND IMPOSING A CEASE-AND-DESIST ORDER PURSUANT TO SECTION 21C OF THE SECURITIES EXCHANGE ACT OF 1934 + I. + The Securities and Exchange Commission ("Commission") deems it appropriate that cease-and-desist proceedings be, and hereby are, instituted pursuant to Section 21C of the Securities Exchange Act of 1934 ("Exchange Act"), against Ture Roland Fahlin ("Fahlin" or "Respondent"). + + II. + In anticipation of the institution of these proceedings, Respondent has submitted an Offer of Settlement (the "Offer") which the Commission has determined to accept. Solely for the purpose of these proceedings and any other proceedings brought by or on behalf of the Commission, or to which the Commission is a party, and without admitting or denying the findings herein, except as to the Commission's jurisdiction over him and the subject matter of these proceedings, which are admitted, Respondent consents to the entry of this Order Instituting Cease-and-Desist Proceedings, Making Findings, and Imposing a Cease-and-Desist Order Pursuant to Section 21C of the Securities Exchange Act of 1934 ("Order"), as set forth below. + + III. + On the basis of this Order and Respondent's Offer, the Commission finds 1 that: + Koninklijke Ahold N.V. ("Ahold") is a publicly-held company organized in The Netherlands with securities registered with the Commission pursuant to Section 12(b) of the Exchange Act. Ahold's securities trade on the New York Stock Exchange and are evidenced by American Depositary Receipts. Ahold prepares its financial statements in accordance with Dutch generally accepted accounting principles ("GAAP") but includes a U.S. GAAP reconciliation and condensed U.S. GAAP financial statements in the Form 20-F Ahold files annually with the Commission. + ICA F¶rbundet Invest AB ("ICA F¶rbundet") is a company organized under the laws of Sweden. Prior to April 2000, ICA F¶rbundet was the largest shareholder of ICA AB ("ICA"), a Swedish company primarily engaged in the retail and wholesale sale of food and consumables in Scandinavia. + Canica AS ("Canica") is a company organized under the laws of Norway. Prior to April 2000, Canica was the second largest shareholder of ICA. + By agreement dated February 24, 2000 (the "Shareholders' Agreement"), Ahold, ICA F¶rbundet, and Canica established a joint venture company, ICA Ahold Holding AB ("ICA Ahold"), that subsequently acquired 100 percent of the shares and votes in ICA. Pursuant to the terms of the Shareholders' Agreement, Ahold held 50 percent of the votes and shares in ICA Ahold. The remaining 50 percent was held by ICA F¶rbundet (30 percent) and Canica (20 percent). The Shareholders' Agreement provided that ICA F¶rbundet and Canica (collectively the "Partners") would act jointly as one party in all matters relating to the agreement in order to create a fifty-fifty balance between Ahold and the Partners. In a separate agreement, the Partners agreed to act or vote in accordance with mutually agreed positions. + The Shareholders' Agreement also provided for the creation of a supervisory board consisting of eight directors and four deputy directors. The agreement gave the Partners the right to nominate four directors (including the chairman) and two deputy directors. Ahold also had the right to nominate four directors and two deputy directors. The agreement provided that all board decisions had to be approved by a unanimous vote and contained deadlock provisions for situations in which the board could not make a unanimous decision. + Fahlin , age 65, is a Swedish national. At the time of the formation of ICA Ahold, Fahlin was president and a member of the board of ICA F¶rbundet and chairman of the board of ICA. Fahlin signed the Shareholders' Agreement on behalf of ICA F¶rbundet. After the joint venture was formed, Fahlin became chairman of the supervisory board of ICA Ahold. + During the negotiations that led to the formation of ICA Ahold, Ahold informed ICA F¶rbundet and Canica that Ahold wanted to fully consolidate the joint venture in Ahold's financial statements. Fahlin was aware that Ahold wanted to consolidate ICA Ahold. + In early 2000, Ahold informed its independent auditors ("the Auditors") that it wanted to fully consolidate ICA Ahold in its financial statements. The Auditors informed Ahold that consolidation would be inappropriate in the absence of a written agreement, signed by Ahold's joint venture partners, clearly stating that Ahold controlled the joint venture. In early May 2000, a former executive vice president of Ahold and member of Ahold's executive board in charge of European operations asked Fahlin and a representative of Canica to sign a letter stating: + + Our auditors have requested us that we be more specific with regard to the interpretation of the Shareholders agreement for ICA Ahold Holding AB . + The shareholder agreement stipulates that all (major) decisions with regard to ICA Ahold Holding AB will be made in consensus between you on one side and Ahold on the other side. This is the basic understanding of the partnership. However, Ahold understands that according to the best interpretation of the Shareholders' Agreement in the case that we reach no consensus decision on a certain issue which we are unable to resolve to shareholders' mutual satisfaction, Ahold's proposal to solve that issue will in the end be decisive. . . + + + Fahlin signed the letter (the "ICA control letter") on behalf of ICA F¶rbundet under the heading, "Agreed." A representative of Canica also signed the ICA control letter. Also in early May 2000, Fahlin, a representative of Canica, and the former Ahold executive vice president signed a second letter (the "ICA rescinding letter") stating: + Aware of the contents of [the ICA control letter], this is to inform you that we do not agree with the interpretation given by you of our Shareholders' Agreement. + Ahold gave a copy of the ICA control letter to the Auditors after it was executed and began consolidating ICA Ahold into its consolidated financial statements in the second quarter of 2000. The Auditors relied upon the ICA control letter in accepting the consolidation of ICA Ahold. Ahold did not give a copy of the ICA rescinding letter to the Auditors. + In May 2001, Fahlin retired from the board of ICA Ahold. On September 1, 2001, Fahlin became a member of Ahold's supervisory board. In January 2002, Fahlin became a member of the audit committee of Ahold's supervisory board. As a member of the supervisory board, Fahlin was required to review and approve Ahold's annual report and financial statements for 2001. + Prior to approving Ahold's annual report and financial statements for 2001, Fahlin received a copy of the Auditors' report to the supervisory board, the audit committee, and the executive board for Ahold's fiscal year 2001 dated February 28, 2002 (the "Auditors' report"). The Auditors' report provided, in relevant part: + + 3.2 Joint ventures + We have had several discussions with management during previous years concerning the accounting for joint ventures under US GAAP. Ahold believes that they may consolidate based on the fact that they control these partnerships and that this conclusion is further substantiated by actions subsequent to the agreement of the different partnerships. We note that for the Disco and ICA partnership control letters have been obtained. . . . + + On or about March 7, 2002, Fahlin and the other members of Ahold's supervisory board approved Ahold's annual report and financial statements for 2001. + Prior to approving Ahold's annual report and financial statements for 2001, Fahlin reviewed the Auditors' report, which disclosed that the Auditors were relying on an ICA "control letter" in allowing the full consolidation of ICA Ahold's financial results. The audit committee plays an essential role in assuring that a company's financial statements have been presented fairly and in conformity with GAAP. Members of the audit committee must take this responsibility seriously. As a member of Ahold's supervisory board and audit committee, Fahlin had a duty to determine whether the "control letter" referenced in the Auditors' report was related to the letter he had initially signed and then rescinded in May 2000 and, if so, he should have informed the Auditors and the other members of the supervisory board of the existence of the ICA rescinding letter prior to approving Ahold's annual report and financial statements for 2001. Fahlin failed to fulfill these duties. + In October 2002, Ahold's executive board informed the full audit committee and the Auditors of the existence of the ICA rescinding letter. Ahold initiated an internal investigation that was completed in January 2003. Following the investigation, Ahold concluded that it did not have the ability to control ICA and therefore should not have consolidated ICA in its financial statements under Dutch or U.S. GAAP. + In February 2003, Ahold's supervisory board and the Auditors learned of the existence of undisclosed rescinding letters for joint ventures in Latin America that had been consolidated on the basis of control letters similar to the ICA control letter. Ahold subsequently initiated an internal investigation into the circumstances surrounding the control and rescinding letters for these joint ventures. + On February 24, 2003, Ahold announced that it would issue restated financial statements for previous periods and would delay filing its consolidated 2002 financial statements as a result of internal investigations into its joint venture accounting and other accounting irregularities. On or about October 17, 2003, Ahold published its annual report for 2002 and filed its 2002 Form 20-F with the Commission. The annual report and Form 20-F contain restatements for fiscal years 2000 and 2001, accounting adjustments for fiscal year 2002, and restated amounts for fiscal years 1998 and 1999 included in the five-year summary data. The restatements reflect numerous accounting adjustments, including the deconsolidation of ICA Ahold and other joint ventures. + Ahold stated in the 2002 annual report and Form 20-F that it had historically consolidated ICA Ahold and other joint ventures on the basis of the control letters. Ahold also stated that the undisclosed rescinding letters nullified the control letters and resulted in the decision to deconsolidate ICA Ahold and other joint ventures under Dutch and U.S. GAAP. On or about October 14, 2003, Fahlin and the other members of Ahold's supervisory board approved the 2002 annual report. On June 2, 2004, Fahlin stepped down from his positions on Ahold's supervisory board and audit committee. + As a result of the improper consolidation of ICA Ahold, Ahold made materially false and misleading statements in filings with the Commission and in other public statements including, without limitation, year-end results included in Forms 20-F and quarterly information included in Forms 6-K and earnings press releases. For example, as a result of the improper consolidation of ICA Ahold, Ahold's originally reported net sales were overstated by approximately EUR 6.5 billion ($5.8 billion) for fiscal year 2001 and EUR 4.5 billion ($4.2 billion) for fiscal year 2000. Ahold's originally reported operating results were overstated by approximately EUR 247 million ($221 million) for fiscal year 2001 and EUR 192 million ($177 million) for fiscal year 2000. 2 + Section 13(a) of the Exchange Act requires issuers to file such annual and quarterly reports as the Commission may prescribe and in conformity with such rules as the Commission may promulgate. Pursuant to Section 13(a), the Commission has promulgated Rules 13a-1 and 13a-16, which require foreign issuers to file annual and other reports, respectively. The obligation to file such reports embodies the requirement that they be true and correct. See, e.g., SEC v. Savoy Indus., Inc. , 587 F.2d 1149, 1165 (D.C. Cir. 1978), cert. denied, 440 U.S. 913 (1979). . + As a result of the improper consolidation of ICA Ahold, Ahold's financial statements included in its Forms 20-F and 6-K filed with the Commission during fiscal years 2000, 2001, and the first three quarters of 2002 were materially false and misleading because they significantly misstated revenue, operating income, and other figures. Ahold therefore violated Section 13(a) of the Exchange Act and Exchange Act Rules 13a-1 and 13a-16. As a result of Fahlin's failure to fulfill his duties described above as a member of Ahold's supervisory board and audit committee, Fahlin was a cause of Ahold's violation of Section 13(a) of the Exchange Act and Exchange Act Rules 13a-1 and 13a-16 with respect to Ahold's Form 20-F for 2001 and Forms 6-K for the first three quarters of 2002. + Section 13(b)(2)(A) of the Exchange Act requires issuers to make and keep books, records, and accounts, which, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the issuer. Section 13(b)(2)(B) of the Exchange Act requires issuers to devise and maintain a system of internal accounting controls sufficient to provide reasonable assurances that transactions are recorded as necessary to permit the preparation of financial statements in conformity with generally accepted accounting principles and to maintain the accountability of assets. + As a result of the improper consolidation of ICA Ahold, Ahold violated Section 13(b)(2)(A) by failing to make and keep accurate books and records. Ahold also violated Section 13(b)(2)(B) by failing to maintain sufficient internal accounting controls to prevent the concealment of the ICA rescinding letter and to ensure that Ahold's financial statements were not materially misleading. As a result of Fahlin's failure to fulfill his duties described above as a member of Ahold's supervisory board and audit committee, Fahlin was a cause of Ahold's violation of Sections 13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act. + + + IV. + In view of the foregoing, the Commission deems it appropriate to impose the sanctions agreed to in Respondent Fahlin's Offer. + Accordingly, it is hereby ORDERED that Respondent Fahlin cease and desist from causing any violations and any future violations of Sections 13(a), 13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act and Rules 13a-1 and 13a-16 thereunder. + + + + By the Commission. + + + + + Jonathan G. Katz + Secretary + + + Endnotes + 1 The findings herein are made pursuant to Respondent's Offer of Settlement and are not binding on any other person or entity in this or any other proceeding. + 2 The conversion from euros to dollars is based on the exchange rate of $0.8956 per euro for 2001 and $0.9212 per euro for 2000. + + +See also the Order in this matter --> + + + + + + + + + + + + + + + + + + + + + + + + + + Return to top + + + + + SEC homepage + + + + + + + + + + + + + + About the SEC + + + + + + Budget & Performance + + + Careers + + + Commission Votes + + + Contact + + + Contracts + + + + + + + + Transparency + + + + + + Accessibility & Disability + + + Super Intelligence + + + FOIA + + + Inspector General + + + No FEAR Act Data + + + Ombuds + + + SEC Excess Personal Property Guidance + + + + + + + + Websites + + + + + + Investor.gov + + + Related Sites + + + USA.gov + + + + + + + + Site Information + + + + + + Plain Writing + + + Privacy & Security + + + Site Map + + + + + + + + + + + + + + + + + + Stay connected. 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Individuals (SALI) + + + + + Enforcement Data Delivery Standards + + + + + Small Businesses + + + + + Appellate Briefs + + + + + Amicus / Friend of the Court Briefs + + + + + + + + + + + + + + + + + + + + + + + + + + Enforcement & Litigation + + + + + + + Litigation Releases + + + + + Administrative Proceedings + + + + + Administrative Law Judge Orders and Initial Decisions + + + + + Trading Suspensions + + + + + Distributions to Harmed Investors + + + + + Receiverships + + + + + Electronic Filings in Administrative Proceedings (eFAP) + + + + + Rules of Practice + + + + + Applications for Reentry + + + + + Reports of Investigations + + + + + Whistleblower Program + + + + + Public Alert: Unregistered Soliciting Entities (PAUSE) + + + + + SEC Action Lookup - Individuals (SALI) + + + + + Enforcement Data Delivery Standards + + + + + Small Businesses + + + + + Appellate Briefs + + + + + Amicus / Friend of the Court Briefs + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + Home + + + Enforcement and Litigation + + + Litigation Releases + + + Ture Roland Fahlin + + + + + + + + + + + + Ture Roland Fahlin + + + + + + + + + + + + + + + + + + + U.S. SECURITIES AND EXCHANGE COMMISSION + Litigation Release No. 18929 / October 13, 2004 + + Accounting and Auditing Enforcement +Release No. 2124 / October 13, 2004 + + Securities and Exchange Commission v. Koninklijke Ahold N.V. (Royal Ahold), Civil Action No. 04-1742 (RMU) (D.D.C.) (October 13, 2004) + + Securities and Exchange Commission v. A. Michiel Meurs and Cees van der Hoeven, Civil Action No. 04-1743 (RMU) (D.D.C.) (October 13, 2004) + + Securities and Exchange Commission v. Johannes Gerhardus Andreae, Civil Action No. 04-1741 (RMU) (D.D.C.) (October 13, 2004) + + In the matter of Ture Roland Fahlin, Administrative Proceeding File No. 3-11707 + + SEC CHARGES ROYAL AHOLD AND THREE FORMER TOP EXECUTIVES WITH FRAUD; FORMER AUDIT COMMITTEE MEMBER CHARGED WITH CAUSING VIOLATIONS OF THE SECURITIES LAWS + + On October 13, 2004, the Securities and Exchange Commission filed fraud and other charges in the United States District Court for the District of Columbia against Royal Ahold (Koninklijke Ahold N.V.) (Ahold) and three former top executives: Cees van der Hoeven, former CEO and chairman of the executive board; A. Michiel Meurs, former CFO and executive board member; and Jan Andreae, former executive vice president and executive board member. The Commission also filed a related administrative action charging Roland Fahlin, a former member of Ahold's supervisory board and audit committee, with causing violations of the reporting, books and records, and internal controls provisions of the securities laws. The SEC's complaints allege that, as a result of the fraudulent inflation of promotional allowances at U.S. Foodservice, Ahold's wholly-owned subsidiary, the improper consolidation of joint ventures through fraudulent side letters, and other accounting errors and irregularities, Ahold's original SEC filings overstated: (a) net income by approximately 17.6%, 32.6%, and 88.1% for the fiscal years 2000, 2001 and first three quarters of 2002, respectively; (b) operating income by approximately 28.1%, 29.4%, and 51.3% for the fiscal years 2000, 2001 and first three quarters of 2002, respectively; and (c) net sales by approximately 20.8%, 18.6%, and 13.8% for the fiscal years 2000, 2001 and 2002, respectively. Ahold and three of the individual defendants have agreed to settlements with the Commission. + The Earnings Fraud At U.S. Foodservice + With respect to the fraud at U.S. Foodservice ("USF"), Ahold's wholly-owned subsidiary based in Columbia, Maryland, the Commission's complaint against Ahold alleges as follows: + A significant portion of USF's operating income was based on vendor payments known as promotional allowances. USF executives materially inflated the amount of promotional allowances recorded by USF and reflected in operating income on USF's financial statements, which were included in Ahold's Commission filings and other public statements.   + USF executives also provided, or assisted in providing, Ahold's independent auditors with false and misleading information by, for example, persuading personnel at many of USF's major vendors to falsely confirm overstated promotional allowances to the auditors in connection with year-end audits.   + The overstated promotional allowances aggregated at least $700 million for fiscal years 2001 and 2002 and caused Ahold to report materially false operating and net income for those and other periods.   + The earnings inflation at USF, which began at least a year before Ahold's acquisition, is the subject of the SEC's complaint against four former USF executives filed July 27, 2004 in the United States District Court for the Southern District of New York + The Joint Venture Sales and Operating Income Fraud +Ahold and the Top Officers + + With respect to the fraudulent consolidation of joint ventures, the Commission's complaints against Ahold, van der Hoeven, Meurs, and Andreae allege as follows: + Ahold fully consolidated several joint ventures in its financial statements despite owning no more than fifty percent of the voting shares and despite shareholders' agreements that clearly provided for joint control by Ahold and its joint venture partners. To justify full consolidation of certain joint ventures, Ahold gave its independent auditors side letters to the joint venture agreements, signed by Ahold and its joint venture partners, which stated, in effect, that Ahold controlled the joint ventures ("control letters").   + However, at the time or soon after executing the control letters, Ahold and its joint venture partners executed side letters that rescinded the control letters - and thus the basis for full consolidation (the "rescinding letters").   + Meurs signed all but one of the control and rescinding letters on behalf of Ahold. He also knew that Ahold's auditors were relying on the control letters and were unaware of the existence of the rescinding letters.   + Van der Hoeven cosigned one of the rescinding letters and he was at least reckless in not knowing that the auditors were unaware of its existence.   + Andreae participated in the fraud by signing the control and rescinding letters for ICA, Ahold's Scandinavian joint venture, and by knowingly or recklessly concealing the existence of the ICA rescinding letter from the auditors.   + As a result of the fraud, Ahold materially overstated net sales by approximately EUR 4.8 billion ($5.1 billion) for fiscal year 1999, EUR 10.6 billion ($9.8 billion) for fiscal year 2000, and EUR 12.2 billion ($10.9 billion) for fiscal year 2001. Ahold materially overstated operating income by approximately EUR 222 million ($236 million) for fiscal year 1999, EUR 448 million ($413 million) for fiscal year 2000, and EUR 485 million ($434) for fiscal year 2001.   + In its administrative action against Fahlin, the Commission alleges the following: + Fahlin signed the ICA control and rescinding letters on behalf of ICA F¶rbundet, one of Ahold's partners in the ICA joint venture. He later left ICA F¶rbundet and became a member of Ahold's supervisory board and audit committee. In that capacity, he received a report indicating that the auditors were relying on a "control letter" to accept the consolidation of ICA. Fahlin's failure to determine whether this "control letter" was the same letter he had signed and then rescinded was a cause of Ahold's violations of the reporting, books and records, and internal controls provisions of the securities laws.   + Settlements + Ahold has agreed to settle the Commission's action, without admitting or denying the allegations in the complaint, by consenting to the entry of a judgment permanently enjoining the company from violating the antifraud, reporting, books and records, and internal controls provisions of the federal securities laws (Section 17(a) of the Securities Act of 1933 (Securities Act); Sections 10(b), 13(a), 13(b)(2)(A) and 13(b)(2)(B) of the Securities Exchange Act of 1934 (Exchange Act); and Exchange Act Rules 10b-5, 12b-20, 13a-1, and 13a-16). The Commission noted in the complaint that Ahold cooperated fully in the SEC staff's investigation. + Van der Hoeven and Meurs have agreed to settle the Commission's action, without admitting or denying the allegations in the complaint, by consenting to the entry of judgments permanently enjoining each of them from violating Section 17(a) of the Securities Act, Sections 10(b) and 13(b)(5) of the Exchange Act, and Exchange Act Rules 10b-5, 13b2-1, and 13b2-2, and from aiding and abetting violations of Sections 13(a), 13(b)(2)(A) and 13(b)(2)(B) and Exchange Act Rules 13a-1 and 13a-16. Van der Hoeven and Meurs have also consented to orders barring each of them from serving as an officer or director of a public company. + Fahlin has agreed to settle the Commission's administrative action by consenting to the entry of an order, without admitting or denying the findings in the order, directing him to cease and desist from causing any violations and any future violations of Sections 13(a), 13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act and Rules 13a-1 and 13a-16 thereunder. + The Commission has not reached a settlement with Andreae. The Commission has charged Andreae with fraud (Section 17(a) of the Securities Act, Sections 10(b) of the Exchange Act, and Exchange Act Rule 10b-5), falsifying accounting records, and lying to auditors (Exchange Act Section 13(b)(5) and Exchange Act Rules 13b2-1 and 13b2-2) or, in the alternative, aiding and abetting violations of Sections 10(b) and 13(b)(5) of the Exchange Act and Exchange Act Rules 10b-5, 13b2-1, and 13b2-2. The Commission has also charged Andreae with aiding and abetting violations of the books and records and reporting requirements (Sections 13(a), 13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act and Exchange Act Rules 13a-1 and 13a-16). The Commission seeks an injunction against future violations of the above provisions, an order prohibiting Andreae from acting as an officer or director of any public company, and disgorgement of ill-gotten gains with prejudgment interest. + The Commission has not sought penalties in the enforcement actions for several reasons. First, the Dutch Public Prosecutor's Office, which is conducting a parallel criminal investigation in The Netherlands, has requested that the Commission not seek penalties against the individuals because of potential double jeopardy issues under Dutch law. Because of the importance of this case in The Netherlands and the need for continued cooperation between the SEC and regulatory authorities in other countries, the Commission has agreed to the Dutch prosecutor's request. + The Commission also did not seek a penalty from Ahold, among other reasons, because of the company's extensive cooperation with the Commission's investigation. Ahold self-reported the misconduct and conducted an extensive internal investigation. On its own initiative, Ahold expanded its internal investigation beyond the fraud at U.S. Foodservice and the improper joint venture accounting to analyze accounting practices and internal controls at seventeen operating companies. Ahold promptly provided the staff with the internal investigative reports and the supporting information and waived the attorney-client privilege and work product protection with respect to its internal investigations. Ahold also made its current personnel available for interviews or testimony, significantly assisted the staff in arranging interviews with, or testimony from, former Ahold personnel located in the United States and abroad. Ahold promptly took remedial actions including, but not limited to, revising its internal controls and terminating employees responsible for the wrongdoing. + Related Actions + This is the second round of enforcement actions the Commission has filed in this investigation. On July 27, 2004, the Commission filed a complaint in the United States District Court for the Southern District of New York against Michael Resnick, Mark P. Kaiser, Timothy J. Lee, and William Carter in connection with the financial fraud at USF and (with respect to Lee) insider trading of USF securities (Litigation Release No. 18797). The Commission also filed a related complaint against Peter O. Marion in connection with insider trading of USF securities (Litigation Release No. 18796). + The Commission's investigation is continuing. + + + SEC Complaint in this matter (Koninklijke Ahold N.V. 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Palbaum, CPA, John M. Wong, CPA, Kenneth B. Janeski, CPA, David A. Hori, CPA + + + + + + + + + + + + KPMG LLP, Bryan E. Palbaum, CPA, John M. Wong, CPA, Kenneth B. Janeski, CPA, David A. Hori, CPA + + + + + + + + + + + + + + + + + + + + + Securities Exchange Act of 1934 +Release No. 50564 / October 20, 2004 + + Accounting And Auditing Enforcement +Release No. 2125 / October 20, 2004 + + Admin. Proc. File No. 3-11714 + + In the Matter of + KPMG LLP, Bryan E. Palbaum, CPA, John M. Wong, CPA, Kenneth B. Janeski, CPA, David A. Hori, CPA, + Respondent. + + : : : : : : : : : : + ORDER INSTITUTING PUBLIC ADMINISTRATIVE PROCEEDINGS PURSUANT TO RULE 102(e) OF THE COMMISSION'S RULES OF PRACTICE, MAKING FINDINGS, AND IMPOSING REMEDIAL SANCTIONS + I. + The Securities and Exchange Commission ("Commission") deems it appropriate that public administrative proceedings be, and hereby are, instituted against KPMG LLP ("KPMG"), Bryan E. Palbaum ("Palbaum"), CPA, John M. Wong ("Wong"), CPA, Kenneth B. Janeski ("Janeski"), CPA, and David A. Hori ("Hori"), CPA, (collectively "Respondents") pursuant to Rule 102(e)(1)(ii) of the Commission's Rules of Practice. 1 + II. + In anticipation of the institution of these proceedings, Respondents have each submitted Offers of Settlement (the "Offers"), which the Commission has determined to accept. Solely for the purpose of these proceedings and any other proceedings brought by or on behalf of the Commission, or to which the Commission is a party, and without admitting or denying the findings herein, except as to the Commission's jurisdiction over them and the subject matter of these proceedings, Respondents consent to the entry of this Order Instituting Public Administrative Proceedings Pursuant to Rule 102(e) of the Commission's Rules of Practice, Making Findings, and Imposing Remedial Sanctions ("Order"), as set forth below. + III. + On the basis of this Order and Respondents' Offers, the Commission finds 2 that: + A. SUMMARY + This matter concerns KPMG and four of its auditors who engaged in improper professional conduct in the audits and reviews of the financial statements of Gemstar-TV Guide International, Inc. ("Gemstar"). The conduct addressed in this order includes KPMG's audits and reviews of Gemstar's financial statements from the quarter ended September 30, 1999, through the quarter ended March 31, 2002. + The KPMG auditors reasonably should have known that Gemstar's recognition of material amounts of revenue was not in conformity with Generally Accepted Accounting Principles ("GAAP"). This improperly reported revenue consisted of approximately $152 million in licensing revenue and approximately $60 million in advertising revenue that was reported during the periods ended March 31, 2000 ($32 million overstatement of licensing revenue), December 31, 2000 ($38 million overstatement of licensing revenue), December 31, 2001 ($70 million and $52 million overstatement of licensing and advertising revenue, respectively) and March 31, 2002 ($12 million and $8 million overstatement of licensing and advertising revenue, respectively). The auditors also reasonably should have known that certain disclosure in Gemstar's Forms 10-K regarding its revenue recognition policies, licensing revenue, and multi-element transactions was inconsistent with Gemstar's accounting for the revenue and/or did not comply with GAAP disclosure requirements. + The KPMG auditors, however, concurred in Gemstar's accounting, did not object to Gemstar's disclosure, and issued audit reports stating that KPMG had conducted its audits in accordance with Generally Accepted Auditing Standards ("GAAS") and that Gemstar's financial statements fairly presented its financial results in conformity with GAAP. In reaching these conclusions, the KPMG auditors unreasonably relied on representations by Gemstar management and/or unreasonably determined that the revenues were immaterial to Gemstar's financial statements. The KPMG auditors' materiality determinations were unreasonable in that they only considered quantitative materiality (i.e., that the amount of revenue was not a large percentage of Gemstar's consolidated financial results) and failed to also consider qualitative materiality (i.e., that the revenue related to business lines that were closely watched by securities analysts and had a material effect on the valuation of Gemstar stock). + As a result, KPMG and the auditors did not comply with GAAS by unreasonably failing to exercise due professional care and skepticism and to obtain sufficient competent evidential matter; substituting management representations for competent evidence; failing to take appropriate action to correct Gemstar's inconsistent and deficient disclosure; and issuing inaccurate audit reports. + In addition, in August 2002 as part of Gemstar's Audit Committee's investigation into potential restatements of Gemstar's financial statements, information concerning the possible improper recognition of electronic advertising revenue came to light. Such information included evidence indicating that senior Gemstar management may have been involved in that improper revenue recognition, that the evidence Gemstar had relied upon to support the recognition of electronic advertising revenue may not have been sufficient, and that the Audit Committee was recommending that certain transactions be restated or reclassified. Although KPMG did have a policy that required an engagement team involved in potential restatements of financial statements upon which KPMG had issued an audit report to consult with KPMG's Department of Professional Practice regarding the specific transaction being proposed for restatement by the issuer of the financial statements, KPMG did not have in place a policy that required consultation with the Department of Professional Practice regarding all significant issues that had come to the attention of the engagement team subsequent to the issuance of the audit report on the financial statements in question. Consultation pursuant to such a policy should have led KPMG to become aware of and to consider the additional evidence that came to light during the Audit Committee's investigation and could have led KPMG to a more prompt decision to withdraw its previously issued audit report on Gemstar's 2001 financial statements. KPMG did not take that step until November 22, 2002. + + B. RESPONDENTS + KPMG LLP ("KPMG") is a Delaware limited liability partnership and a national public accounting firm with its headquarters in New York, New York. KPMG was the auditor for Gemstar-TV Guide International, Inc. from 1993 until October 30, 2002, when Gemstar dismissed KPMG as its independent accountants. On November 22, 2002, KPMG advised Gemstar that its reports on Gemstar's financial statements for the periods ended March 31, 2000 through December 31, 2001, should no longer be relied upon because Gemstar's November 15, 2002 filing of a Form 10-K/A (Amendment No. 2) that restated Gemstar's consolidated financial statements, without audit, constituted an implicit withdrawal of management's representations as to the financial statements previously audited by KPMG. + Bryan E. Palbaum, CPA , 41, of Encino, California, began work on the Gemstar engagement during the audit for the fiscal year ended March 31, 2000. 3 He was the KPMG co-engagement partner for the Gemstar engagement from the June 30, 2000 review through the March 31, 2002 review. Palbaum began working for KPMG in 1986 and was a KPMG partner from 1997 until he left the firm in August 2002. Palbaum has been licensed as a CPA in California since 1988. He is currently employed with a private company. While performing an in-depth review of Gemstar's March 31, 2000 financial statements, Palbaum reviewed the work papers supporting the auditors' conclusions on significant issues arising from the year-end financial statements. As the co-engagement partner for all periods following his in-depth review through the March 31, 2002 review, Palbaum shared primary responsibility for the conduct of the reviews and audits of Gemstar's financial statements. + John M. Wong, CPA , 43, of Huntington Beach, California, was the KPMG engagement partner for the Gemstar engagement for the audits of the fiscal years ended March 31, 1996 through March 31, 2000. He did not participate in any subsequent audits or reviews of Gemstar's financial statements. Wong has been a KPMG partner since July 1995 and currently works out of the firm's Costa Mesa, California office. He was a manager for the Gemstar audit for the fiscal years ended March 31, 1993 through 1995. Wong has been licensed as a CPA in California since 1985. He has worked at KPMG since January 1984. As the engagement partner, Wong had primary responsibility for the conduct of the reviews and audit of Gemstar's financial statements for the year ended March 31, 2000. + Kenneth B. Janeski, CPA , 55, of Tarzana, California, was the KPMG SEC reviewing partner for the Gemstar engagement from 1999 through the March 31, 2002 review. Janeski has been a KPMG partner since 1982, and has worked for KPMG since 1972. He is currently assigned to the firm's Los Angeles office. Janeski has been licensed as a CPA in California since 1974 and New York since 1981. As the SEC reviewing partner, Janeski participated in planning the Gemstar engagements, consulted with other members of the audit team and reviewed the company's financial statements for compliance with professional standards and SEC rules and regulations. + David A. Hori, CPA , 35, of New York, New York, was a KPMG senior manager for the Gemstar engagement from late 1999 through the March 31, 2002 review. Hori has been a KPMG senior manager since 1999, and has worked for KPMG since 1992. Hori has been licensed as a CPA in California since 1994. Hori is currently assigned to KPMG's office in Phoenix, Arizona. As senior manager, Hori supervised the reviews and audits of Gemstar's financial statements. + + C. OTHER ENTITIES + Gemstar-TV Guide International, Inc. is a Delaware corporation with its principal place of business in Hollywood, California. Gemstar's common stock is registered with the Commission pursuant to Section 12(g) of the Exchange Act and listed on the Nasdaq National Market System. In August and September 2002, Gemstar announced that it would restate its financial results for the year ended December 31, 2001. In addition, from November 14, 2002 through March 31, 2003, Gemstar twice filed amended periodic reports to restate its financial results for 2001 and the first quarter of 2002 and restated its financial results for the second and third quarters of 2002. Also on March 31, 2003, Gemstar filed its 2003 Form 10-K to become current on its financial reporting obligations. + Scientific-Atlanta, Inc. , a public company, provides equipment and services to the cable television industry. Gemstar and Scientific-Atlanta were parties to a License and Settlement Agreement, which expired in July 1999 and under which Scientific-Atlanta paid fees to Gemstar in connection with Scientific-Atlanta's manufacture and sale of cable television set-top boxes. Between late 1998 and early 2001, Gemstar and Scientific-Atlanta initiated seven different lawsuits against one another relating to the purported misappropriation of each other's intellectual property. From early 2000 through early 2002, Gemstar recognized and reported, but had not received, $113.5 million in licensing revenue from Scientific-Atlanta. In November 2002, Gemstar reversed the Scientific-Atlanta licensing revenue that it had recognized. + Time Warner, Inc. , fka AOL Time Warner, Inc. ("AOLTW"), a public company formed in connection with the January 2001 merger of America Online, Inc. ("AOL") and Time Warner, Inc., operates various media businesses, including cable television systems through its Time Warner Cable ("TWC") subsidiary. Gemstar entered into an eight-year licensing agreement with AOL and received a $23.5 million upfront nonrefundable fee in May 1999 and recognized the $23.5 million from May 1999 through June 2000. From late 2001 through early 2002, Gemstar recognized and reported, but had not received, $18.1 million in licensing revenue from TWC. In March 2003, Gemstar restated its recognition of the $23.5 million upfront fee so that the fee would be recognized over the eight-year term of the agreement and reversed the TWC licensing revenue that it had recognized. + Fantasy Sports Properties, Inc. , a privately owned company, creates and implements Internet-based fantasy sports games. In June 2001, Gemstar acquired Fantasy Sports' intellectual property by paying $750,000 in cash and agreeing to run $20 million in advertising for Fantasy Sports. During 2001, Gemstar ran advertising for Fantasy Sports and recognized and reported $20 million in advertising revenue from Fantasy Sports. In November 2002, Gemstar reversed the Fantasy Sports advertising revenue that it had recognized. + Motorola, Inc. , a public company, entered into an October 2000 License and Settlement Agreement with Gemstar, under which Gemstar ran advertising for Motorola and recognized and reported a total of $17.5 million in advertising revenue in 2001 and 2002. Gemstar reversed the recognition of this revenue in March 2003. + Tribune Company , a public company, operates various media businesses, including the WGN television station. In April 2001, Tribune acquired Gemstar's WGN distribution business by paying $106 million in cash and agreeing to purchase $100 million in advertising from Gemstar. Under this agreement, Gemstar ran advertising for Tribune and recognized and reported $26 million in advertising revenue in 2001 and 2002. In March 2003, Gemstar reversed the recognition of the $26 million as advertising revenue and allocated it to the sale of the WGN distribution business and interest income. + + D. BACKGROUND: THE KPMG AUDITORS' UNDERSTANDING OF GEMSTAR'S BUSINESS AND REPORTED FINANCIAL RESULTS + + KPMG audited or reviewed Gemstar's annual and quarterly financial statements from the quarter ended September 30, 1999, through the quarter ended March 30, 2002. From these audits and reviews, the KPMG auditors understood that in the fiscal year ended March 31, 2000, virtually all of Gemstar's revenues were derived from licensing Gemstar technologies. During this period, Gemstar's primary technology was an interactive program guide ("IPG") that enabled consumers to navigate through, sort, obtain information on, and select television programs. + The KPMG auditors further understood that after Gemstar's July 2000 TV Guide acquisition, Gemstar divided its business into three primary sectors. The first sector was the Technology and Licensing ("Licensing") Sector, which developed and licensed Gemstar's technologies, including the IPG. Gemstar generated revenue in this sector by charging a licensing fee for the right to use the technologies. The second sector was the Interactive Platform ("Interactive") Sector, which constructed and operated the infrastructure for the delivery of IPG services and IPG and Internet advertising to consumers. Gemstar generated revenues in this sector principally by selling advertising on the IPG. The third sector was the Media and Services ("Media") Sector, which operated various media properties, including the TV Guide magazine. Gemstar generated revenues in this sector from subscription fees, advertising revenues, programming fees, and catalog sales. + The KPMG auditors also knew from their audits and reviews of Gemstar's financial statements that beginning in the quarter ended September 30, 2000, Gemstar began separately reporting sector results. They also reasonably should have known that Gemstar touted the strong performance of the Licensing and Interactive Sectors; that during 2001, the Interactive Sector's financial performance was important to the securities market and to the market's valuation of Gemstar stock, even though the Interactive Sector contributed only a small percentage to Gemstar's consolidated financial results; and that Gemstar's IPG was a new and untested advertising medium. + + E. KPMG'S AUDITS AND REVIEWS OF GEMSTAR'S FINANCIAL STATEMENTS + 1. Licensing Revenue + a. The Improper Accounting + The KPMG auditors knew that Gemstar was recognizing revenue from AOL, Scientific-Atlanta, and TWC, and reasonably should have known that the revenue was material to Gemstar's financial statements. 4 As stated below, the KPMG auditors reasonably should have known that Gemstar's recognition of the revenue was not in accordance with GAAP. + i. AOL + Gemstar recognized and reported a $23.5 million upfront nonrefundable fee from AOL as revenue over the 12 months ended April 2000, which consisted of $21.5 million in the fiscal year ended March 31, 2000 and $2 million in the quarter ended June 30, 2000. This revenue was material to Gemstar's reported financial results. + The KPMG auditors knew or reasonably should have known that (1) AOL paid the amount as an upfront nonrefundable fee under an IPG agreement with Gemstar; and (2) Gemstar's accounting for this fee was based on management's representation that the fee was for transfer of the license and for 12 months of technical assistance and engineering support. 5 The KPMG auditors also reasonably should have known, however, that (1) under the IPG agreement, the license had a term of eight years and Gemstar agreed to provide AOL with its IPG technology and certain technical assistance and engineering support for the eight-year license term; and (2) Gemstar had insufficient evidence to support its recognition of the revenue in the first 12 months. + The KPMG auditors therefore reasonably should have known that Gemstar's recognition of the AOL upfront fee did not conform to GAAP because Gemstar should have recognized the AOL upfront fee over the IPG agreement's eight-year term and not over 12 months. See Statement of Financial Accounting Concepts ("SFAC") No. 5, ¶ 84d (revenues recognized as earned as time passes if rights to use assets extend continuously over time); Staff Accounting Bulletin ("SAB") No. 101 (effective no later than the fourth fiscal quarter of fiscal year beginning after December 15, 1999) and authorities cited therein (upfront fees must be recognized over the contractual terms in which goods or services are to be provided or rights to use assets are to be extended). + ii. Scientific-Atlanta and TWC + + Gemstar recognized and reported $113.5 million in Scientific-Atlanta revenue from the quarter and year ended March 31, 2000, through the quarter ended March 31, 2002. At all times, the Scientific-Atlanta revenue was material to Gemstar's consolidated and separately reported Licensing Sector financial results. Gemstar recognized a total of $18.1 million in TWC revenue in the last two quarters of 2001 and the first quarter of 2002. The TWC revenue was material to Gemstar's consolidated and separately reported Licensing Sector financial results. + The KPMG auditors knew that Gemstar based its recognition of the Scientific-Atlanta revenue on (1) Gemstar management's assertions that (a) Scientific-Atlanta was incorporating IPG technology into its cable set-top boxes; (b) Scientific-Atlanta had communicated its intention to enter into a new licensing agreement soon; and (c) Gemstar's settlement discussions with Scientific-Atlanta were consistent with the expectation that Gemstar would receive revenue from Scientific-Atlanta that was at least commensurate with the amount of revenue that had been recognized; and (2) with respect to the March 31, 2000 audit, Gemstar's receipt of a document from Scientific-Atlanta reporting the number and type of set-top boxes that Scientific-Atlanta had shipped during the last half of 1999. Gemstar based its conclusion regarding the collectibility of the revenue on the fact that Gemstar's outside legal counsel had issued an opinion that it was "probable" that Gemstar would prevail in its pending litigation against Scientific-Atlanta in which Gemstar alleged that Scientific-Atlanta used Gemstar's technology in Scientific-Atlanta's set-top boxes. + The KPMG auditors also knew that Gemstar based its recognition of the TWC revenue on Gemstar management's assertion that its IPG agreement with AOL applied to TWC and that AOLTW had acknowledged that the AOL IPG agreement applied to TWC. + The KPMG auditors, however, also knew or reasonably should have known that (1) Gemstar did not have a current contract with Scientific-Atlanta, and the AOL IPG agreement by its terms did not apply to TWC; (2) Gemstar had not received any of the recognized revenue; (3) Scientific-Atlanta was disputing that it owed Gemstar the revenue; and (4) Gemstar's receipt of the revenue was contingent on Gemstar negotiating contracts with Scientific-Atlanta and AOLTW or settling or prevailing in litigation against Scientific-Atlanta. + The KPMG auditors therefore reasonably should have known that Gemstar's recognition of the Scientific-Atlanta revenue and the TWC revenue did not conform to GAAP. Specifically, they reasonably should have known that Gemstar did not have an arrangement with Scientific-Atlanta or TWC. See SFAC No. 5, 83 (revenue generally recognized when it is both realized or realizable and earned); SAB No. 101 and authorities cited therein (revenue realized or realizable and earned when, among other things, persuasive evidence of arrangement exists). + + b. The Improper Disclosure + The KPMG auditors also reasonably should have known that Gemstar's disclosed revenue recognition policies in Forms 10-K as relating to the AOL, Scientific-Atlanta, and TWC revenue did not comply with GAAP disclosure requirements and that Gemstar's disclosure of the AOL IPG agreement was inconsistent with Gemstar's accounting for the AOL upfront fee. + + i. AOL + The KPMG auditors knew that Gemstar represented in its financial statement footnotes that its revenue recognition policy for upfront license fees was to recognize revenue ratably over the specified term of the particular license and that Gemstar had no disclosed revenue recognition policy for technical assistance and engineering support revenue. They also reasonably should have known that Gemstar described the AOL transaction in a Form 10-K as a "long-term licensing agreement with AOL" and did not disclose providing technical assistance or engineering support to AOL for, or recognizing the $23.5 million upfront nonrefundable fee over, 12 months. See AICPA Codification of Statements on Auditing Standards ("AU") §§550.02 & 04 (under GAAS, auditors should read company's annual report). + In light of their knowledge regarding the AOL transaction and Gemstar's accounting for the AOL upfront nonrefundable fee, the KPMG auditors reasonably should have known that Gemstar's disclosures of its recognition policies for upfront license fees and the AOL transaction and failure to disclose a revenue recognition policy for technical assistance and engineering support revenue was inconsistent with Gemstar's accounting for the AOL upfront nonrefundable fee and did not conform to GAAP. Accounting Principles Board ("APB") Opinion No. 22, ¶ 8 (GAAP requires disclosure of all significant accounting policies). + + ii. Scientific-Atlanta and TWC + The KPMG auditors knew that Gemstar represented in its financial statement footnotes that its revenue recognition policy for licensing revenue was to recognize revenue when Gemstar learned that a manufacturer had shipped units incorporating Gemstar's patented technology. + In light of their knowledge regarding the Scientific-Atlanta and TWC revenue, the KPMG auditors reasonably should have known that Gemstar's disclosed licensing revenue recognition policy was inadequate under GAAP to describe Gemstar's actual recognition of the contingent Scientific-Atlanta and TWC revenue. See APB Opinion No. 22, ¶¶ 8 & 12 (company must describe all significant accounting policies, including accounting policies that involve "unusual or innovative" applications of GAAP); see SAB 101 (company should disclose information necessary to understanding of financial results, including information relating to unusual or infrequent transactions or to uncertainties that might reasonably be expected to have a material effect on financial results). + + 2. IPG Advertising Revenue + a. The Improper Accounting + + The KPMG auditors knew or reasonably should have known that Gemstar was recognizing IPG advertising revenue from multi-element transactions with Motorola and Tribune, from a non-monetary transaction with Fantasy Sports, and from certain print advertisers, and reasonably should have known that the revenue was material to Gemstar's financial statements. 6 As stated below, the KPMG auditors reasonably should have known that Gemstar's recognition of the revenue was not in accordance with GAAP. + + i. Motorola and Tribune + + Gemstar recognized and reported $17.5 million in IPG advertising revenue from Motorola during 2001 and the first quarter of 2002. Gemstar recognized and reported $17 million in IPG advertising revenue from Tribune during the last three quarters of 2001 and the first quarter of 2002. The Motorola and Tribune IPG advertising revenues were each material to Gemstar's separately reported Interactive Sector financial results. + The KPMG auditors knew or reasonably should have known that (1) Gemstar entered into a multi-element transaction with Motorola under which Motorola paid Gemstar $188 million for a license to use Gemstar's IPG technology, to settle pending litigation, and to purchase $17.5 million in prepaid advertising; (2) Gemstar entered into a multi-element transaction with Tribune under which Tribune agreed to purchase from Gemstar its WGN distribution business for $106 million in cash and $100 million in advertising; and (3) Gemstar was recognizing millions of dollars in IPG advertising revenue from Motorola and Tribune. They also reasonably should have known that Gemstar did not have sufficient stand-alone IPG advertising revenue (i.e., revenue from advertising that was not part of a related-party, non-monetary, or multi-element transaction) to provide a basis on which to fair value the Motorola and Tribune IPG advertising components of the multi-element transactions. + The KPMG auditors therefore reasonably should have known that Gemstar's recognition of the Motorola and Tribune IPG advertising revenue did not conform to GAAP. Specifically, they should have known that Gemstar could not reliably, verifiably, and objectively determine the fair value of the IPG advertising. See, e.g., SAB 101, Frequently Asked Questions and Answers, Question 4 (revenue from multi-element transaction should be allocated to various elements based on fair value that is reliable, verifiable, and objectively determinable; prices listed in multi-element arrangement may not be representative of fair value because prices of different components of transaction can be altered in negotiations and still result in same aggregate consideration). + + ii. Fantasy Sports + Gemstar recognized and reported $20 million in IPG advertising revenue from Fantasy Sports in 2001, including $1.9 million in the quarter ended March 31, 2001. This revenue was material to Gemstar's separately reported Interactive Sector financial results. + The KPMG auditors knew that (1) in June 2001, Gemstar entered into a non-monetary transaction to purchase Fantasy Sports' intellectual property for $750,000 in cash and $20 million in Gemstar advertising; (2) in the first quarter of 2001 and before consummating the non-monetary transaction with, or receiving any payment from, Fantasy Sports, Gemstar ran IPG advertising for Fantasy Sports and recognized and reported $1.9 million in IPG advertising revenue; and (3) in 2001, Gemstar ran IPG advertising for Fantasy Sports and recognized $20 million in IPG advertising revenue. + They also reasonably should have known that (1) Fantasy Sports did not have the financial ability to pay for the $1.9 million in IPG advertising if the non-monetary transaction was not consummated; and (2) Gemstar did not have sufficient stand-alone IPG advertising revenue (i.e., revenue from advertising that was not part of a related-party, non-monetary, or multi-element transaction) to provide a basis on which to fair value the Fantasy Sports IPG advertising. + The KPMG auditors therefore reasonably should have known that Gemstar's recognition of the Fantasy Sports IPG advertising revenue in the first quarter of 2001 did not conform to GAAP. Specifically, they should have known that Gemstar did not have an arrangement with Fantasy Sports and there was no assurance of collectibility, in that Gemstar had not consummated the non-monetary transaction with Fantasy Sports and Fantasy Sports did not otherwise have the financial ability to pay for the advertising. See SFAC No. 5, ¶ 83 (revenue generally recognized when it is both realized or realizable and earned); SAB No. 101 and authorities cited therein (revenue realized or realizable and earned when persuasive evidence of arrangement exists, delivery has occurred or services have been rendered, price is fixed or determinable, and collectibility is reasonably assured). + The KPMG auditors also reasonably should have known that Gemstar's recognition of the Fantasy Sports IPG advertising revenue for all of 2001 did not conform to GAAP. Specifically, they should have known that Gemstar could not reliably, verifiably, and objectively determine the fair value of the IPG advertising. See APB Opinion No. 29 (revenue from non-monetary transactions must be based on fair value of assets involved; fair value to be used is that of asset surrendered unless fair value of asset received is more clearly evident; fair value defined as estimated realizable values in cash transactions of same or similar assets, quoted market prices, independent appraisals, estimated fair values of assets or services received in exchange, and other available evidence). 7 + + iii. Print Advertisers + + In the last two quarters of 2001, Gemstar gave advertisers that had already committed to purchase a total of $5.6 million in print advertising an equal amount of IPG advertising for free. Gemstar, however, recognized and reported the $5.6 million in revenue from these advertisers as IPG advertising revenue in the Interactive Sector and not as print advertising revenue in the Media Sector. This revenue was material to Gemstar's separately reported Interactive Sector financial results. + During the September 30, 2001 review, the KPMG auditors received information from a TV Guide controller concerning the allocation of IPG revenue, specifically that Gemstar was allocating print advertising revenue from TV Guide to other Gemstar sectors. Despite this information, the KPMG auditors relied on an assurance from a Gemstar accountant that the amount of such multi-platform advertising revenue was not significant in 2001 and that Gemstar was developing a policy for proper recognition of such revenue in the future. Had the KPMG auditors looked into this issue, they would likely have determined that Gemstar was improperly recognizing Media Sector print advertising revenue as Interactive Sector IPG advertising revenue. + b. The Improper Disclosure of the Motorola and Tribune Revenue and Transactions + + The KPMG auditors reasonably should have known that Gemstar's disclosure in Forms 10-K regarding its Interactive Sector revenue and the Motorola and Tribune revenue and transactions was inconsistent with Gemstar's accounting for those transactions. The KPMG auditors knew that Gemstar, in its 2001 financial statement footnotes, separately reported its Interactive Sector financial results. They also should have known that Gemstar, in its 2001 Form 10-K, touted the substantial growth in Interactive Sector revenues and attributed that growth to the successful launch of IPG advertising but did not disclose that a material amount of Interactive Sector revenue resulted from the multi-element Motorola and Tribune transactions. See AU §§550.02 & 04 (auditors should read company's annual report). + The KPMG auditors also knew that Gemstar, in its 2000 and 2001 financial statement footnotes, stated that Gemstar had settled a pending arbitration and lawsuit with, and provided for a long-term license to, Motorola but omitted to disclose the $17.5 million advertising component of the transaction. + The KPMG auditors also reasonably should have known that Gemstar, in its 2001 financial statement footnotes, stated that Gemstar had sold its WGN distribution business to Tribune but omitted to disclose the $100 million advertising component of the transaction. + In light of their knowledge regarding the Motorola and Tribune transactions, the KPMG auditors reasonably should have known that Gemstar's disclosure regarding its Interactive Sector revenue and the Motorola and Tribune transactions and IPG advertising revenue was inconsistent with Gemstar's accounting for the transactions. + 3. KPMG's Policy Regarding Possible Restatements + From April to September 2002, Gemstar's Audit Committee conducted a review of Gemstar's accounting policies and procedures relating to Gemstar's 2001 financial statements. In mid-August 2002, KPMG learned that Gemstar was considering restating its recognition of IPG advertising revenue from the Fantasy Sports transaction and that the Audit Committee was continuing to review Gemstar's recognition practices for certain additional transactions. Also in mid-August 2002, as part of the Gemstar's Audit Committee's investigation into potential restatements of Gemstar's financial statements, certain additional information came to light that was not conveyed to KPMG's Department of Professional Practice. This information included evidence indicating that senior Gemstar management may have been involved in an intentional misallocation of print advertising revenue to the Interactive Sector and that Gemstar's evidence to support the fair value of its IPG advertising may not have been sufficient. + Although KPMG did have in place a policy that required an engagement team involved in potential restatements of financial statements upon which the firm had issued an audit report to consult with KPMG's Department of Professional Practice regarding the specific transaction being proposed for restatement by the issuer of the financial statements, it did not have in place a policy that required that such consultation with the Department of Professional Practice encompass all significant issues that had come to the attention of the engagement team subsequent to the issuance of the audit report on the financial statements in question. Consultation pursuant to such a policy should have led KPMG to become aware of and to consider the additional evidence that came to light during the Audit Committee's investigation and could have led KPMG to a more prompt decision to withdraw its previously issued audit report on Gemstar's 2001 financial statements. KPMG did not take that step until November 22, 2002. 8 + F. RESPONDENTS ENGAGED IN IMPROPER PROFESSIONAL CONDUCT WITHIN THE MEANING OF COMMISSION'S RULE OF PRACTICE 102(e) + Rule 102(e)(1)(ii) of the Commission's Rules of Practice provides, in part, that the Commission may censure or deny, temporarily or permanently, the privilege of appearing or practicing before the Commission to any person who is found by the Commission to have engaged in improper professional conduct. Rule 102(e)(1)(iv) defines improper professional conduct with respect to persons licensed to practice as accountants. + As applicable here, improper professional conduct means a violation of applicable professional standards that resulted from "repeated instances of unreasonable conduct … that indicate a lack of competence to practice before the Commission." Rule 102(e)(1)(iii)(B)(2). As stated below, KPMG and its auditors acted unreasonably in failing to require its client to comply with GAAP and in failing to comply with GAAS during its audits and reviews of Gemstar's financial statements. + 1. Failure to Exercise Professional Care and Skepticism, Failure to Obtain Sufficient Competent Evidential Matter, and Over-Reliance on Management Representations + GAAS requires that auditors exercise due professional care in performing an audit or review and in preparing the audit report. AU §230.01. Due professional care requires that the auditor exercise professional skepticism in performing audit and review procedures and gathering and analyzing audit evidence. AU §230.07-.08. "In exercising professional skepticism, the auditor should not be satisfied with less than persuasive evidence because of a belief that management is honest." AU §230.09. Exercise of professional skepticism requires auditors to demonstrate a questioning mind and to critically assess audit evidence. AU §316.27. + GAAS also requires that auditors obtain sufficient competent evidential matter through inspection, observation, inquiries, and confirmations to afford a reasonable basis for an audit opinion. AU §326.01. Evidence obtained from independent sources outside the company provides greater assurance of reliability than that secured solely within the company. AU §326.21a. Auditors may not substitute management's representations for the application of auditing procedures necessary to afford a reasonable basis for an audit opinion. AU §333.02. + In auditing and reviewing Gemstar's financial statements, the KPMG auditors acted unreasonably in failing to exercise due professional care and skepticism, failing to obtain sufficient competent evidential matter, and substituting management's representations for competent evidential matter. + With respect to the AOL revenue, Wong, Palbaum, Hori, and KPMG unreasonably failed to exercise professional care and skepticism in reviewing the AOL IPG agreement and in testing Gemstar's representations regarding the purpose of the upfront nonrefundable fee. They also unreasonably failed to obtain sufficient competent evidential matter and substituted management's representations for such competent evidential matter regarding Gemstar's recognition of the AOL upfront nonrefundable fee. Had they reasonably complied with GAAS, they would have concluded that Gemstar had improperly recognized the revenue. + With respect to the Scientific-Atlanta and TWC revenue, Wong (as to Scientific-Atlanta), Palbaum, Janeski, Hori, and KPMG unreasonably failed to exercise professional care and skepticism, failed to obtain sufficient competent evidence, and substituted management's representations for such competent evidential matter in determining that there was a final arrangement. Had they reasonably complied with GAAS, they would have concluded that Gemstar had improperly recognized the revenue. + With respect to the first quarter 2001 Fantasy Sports revenue, Palbaum, Janeski, Hori, and KPMG unreasonably failed to exercise professional care and skepticism in determining that there was a final arrangement and that collectibility was reasonably assured. Had they reasonably exercised professional care and skepticism, they would have concluded that Gemstar had improperly recognized the revenue. + With respect to the Motorola, Tribune and Fantasy Sports revenue, Palbaum, Janeski (as to Motorola and Fantasy Sports), Hori, and KPMG unreasonably failed to exercise professional care and skepticism, failed to obtain sufficient competent evidence as to the fair value of the IPG advertising, and substituted management's representations for such competent evidential matter in ensuring that Gemstar's recognition of the Interactive Sector revenue from these transactions was based on the advertising's fair value. Had they reasonably complied with GAAS, they would have concluded that Gemstar had improperly recognized the revenue. + With respect to the print advertising Interactive Sector revenue, Palbaum, Hori, and KPMG unreasonably failed to exercise professional care and skepticism, failed to obtain sufficient competent evidence, and substituted management's representations for such competent evidential matter in ensuring that Gemstar properly allocated the print advertising revenue to the Media Sector and not the Interactive Sector. Had they reasonably complied with GAAS, they would have concluded that Gemstar had improperly allocated the print advertising revenue to the Interactive Sector instead of the Media Sector. + 2. Failure to Take Appropriate Action to Correct Disclosure that Did Not Comply with GAAP and/or Was Inconsistent with Gemstar's Financial Statements + GAAS provides that if a company omits from its financial statements, including the accompanying notes, information that is required by GAAP, the auditor should express a qualified or adverse audit opinion and should provide the information in the auditor's report. AU §431.03. GAAS further requires auditors to read the other information in a company's annual reports and to consider whether this other information is materially inconsistent with information in the financial statements and whether the auditors should take appropriate action to correct the inconsistency. AU §§550.02 & .04. + With respect to the AOL revenue, Wong, Palbaum, and Hori knew that Gemstar was recognizing the AOL upfront nonrefundable fee as compensation for providing technical assistance and engineering support and the transfer of a license; they also reasonably should have known that Gemstar had no stated policy for the recognition of revenue for technical assistance and engineering support, and that Gemstar's accounting for the AOL upfront fee was inconsistent with its disclosure of the AOL transaction. Wong, Palbaum, Hori, and KPMG, however, unreasonably failed to take appropriate action. + With respect to the Scientific-Atlanta and TWC revenue, Wong (as to Scientific-Atlanta), Palbaum, Janeski, and Hori reasonably should have known that Gemstar's disclosed licensing revenue recognition policy was inadequate under GAAP to support the recognition of the contingent Scientific-Atlanta and TWC revenue. Wong (as to Scientific-Atlanta), Palbaum, Janeski, Hori, and KPMG unreasonably failed to take appropriate action. + With respect to the Motorola and Tribune revenue, Palbaum, Janeski (as to Motorola), and Hori reasonably should have known that Gemstar's disclosure regarding the Interactive Sector financial results and the reasons for those results was inconsistent with Gemstar's recognition of IPG revenue from the multi-element Motorola and Tribune transactions. They also reasonably should have known that Gemstar's disclosure regarding the fair value of the Motorola and Tribune IPG advertising and the terms of the Motorola and Tribune transactions was inconsistent with Gemstar's recognition of IPG revenue from these transactions. Palbaum, Janeski (as to Motorola), Hori, and KPMG unreasonably failed to take appropriate action. + 3. Failure to Render Accurate Audit Reports + GAAS requires that the auditor's report express an opinion on the financial statements taken as a whole and must contain a clear indication of the character of the auditor's work. AU § 508.04. The auditor can determine that he is able to issue an audit report containing an unqualified opinion only if he has conducted his audit in accordance with GAAS. AU § 508.07. + In auditing Gemstar's financial statements, Wong, Palbaum, Janeski, and Hori acted unreasonably in causing KPMG to render its audit reports containing unqualified opinions. As stated above, they reasonably should have known that Gemstar's financial statements did not conform to GAAP and that they did not conduct their audits in accordance with GAAS. KPMG, however, issued audit reports containing unqualified opinions that inaccurately stated that Gemstar's financial statements conformed to GAAP and that they had conducted their audits in accordance with GAAS. + G. CONCLUSION AND UNDERTAKINGS + Based on the foregoing, the Commission finds that KPMG engaged in improper professional conduct within the meaning of Rule 102(e)(1)(ii) of the Commission's Rules of Practice. Specifically, KPMG engaged in repeated instances of unreasonable conduct, each resulting in a violation of applicable professional standards. + KPMG undertakes: + Within 10 days of the date of this Order, to pay $10,000,000 to the Clerk of the United States District Court for the Central District of California, Western Division, together with a cover letter identifying KPMG as a respondent in a Commission administrative proceeding related to SEC v. Gemstar-TV Guide International, Inc. , Civil Action No. 04-4506 (C.D. Cal.) and specifying that the payment is made in connection with the Commission's administrative proceeding. KPMG shall simultaneously transmit photocopies of such payment and letter to Kelly Bowers, Securities and Exchange Commission, 5670 Wilshire Blvd., 11th Floor, Los Angeles, California 90036. By making this payment, KPMG relinquishes all legal and equitable right, title, and interest in such funds, and no part of the funds shall be returned to KPMG. The Clerk shall deposit the funds into an interest bearing account. These funds, together with any interest and income earned thereon (collectively, the "Fund"), shall be held until further order of the Court. In accordance with the guidelines set by the Director of the Administrative Office of the United States District Courts, the Clerk is directed, without further order of the Court, to deduct from the income earned on the money in the Fund a fee equal to ten percent of the income earned on the Fund. Such fee shall not exceed that authorized by the Judicial Conference of the United States. The Commission will by motion propose a plan to distribute the Fund subject to the Court's approval. Such a plan will provide that the Fund shall be distributed pursuant to the Fair Fund provisions of Section 308(a) of the Sarbanes-Oxley Act of 2002. KPMG acknowledges that such funds will not be used to pay attorneys' fees in any private damages action brought against KPMG by or on behalf of one or more Gemstar investors.   + To provide (a) training to its partners and managers with respect to (i) qualitative materiality; (ii) accounting for multi-element transactions; and (iii) consideration of appropriate disclosure related to complex accounting issues, which are defined as accounting issues about which an engagement team specifically consulted with the Department of Professional Practice, local Professional Practice Partner, or the SEC Reviewing Partner; by June 30, 2005, KPMG shall certify in writing to the Commission that such training has occurred; and (b) continuing training to its audit personnel on such topics, as appropriate.   + To adopt a policy that (1) requires engagement teams to (a) consult with the Department of Professional Practice whenever (i) a registrant informs the engagement team that it is considering restating previously issued financial statements (for reasons other than due to the adoption of new accounting pronouncements, a change in accounting principle or the application of an accounting principle that requires or permits retroactive application) or (ii) the engagement team independently is considering whether to advise the registrant that previously issued financial statements should be restated (for reasons other than due to the adoption of new accounting pronouncements, a change in accounting principle or the application of an accounting principle that requires or permits retroactive application); (b) to include in such consultation all significant new information related to the previously issued financial statements not known by the engagement team at the time the audit report was issued and not limit its consultation to the initial issue or issues which may have led to a consideration of a possible restatement; and (c) document its communication and consultation with the Department of Professional Practice, which documentation shall be included by the engagement team in KPMG's work papers for the client and a copy sent to the Department of Professional Practice; and (2) requires the Department of Professional Practice, upon a determination, either by the issuer of the financial statements or by KPMG, that there is a likely material error in the previously issued financial statements, to review the memorandum previously prepared by the engagement team documenting significant issues that arose during the audits of the financial statements that may be restated (currently the Significant Issues and Decisions Document, or its functional equivalent). By January 31, 2005, KPMG shall certify in writing to the Commission that such a policy has been established and implemented.   + In determining whether to accept KPMG's Offer, the Commission has considered the undertakings set forth in paragraphs 1 through 3, above. + Based on the foregoing, the Commission finds that Palbaum, Wong, Janeski and Hori engaged in improper professional conduct pursuant to Rule 102(e)(1)(ii) of the Commission's Rules of Practice. Specifically, Palbaum, Hori, Wong, and Janeski engaged in repeated instances of unreasonable conduct, each resulting in a violation of applicable professional standards. + IV. + On the basis of the foregoing, the Commission deems it appropriate to impose the sanctions agreed to in Respondents KPMG's, Palbaum's, Hori's, Wong's, and Janeski's Offers. + Accordingly, it is hereby ORDERED, effective immediately, that: + KPMG is censured pursuant to Rule 102(e)(1)(ii) of the Commission's Rules of Practice.   + Palbaum, Hori, Wong, and Janeski are each denied the privilege of appearing or practicing before the Commission as an accountant.   + After three years (Palbaum), eighteen months (Hori), and one year (Wong and Janeski), respectively, from the date of this Order, Palbaum, Hori, Wong, and Janeski may each request that the Commission consider his reinstatement by submitting an application (attention: Office of the Chief Accountant) to resume appearing or practicing before the Commission as:   + a preparer or reviewer, or a person responsible for the preparation or review, of any public company's financial statements that are filed with the Commission. Such an application must satisfy the Commission that such Respondent's work in his practice before the Commission will be reviewed either by the independent audit committee of the public company for which he works or in some other acceptable manner, as long as he practices before the Commission in this capacity; and/or   + an independent accountant. Such an application must satisfy the Commission that:   + such Respondent, or the public accounting firm with which he is associated, is registered with the Public Company Accounting Oversight Board ("Board") in accordance with the Sarbanes-Oxley Act of 2002, and such registration continues to be effective;   + such Respondent, or the registered accounting firm with which he is associated, has been inspected by the Board and that inspection did not identify any criticisms of or potential defects in such Respondent's or the firm's quality control system that would indicate that such Respondent will not receive appropriate supervision or, if the Board has not conducted an inspection, has received an unqualified report relating to his, or the firm's, most recent peer review conducted in accordance with the guidelines adopted by the former SEC Practice Section of the American Institute of Certified Public Accountants Division for CPA Firms or an organization providing equivalent oversight and quality control functions;   + such Respondent has resolved all disciplinary issues with the Board, and has complied with all terms and conditions of any sanctions imposed by the Board (other than reinstatement by the Commission); and   + such Respondent acknowledges his responsibility, as long as such Respondent appears or practices before the Commission as an independent accountant, to comply with all requirements of the Commission and the Board, including, but not limited to, all requirements relating to registration, inspections, concurring partner reviews and quality control standards.   + The Commission will consider an application by each such Respondent to resume appearing or practicing before the Commission provided that his state CPA license is current and he has resolved all other disciplinary issues with the applicable state boards of accountancy. However, if state licensure is dependent on reinstatement by the Commission, the Commission will consider an application on its other merits. The Commission's review may include consideration of, in addition to the matters referenced above, any other matters relating to such Respondent's character, integrity, professional conduct, or qualifications to appear or practice before the Commission.   + By the Commission. + + + + + Jonathan G. Katz + Secretary + + + Endnotes + 1 Rule 102(e)(1)(ii) provides, in pertinent part, that the "Commission may censure a person or deny, temporarily or permanently, the privilege of appearing or practicing before it to any person who is found…to have engaged in improper professional conduct." + 2 The findings herein are made pursuant to the Respondents' Offers of Settlement and are not binding on any other person or entity in this or any other proceeding. + 3 On December 31, 2000, Gemstar changed its fiscal year end from March 31 to December 31. + 4 The discussions concerning AOL relate to Wong, Palbaum, Hori, and KPMG; the discussions concerning Scientific-Atlanta relate to Wong (for the March 31, 2000 audit only), Palbaum, Janeski, Hori, and KPMG; and the discussions concerning TWC relate to Palbaum, Janeski, Hori, and KPMG. + 5 The KPMG auditors also understood that the AOL IPG agreement provided that AOL would pay Gemstar other various fees, including monthly subscriber fees, which Gemstar's management represented would be substantial, for the remainder of the agreement's term. The IPG agreement also provided that AOL would have to pay Gemstar a renewal fee to extend the term of the agreement. + 6 The discussions concerning Motorola and Fantasy Sports relate to Palbaum, Janeski, Hori, and KPMG; and the discussions concerning Tribune and the print advertisers relate to Palbaum, Hori (for the March 31, 2002 review only as to Tribune), and KPMG. + 7 APB Opinion No. 29 also states that an issuer that engages in one or more non-monetary transactions during a period should disclose in its periodic financial statements the nature of the transactions, the basis of the accounting for the assets transferred, and gains or losses recognized on transfers. Gemstar, however, failed to disclose the non-monetary Fantasy Sports transaction in its 2001 Forms 10-Q and did not disclose the transaction until it filed its 2001 Form 10-K. + 8 See AU § 561 (procedures to be followed by auditor who, subsequent to the date of report upon audited financial statements, becomes aware that facts may have existed at date of audit report and may have affected the report had he then been made aware of such facts). + + + +See also the Order in this matter --> + + + + + + + + + + + + + + + + + + + + + + + + + + Return to top + + + + + SEC homepage + + + + + + + + + + + + + + About the SEC + + + + + + Budget & Performance + + + Careers + + + Commission Votes + + + Contact + + + Contracts + + + + + + + + Transparency + + + + + + Accessibility & Disability + + + Super Intelligence + + + FOIA + + + Inspector General + + + No FEAR Act Data + + + Ombuds + + + SEC Excess Personal Property Guidance + + + + + + + + Websites + + + + + + Investor.gov + + + Related Sites + + + USA.gov + + + + + + + + Site Information + + + + + + Plain Writing + + + Privacy & Security + + + Site Map + + + + + + + + + + + + + + + + + + Stay connected. 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McCracken + + + + + + + + + + + + John Mervyn Nabors and Eric J. McCracken + + + + + + + + + + + + + + + + + + + U.S. SECURITIES AND EXCHANGE COMMISSION + Litigation Release No. 18935 / October 20, 2004 + + Accounting and Auditing Enforcement +Release No. 2126 / October 20, 2004 + + Securities and Exchange Commission v. John Mervyn Nabors and Eric J. McCracken, Civil Action No. 8:04-CV-02288-SDM-MAP (M.D. FL) + + SEC Sues Former CEO and Former CFO of a Florida Airplane Instrument Manufacturer in Financial Fraud Spanning Over Five Years + + The Securities and Exchange Commission (SEC) filed fraud charges on Monday against John Mervyn Nabors, the former Chief Executive Officer, and Eric J. McCracken, the former Chief Financial Officer, of Aerosonic Corporation (Aerosonic), a Clearwater, Florida airplane instrument manufacturer. Nabors, who resides in Clearwater Beach, Florida, has settled this action with the SEC. McCracken, formerly of Clearwater, Florida, currently resides in New York. The case, filed in the United States District Court for the Middle District of Florida, has been assigned to Judge Steven D. Merryday. + According to the SEC's Complaint, from January 1999 through December 2002, Nabors and McCracken implemented various accounting schemes designed to artificially inflate Aerosonic's reported pre-tax earnings. Among their schemes, Nabors and McCracken allegedly caused Aerosonic to overstate inventory by falsifying inventory records and by failing to provide adequate reserves for Aerosonic's obsolete and slow moving inventory. In addition, Nabors and McCracken allegedly caused Aerosonic to report inflated earnings by recording fictitious and premature revenue. As a result of these and other accounting tricks, Aerosonic reported earnings in its periodic filings with the SEC that were overstated by at least 35% to as much as 825%. The Complaint further alleges that during the same time period, Nabors and McCracken caused Aerosonic to issue a series of false press releases touting the Company's strong financial performance when, in fact, the Company had actually suffered losses totaling over $3.9 million. Both Nabors and McCracken financially benefited from their fraudulent activities by reaping lucrative bonuses and, in the case of McCracken, selling his Aerosonic stock while its price was artificially inflated as a result of Aerosonic's false filings and press releases. Both Nabors and McCracken resigned from Aerosonic in December 2002. + After Nabors and McCracken resigned, Aerosonic's new management discovered inventory and other accounting improprieties totaling in the millions. On March 17, 2003, Aerosonic issued a press release announcing approximately $3 million in overstated revenue and inventory for its fiscal years ended 2001 through 2003, and its ongoing internal investigation to identify additional accounting misstatements. In November 2003, Aerosonic restated over $8.6 million in revenue and inventory-related items for its fiscal years ended 1999 through 2002, and for its first three quarters of 2003. + Nabors has reached a settlement of this matter with the SEC. Accordingly, concurrently with its Complaint, the SEC filed Nabor's Consent, without admitting or denying the allegations of the SEC's Complaint, and proposed Final Judgment of Permanent Injunction and Other Relief (Final Judgment), and has requested that the District Court enter the Final Judgment. The Final Judgment will permanently enjoin Nabors from violating the antifraud provisions, requirements that public companies maintain accurate books and records, and provisions prohibiting public companies from making false filings. The Final Judgment will further bar Nabors from serving as an officer or director of a public company and will order Nabors to pay disgorgement of $210,200 and civil money penalties of $50,000. The SEC intends to direct that disgorgement and penalties paid in this case be paid to a Fair Fund for the benefit of defrauded investors, including those who held Aerosonic's shares during the time period alleged in the SEC's Complaint, pursuant to Section 308 (Fair Funds for Investors) of the Sarbanes-Oxley Act of 2002. The SEC's case against McCracken is pending. + The SEC's Complaint alleges that, as a result of their conduct, Nabors violated Sections 10(b) and 13(b)(5) of the Securities Exchange Act of 1934 ("Exchange Act") and Rules 10b-5, 13b2-1, 13b2-2, and 13a-14, thereunder, and that he aided and abetted Aerosonic's violations of Sections 13(a), 13(b)(2)(A) and 13 (b)(2)(B) of the Exchange Act and Rules 12b-20, 13a-1, and 13a-13, thereunder. The Complaint also alleges that McCracken violated Section 17(a) of the Securities Act of 1933 ("Securities Act"), and Sections 10(b) and 13(b)(5) of the Exchange Act and Rules 10b-5, 13b2-1, 13b2-2, and 13a-14, thereunder, and, that he aided and abetted Aerosonic's violations of Sections 13(a), 13(b)(2)(A) and 13 (b)(2)(B) of the Exchange Act and Rules 12b-20, 13a-1, and 13a-13, thereunder. The SEC's Complaint seeks injunctive relief, disgorgement, civil money penalties, and officer and director bars against Nabors and McCracken. + + + SEC Complaint in this matter + + + + + + + + + + + + + + + + + + + + + + + + + + Return to top + + + + + SEC homepage + + + + + + + + + + + + + + About the SEC + + + + + + Budget & Performance + + + Careers + + + Commission Votes + + + Contact + + + Contracts + + + + + + + + Transparency + + + + + + Accessibility & Disability + + + Super Intelligence + + + FOIA + + + Inspector General + + + No FEAR Act Data + + + Ombuds + + + SEC Excess Personal Property Guidance + + + + + + + + Websites + + + + + + Investor.gov + + + Related Sites + + + USA.gov + + + + + + + + Site Information + + + + + + Plain Writing + + + Privacy & Security + + + Site Map + + + + + + + + + + + + + + + + + + Stay connected. 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Individuals (SALI) + + + + + Enforcement Data Delivery Standards + + + + + Small Businesses + + + + + Appellate Briefs + + + + + Amicus / Friend of the Court Briefs + + + + + + + + + + + + + + + + + + + + + + + + + + Enforcement & Litigation + + + + + + + Litigation Releases + + + + + Administrative Proceedings + + + + + Administrative Law Judge Orders and Initial Decisions + + + + + Trading Suspensions + + + + + Distributions to Harmed Investors + + + + + Receiverships + + + + + Electronic Filings in Administrative Proceedings (eFAP) + + + + + Rules of Practice + + + + + Applications for Reentry + + + + + Reports of Investigations + + + + + Whistleblower Program + + + + + Public Alert: Unregistered Soliciting Entities (PAUSE) + + + + + SEC Action Lookup - Individuals (SALI) + + + + + Enforcement Data Delivery Standards + + + + + Small Businesses + + + + + Appellate Briefs + + + + + Amicus / Friend of the Court Briefs + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + Home + + + Enforcement and Litigation + + + Litigation Releases + + + Qwest Communications International Inc. + + + + + + + + + + + + Qwest Communications International Inc. + + + + + + + + + + + + + + + + + + + U.S. SECURITIES AND EXCHANGE COMMISSION +Washington, D.C. + + Litigation Release No. 18936 / October 21, 2004 +Accounting and Auditing Enforcement Release No. 2127 / October 21, 2004 + + SEC v. Qwest Communications International Inc., Civil Action No. 04-Z-2179 (OES) (D. Co.) + + SEC Charges Qwest Communications International Inc. with Multi-Faceted Accounting and Financial Reporting Fraud + + Qwest Agrees to Anti-Fraud Injunction, $250 Million Penalty, and Maintain Permanently Chief Compliance Officer Reporting to the Outside Directors of the Board + + The Securities and Exchange Commission today charged Qwest Communications International Inc., one of the largest telecommunications companies in the United States, with securities fraud and other violations of the federal securities laws. The Commission's complaint alleges that, between 1999 and 2002, Qwest fraudulently recognized over $3.8 billion in revenue and excluded $231 million in expenses as part of a multi-faceted fraudulent scheme to meet optimistic and unsupportable revenue and earnings projections. Without admitting or denying the allegations in the complaint, Qwest consented to entry of a judgment enjoining it from violating the Sections 5(a), 5(c), and 17(a) of the Securities Act of 1933 and Sections 10(b), 13(a), 13(b)(2), and 14(a) of the Securities Exchange Act of 1934 and Rules 10b-5, 12b-20, 13a-1, 13a-11, 13a-13, 13b2-1, 14a-3, and 14a-9 thereunder. + + The judgment also directs Qwest to pay a civil penalty of $250 million and $1 disgorgement. The entire penalty amount will be distributed to defrauded investors pursuant to the Fair Funds provision of the Sarbanes-Oxley Act of 2002. In assessing the penalty amount, the Commission considered Qwest's current financial condition. + + In addition, Qwest is required to maintain permanently a chief compliance officer ("CCO") reporting to a committee of outside directors and responsible for ensuring the company conducts its business in compliance with the federal securities laws. The CCO shall aid the board in maintaining, implementing and enforcing standards of conduct for the corporation. The CCO shall also respond to employee concerns that may implicate matters of ethics or questionable business practices. + + The Commission's complaint, which was filed in United States District Court for the District of Colorado, alleges as follows: + + Fraudulent Use of Non-Recurring Revenue + + After its initial public offering in 1997, Qwest touted itself as a progressive, new-generation technology company with enormous growth potential. Beginning in 1999, in fact, Qwest's CEO consistently predicted publicly that Qwest would achieve double-digit revenue and earnings growth. By mid-1999, it became clear to Qwest senior management that the market for telecommunications services was declining and that revenue from those services would not sustain Qwest's projected revenue and earnings growth. + + To "fill the gap" between its actual and projected revenue, Qwest, at the direction of its senior management, began selling indefeasible rights of use ("IRUs"). An IRU is an irrevocable right to use a specific fiber strand or specific amount of fiber capacity for a specified time period. Thus, to meet revenue expectations that it created, Qwest sold what the company had previously identified in Commission filings and press releases as its "principal asset." When the demand for IRUs declined, Qwest engaged in IRU "swaps" whereby Qwest bought IRUs from other companies in exchange for agreements from those companies to buy IRUs from Qwest. As another "gap filler," Qwest sold capital equipment. + + Both IRU and equipment sales were referred to internally as "one hit wonders." Indeed, the investment community generally discounted such non-recurring revenue sources when valuing telecommunications companies because non-recurring revenue sources were not sustainable. Qwest's use of one-time transactions to fill the gap between actual and projected revenue became so common that many Qwest employees likened the practice to an "addiction" and the non-recurring IRU and equipment sale transactions as Qwest's "heroin." + + In Commission filings and other public statements, Qwest fraudulently characterized non-recurring revenue from IRU and equipment transactions as recurring "data and Internet service revenues," thereby masking its declining financial condition and artificially inflating its stock price. + + Fraudulent Accounting for IRU and Equipment Sale Transactions + + In addition to fraudulently characterizing non-recurring revenue as recurring revenue, Qwest ignored generally accepted accounting principles ("GAAP") by recognizing upfront revenue from IRU transactions and equipment sales. Qwest, in fact, employed fraudulent devices such as backdated contracts and secret side agreements to conceal the fact that its IRU and equipment transactions did not meet GAAP's requirements for upfront revenue recognition. Under GAAP, Qwest should either have not recognized any revenue on these transactions or recognized revenue ratably over the lives of the contracts. + + Other Fraudulent Conduct + + Qwest engaged in a variety of other fraudulent conduct. In particular: + + Qwest fraudulently failed to disclose in periodic filings with the Commission that Qwest committed to buy millions of dollars of equipment that it never intended to deploy in its network and entered into strategic relationships with, and invested in, many equipment and service vendors in part for the benefit of certain members of its senior management. Qwest also failed to disclose that Qwest executives received, as compensation, investment opportunities in some of Qwest's vendors.   + + Qwest made misleading statements in Commission filings concerning revenue from its directory services unit, Qwest Dex, Inc. In particular, Qwest stated that changes in period-over-period revenue were attributable to changes in the "number," "mix," or "length" of directories published. In fact, Qwest had advanced the publication dates of certain directories and extended the lives of others for the sole purpose of meeting revenue or earnings targets.   + + Qwest fraudulently concealed the fact that, based on a series of accounting errors, it improperly recognized $112 million of revenue between 2000 and 2002 from its Wireless division.   + + Qwest fraudulently understated expenses relating to sales commission plans and compensated absences. Other Securities Law Violations + + Qwest's lack of internal controls and inadequate books and records resulted in numerous other accounting errors during the same period, including a $56 million overstatement in operator services revenue, $200 million in improper capitalized costs associated with its design service centers, and a total of $850 million understatement of expenses in accounting for its merger with US West, Inc. and in certain restructuring charges. Further, Qwest failed to disclose a related party transaction with Anschutz Company and sold unregistered securities. + + Related Actions + + In February 2003, the Commission filed a civil injunctive action against former Qwest officers Joel M. Arnold, William L. Eveleth, Grant Graham, Thomas W. Hall, Douglas K. Hutchins, Bryan K. Treadway, John M. Walker, and Richard L. Weston ( Litigation Release No. 17996 ). In September 2003, the Commission instituted a settled cease-and-desist proceeding and filed a related civil action for penalties against Loren D. Pfau, a former Qwest sales manager ( Litigation Release No. 18374 ). In June 2004, the Commission instituted settled cease-and-desist proceedings and filed related civil actions for penalties against Augustine M. Cruciotti, a former Qwest executive vice president, and Steven L. Haggerty, a former Qwest senior vice president (Litigation Release Nos. 18754 and 18755 ). In July 2004, the Commission filed a civil injunctive action against Michael Felicissimo, the former CFO of Qwest's Wireless division ( Litigation Release No. 18800 ). Also in July 2004, the Commission filed a subpoena enforcement action against Drake Tempest, Qwest's former general counsel ( Litigation Release No. 18804 ). + + The Commission's investigation into matters related to Qwest's financial fraud is continuing. + + + + SEC Complaint in this matter + + + + + + + + + + + + + + + + + + + + + + + + + Return to top + + + + + SEC homepage + + + + + + + + + + + + + + About the SEC + + + + + + Budget & Performance + + + Careers + + + Commission Votes + + + Contact + + + Contracts + + + + + + + + Transparency + + + + + + Accessibility & Disability + + + Super Intelligence + + + FOIA + + + Inspector General + + + No FEAR Act Data + + + Ombuds + + + SEC Excess Personal Property Guidance + + + + + + + + Websites + + + + + + Investor.gov + + + Related Sites + + + USA.gov + + + + + + + + Site Information + + + + + + Plain Writing + + + Privacy & Security + + + Site Map + + + + + + + + + + + + + + + + + + Stay connected. 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Livesay, et al. + + + + + + + + !function(){var e=navigator.userAgent,a=document.documentElement,n=a.className;n=n.replace("no-js","js"),/iPad|iPhone|iPod/.test(e)&&!window.MSStream&&(n+=" ua-ios"),a.className=n}(); + {"path":{"baseUrl":"\/","pathPrefix":"","currentPath":"node\/495256","currentPathIsAdmin":false,"isFront":false,"currentLanguage":"en"},"pluralDelimiter":"\u0003","suppressDeprecationErrors":true,"gtag":{"tagId":"","consentMode":false,"otherIds":[],"events":[],"additionalConfigInfo":[]},"ajaxPageState":{"libraries":"eJxdT0GOwzAI_JBdn_oei2DkeINNZLC22devlaZS2wtiBhhmcKNUTPo97jxyaXEH3GJpiZrFhQW38A4cMqgeYQGlV19JFTKpQ-kUmvQKXP7I0cO4tC2kPnbg2wVdFslM0SCHPMs3vsEPPD7J6hgOGdPCKJyoRxxqUuePHjLLAuzVjimenRJGSLW08NoBK9LUn6SHlrytVOlcpJShB63QLSpBx_WkOzHNePol4fRQo_qMPvQ36ZXsAmd99lMNr2t_GUR9n60EyX9a_wePd5ns","theme":"uswds_sec","theme_token":null},"ajaxTrustedUrl":[],"gtm":{"tagId":null,"settings":{"data_layer":"dataLayer","include_classes":false,"allowlist_classes":"","blocklist_classes":"","include_environment":false,"environment_id":"","environment_token":""},"tagIds":["GTM-TD3BKV"]},"data":{"extlink":{"extTarget":false,"extTargetAppendNewWindowDisplay":true,"extTargetAppendNewWindowLabel":"(opens in a new window)","extTargetNoOverride":false,"extNofollow":false,"extTitleNoOverride":false,"extNoreferrer":false,"extFollowNoOverride":false,"extClass":"0","extLabel":"(link is external)","extImgClass":false,"extSubdomains":true,"extExclude":".*\\.gov|http:\/\/www.xbrl.org\/utr\/2013-05-17\/utr.xml|http:\/\/www.xbrl.org\/dtr\/type\/numeric-2009-12-16.xsd|http:\/\/www.xbrl.org\/dtr\/type\/nonNumeric-2009-12-16.xsd|https:\/\/secir.secure.force.com\/ombudsman\/OMMSForm","extInclude":"","extCssExclude":".data-exempt","extCssInclude":"","extCssExplicit":"","extAlert":true,"extAlertText":"You are now leaving the SEC Website. 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Livesay, et al. + + + + + + + + + + + + Kenneth K. Livesay, et al. + + + + + + + + + + + + + + + + + + + U.S. SECURITIES AND EXCHANGE COMMISSION + Litigation Release No. 18941 / October 25, 2004 + + Accounting and Auditing Enforcement +Release No. 2128 / October 25, 2004 + + Securities and Exchange Commission v. Kenneth K. Livesay, et al., United States District Court for the Northern District of Alabama, Civil Action No. CV-03-HS-0758-S + + On October 22, 2004, the Honorable Virginia Emerson Hopkins, U. S. District Judge for the Northern District of Alabama, entered a Final Judgment as to defendant Kay Morgan (Morgan), group vice president, accounting and assistant controller of HealthSouth Corporation. The Final Judgment enjoined her from further violations of Section 17(a) of the Securities Act of 1933 (Securities Act), Sections 10(b) and 13(b)(5) of the Securities Exchange Act of 1934 (Exchange Act) and Rules 10b-5 and 13b2-1 thereunder, and from aiding and abetting violations of Section 17(a) of the Securities Act, Sections 10(b), 13(a), 13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act and Rules 10b-5, 12b-20, 13a-1 and 13a-13 thereunder. Morgan was also permanently barred from serving as an officer or director of a public company. Morgan was not ordered to pay disgorgement and civil penalties in view of the forfeiture and fine ordered against her in the related criminal proceeding. Morgan consented to the entry of the judgment without admitting or denying any of the allegations of the Commission's Complaint. + The Commission's Complaint alleged that Morgan made false accounting entries to inflate reported operating results in order to meet or exceed Wall Street earnings expectations. + See also: L.R. 18044 /March 20, 2003; L. R. 18059 /April 1, 2003; L. R. 18060 /April 1, 2003; AAER No. 1749/April 1, 2003; L. R. 18070 /April 4, 2003; and L. R. 18339 /September 10, 2003; AAER No. 2004/May 10, 2004; AAER No. 2083/August 23, 2004; and AAER No. 2111/September 28, 2004 + + + + SEC Complaint in this matter --> + + + + + + + + + + + + + + + + + + + + + + + + + + Return to top + + + + + SEC homepage + + + + + + + + + + + + + + About the SEC + + + + + + Budget & Performance + + + Careers + + + Commission Votes + + + Contact + + + Contracts + + + + + + + + Transparency + + + + + + Accessibility & Disability + + + Super Intelligence + + + FOIA + + + Inspector General + + + No FEAR Act Data + + + Ombuds + + + SEC Excess Personal Property Guidance + + + + + + + + Websites + + + + + + Investor.gov + + + Related Sites + + + USA.gov + + + + + + + + Site Information + + + + + + Plain Writing + + + Privacy & Security + + + Site Map + + + + + + + + + + + + + + + + + + Stay connected. 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Proc. File No. 3-11722 + + In the Matter of + David Rivard, CPA, + Respondent. + + : : : : : : : : : + ORDER INSTITUTING ADMINISTRATIVE PROCEEDINGS, PURSUANT TO RULE 102(e) OF THE COMMISSION'S RULES OF PRACTICE, MAKING FINDINGS, AND IMPOSING REMEDIAL SANCTIONS + I. + The Securities and Exchange Commission ("Commission") deems it appropriate and in the public interest that public administrative proceedings be, and hereby are, instituted against David Rivard ("Rivard" or "Respondent"), pursuant to Rule 102(e)(3)(i) of the Commission's Rules of Practice. 1 + + II. + In anticipation of the institution of these proceedings, Respondent has submitted an Offer of Settlement (the "Offer") which the Commission has determined to accept. Solely for the purpose of these proceedings and any other proceedings brought by or on behalf of the Commission, or to which the Commission is a party, and without admitting or denying the findings herein, except as to the Commission's jurisdiction over him and the subject matter of these proceedings, and the findings contained in Section III.3 below, which are admitted, Respondent consents to the entry of this Order Instituting Administrative Proceedings Pursuant to Rule 102(e) of the Commission's Rules of Practice, Making Findings, and Imposing Remedial Sanctions ("Order"), as set forth below. + + + III. + On the basis of this Order and Respondent's Offer, the Commission finds that: + 1. Rivard, age 36, resides in East Setauket, New York and has been a certified public accountant licensed to practice in the State of New York. He served as Divisional Vice President and head of the Sales Accounting Department of Computer Associates ("CA") during the relevant period, from April 1999 through April 2000. + 2. CA was, at all relevant times, a Delaware corporation headquartered in Islandia, New York. CA licenses software for computer mainframes and client server systems. At all relevant times, CA's common stock was registered with the Commission pursuant to Section 12(b) of the Securities Exchange Act of 1934 ("Exchange Act"), and traded on the New York Stock Exchange. + 3. On April 8, 2004, the Commission filed a complaint against Rivard in SEC v. David Rivard, (Civil Action No. 04 Civ. 1464 (I.L.G.)). On April 12, 2004, the court entered an order permanently enjoining Rivard, by consent, from future violations of Sections 10(b) and 13(b)(5) of the Exchange Act and Rules 10b-5, 13b2-1 and 13b2-2 thereunder, and aiding and abetting violations of Sections 10(b), 13(a), 13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act and Rules 10b-5, 12b-20, 13a-1 and 13a-13 thereunder. + 4. The Commission's complaint alleged, among other things, that Rivard engaged in a fraudulent scheme which resulted in CA improperly recording revenue and filing materially false and misleading financial statements on CA's Form 10-K for the fiscal year ended March 31, 2000, and in CA's quarterly reports on Form 10-Q for the first three quarters of fiscal year 2000. The Complaint alleged that Rivard engaged in a number of improper accounting practices that fraudulently increased CA's annual and quarterly revenue and net income in a departure from generally accepted accounting principles ("GAAP"). These practices included, among other things, prematurely recognizing revenue from software license contracts. In addition, the complaint alleged that Rivard failed to disclose information in response to questions by CA's independent auditors about certain of the Company's fraudulent revenue recognition practices. + + IV. + In view of the foregoing, the Commission deems it appropriate and in the public interest to impose the sanction agreed to in Respondent Rivard's Offer. + Accordingly, it is hereby ORDERED, effective immediately, that: + Rivard is suspended from appearing or practicing before the Commission as an accountant. + + By the Commission. + + + + + Jonathan G. Katz + Secretary + + + Endnotes + 1 Rule 102(e) (3)(i) of the Commission's Rules of Practice provides, in relevant part, that : + The Commission, with due regard to the public interest and without preliminary hearing, may, by order, . . . suspend from appearing or practicing before it any . . . accountant . . . who has been by name . . . permanently enjoined by any court of competent jurisdiction, by reason of his or her misconduct in an action brought by the Commission, from violating or aiding and abetting the violation of any provision of the Federal securities laws or of the rules and regulations thereunder. + + +See also the Order in this matter --> + + + + + + + + + + + + + + + + + + + + + + + + + + Return to top + + + + + SEC homepage + + + + + + + + + + + + + + About the SEC + + + + + + Budget & Performance + + + Careers + + + Commission Votes + + + Contact + + + Contracts + + + + + + + + Transparency + + + + + + Accessibility & Disability + + + Super Intelligence + + + FOIA + + + Inspector General + + + No FEAR Act Data + + + Ombuds + + + SEC Excess Personal Property Guidance + + + + + + + + Websites + + + + + + Investor.gov + + + Related Sites + + + USA.gov + + + + + + + + Site Information + + + + + + Plain Writing + + + Privacy & Security + + + Site Map + + + + + + + + + + + + + + + + + + Stay connected. 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Proc. File No. 3-11725 + + In the Matter of + MORGAN STANLEY, + Respondent. + + : : : : : : : : : + ORDER INSTITUTING CEASE-AND-DESIST PROCEEDINGS, MAKING FINDINGS, AND IMPOSING A CEASE-AND-DESIST ORDER PURSUANT TO SECTION 21C OF THE SECURITIES EXCHANGE ACT OF 1934 + I. + The Securities and Exchange Commission ("Commission") deems it appropriate that cease-and-desist proceedings be, and hereby are, instituted pursuant to Section 21C of the Securities Exchange Act of 1934 ("Exchange Act"), against Morgan Stanley ("Company," or "Respondent"). + + II. + In anticipation of the institution of these proceedings, Respondent has submitted an Offer of Settlement (the "Offer"), which the Commission has determined to accept. Solely for the purpose of these proceedings and any other proceedings brought by or on behalf of the Commission, or to which the Commission is a party, and without admitting or denying the findings herein, except as to the Commission's jurisdiction over Respondent and the subject matter of these proceedings, which Respondent admits, Respondent consents to the entry of this Order Instituting Cease-and-Desist Proceedings, Making Findings, and Imposing a Cease-and-Desist Order Pursuant to Section 21C of the Securities Exchange Act of 1934 ("Order"), as set forth below. + + III. + On the basis of this Order and Respondent's Offer, the Commission finds 1 as follows: + + Respondent + Respondent Morgan Stanley is a financial services firm incorporated under the laws of Delaware with its headquarters in New York City. Morgan Stanley's securities are registered with the Commission under Section 12(b) of the Exchange Act. Morgan Stanley reported its financial results using a fiscal year ended November 30. + + Summary + Morgan Stanley valued certain aircraft in its aircraft leasing business in late 2001, late 2002, and early 2003 and certain bonds in its high-yield bond portfolio in late 2000 in a manner that violated financial reporting, recordkeeping, and internal controls provisions of the federal securities laws. Regarding its impaired aircraft, for the fourth quarter of fiscal year 2001 and for the third quarter of fiscal year 2002, Morgan Stanley used a valuation method not in compliance with Generally Accepted Accounting Principles ("GAAP") to determine the value of certain impaired aircraft in its aircraft leasing portfolio. GAAP requires that the value for these aircraft be recorded at "fair value." For the fourth quarter of fiscal year 2001, when there was a slump in the aircraft leasing business brought on by the terrorist attacks of September 11, 2001, and for the third quarter of fiscal year 2002, Morgan Stanley obtained independent appraisers' estimates of "base value" and used the average of their estimates of base value to establish the recorded value of a number of its aircraft. Base value, as described by Morgan Stanley, involved estimation of the value of an aircraft "presuming a transaction between an equally willing and informed buyer and seller, neither under compulsion to buy or sell, and with supply and demand for the aircraft in reasonable balance." Use of base value did not meet the GAAP requirement of fair value. Morgan Stanley should have considered current market conditions such as imbalances in supply and demand, and other factors that could be considered when looking at the then current market value of the aircraft. Had Morgan Stanley used market values to calculate a fair value for its impaired aircraft, it would have recorded significantly greater writedowns for the fourth quarter of fiscal year 2001 and for the third quarter of fiscal year 2002. In both of these quarters, Morgan Stanley's use of base value instead of an appropriate method of calculating fair value violated GAAP. + After the Commission staff questioned Morgan Stanley's use of base value and after a months long dialogue, Morgan Stanley agreed to use independent appraisers' market values as a basis for calculating fair value. In the first quarter of fiscal year 2003, Morgan Stanley recorded an impairment of certain aircraft as a catch-up adjustment for using base value in prior reporting periods. However, without an adequate basis under GAAP, and without creating adequate documentation of its valuation determination, Morgan Stanley used the highest portfolio market value in the range of appraisers' estimates it obtained as the fair value of aircraft. The Commission staff then questioned whether Morgan Stanley should have instead used the average of the appraisers' market valuations as it had for base valuations. Use of average market valuation would have resulted in a significantly greater writedown as the catch-up adjustment for prior reporting periods in the first quarter of 2003. After the staff's inquiry, Morgan Stanley then committed to use the average market valuation of aircraft to determine their fair value going forward. As a result of the above, Morgan Stanley's financial results for the fourth quarter of fiscal year 2001, third quarter of fiscal year 2002 and the first quarter of fiscal year 2003, as reported on filings made with the Commission, were misstated and not in conformity with GAAP. In addition, Morgan Stanley violated applicable recordkeeping and internal accounting control requirements. + Regarding its high-yield bond portfolio, Morgan Stanley overvalued certain bonds in the portfolio in 2000 by taking a "longer view" as to their value, which entailed discounting current market conditions such as imbalances in supply and demand. This reflected Morgan Stanley's view that its opinion about the value of the bonds was superior to the valuations of external pricing sources. Morgan Stanley's taking a "longer view of the market" was not in conformity with GAAP. The majority of the overvaluations occurred in the telecommunications sector, which in the fall of 2000 was experiencing significant business turmoil. Bonds in that sector declined significantly in value during that time period. By overvaluing those bonds, Morgan Stanley took less of a markdown than it would have had it complied with GAAP, thereby overstating its trading revenue for the fourth quarter of its fiscal year 2000. Because of this, Morgan Stanley's financial results for the fourth quarter of fiscal year 2000, as reported on filings made with the Commission, were misstated and not in conformity with GAAP. Morgan Stanley also failed to maintain sufficient underlying documentation supporting its bond valuations. Finally, Morgan Stanley's internal controls failed to ensure that it valued its bond positions in accordance with GAAP. + + Facts + A. Morgan Stanley's Overvaluation of Certain Aircraft + In fiscal year 2000, Morgan Stanley purchased Ansett Worldwide Aviation Services, an aircraft-leasing group that leases new and old commercial jet aircraft to airlines around the world. For the fourth quarter of fiscal year 2001, Morgan Stanley took an $87 million charge in financial statements filed with the Commission on Form 10-K to reflect the impairment of certain aircraft values as a result of the adverse impact the terrorist attacks of September 11, 2001, had on the global aviation industry, including its aircraft leasing business. Morgan Stanley calculated impairment charges for its aircraft using "base value," which Morgan Stanley described in its Form 10-Q for the third quarter of 2002 as "presuming a transaction between an equally willing and informed buyer and seller, neither under compulsion to buy or sell, and with supply and demand for the aircraft in reasonable balance." In consultation with its independent external auditors, Morgan Stanley used the average of several appraisers' estimates of base value to determine the reported value of its aircraft. Base value presumes supply and demand in a hypothetical balance, but GAAP defines fair value as the amount at which that asset could be bought or sold in a current transaction. By using base value to measure the impairment of aircraft, Morgan Stanley did not take into account fully the negative impact that the post September 11, 2001, overhang of unused aircraft and excess seat capacity had on aircraft valuations. In the third quarter of fiscal year 2002, Morgan Stanley took another $74 million impairment charge in financial statements filed with the Commission in its Form 10-Q to reflect declines in the value of its impaired aircraft. This impairment charge was also determined using the base value methodology described above. + + Had Morgan Stanley used an appropriate market value method of determining fair value as required by GAAP to determine the impairment charges, it would have taken an additional $71 million charge in the fourth quarter of fiscal year 2001. This additional charge would have reduced pre-tax income for the quarter by 5.1%. Similarly, Morgan Stanley would have taken an additional $72 million charge in the third quarter of fiscal 2002, reducing pre-tax income for the quarter by 7.4%. Morgan Stanley believed that its use of base value was proper because the market for the purchase and sale of aircraft was "highly illiquid" at the time, making estimates of fair value based on current market conditions unreliable. After the use of this methodology was questioned by the Commission staff in a months long dialogue, on or about February 5, 2003, the Commission staff informed Morgan Stanley that its use of base value in determining the impairment charge was not in compliance with GAAP. Morgan Stanley ceased to use base value and began determining fair value using market values for the first fiscal quarter of 2003, ended February 28, 2003. It used market valuations from several appraisers to create a range of potential values. Then, Morgan Stanley used the valuation provided by the appraisal with the highest portfolio value as the reported value of aircraft, which resulted in a writedown of $36 million as a catch-up adjustment from prior reporting periods in financial statements filed with the Commission in its Form 10-Q for the first fiscal quarter of 2003. Morgan Stanley used its own internally generated cash flow projections for the aircraft in question as the justification for using the highest portfolio market value as fair value. However, the manner in which Morgan Stanley used its internal cash projections to select the highest appraiser's market valuation as fair value resulted in reporting that was not appropriate under GAAP. In addition, Morgan Stanley did not maintain contemporaneous documentation of its valuation determination. Had Morgan Stanley used the average of the market values provided by its appraisers, as it did with its base value methodology, Morgan Stanley would have written off an additional $138 million in the first fiscal quarter of 2003, or 10% of quarterly pre-tax income. + + The Commission staff, in further dialogue with Morgan Stanley, questioned its use of the appraisal with the highest portfolio value as the basis for establishing fair value. Morgan Stanley then committed to use the average of the market values provided by its appraisers to determine the fair value of its aircraft. + As a result of the above, Morgan Stanley's financial results for the fourth quarter of fiscal year 2001, third quarter of fiscal year 2002 and the first quarter of fiscal year 2003, as reported on filings made with the Commission, were misstated and not in conformity with GAAP. Therefore, Morgan Stanley violated Section 13(a) of the Exchange Act and Rules 12b-20, 13a-1 and 13a-13 thereunder. In addition, Morgan Stanley failed to comply with recordkeeping and internal accounting control requirements in violation of Section 13(b) of the Exchange Act. + + B. Morgan Stanley's Overvaluation of Certain High-Yield Bonds + On September 21, 2000, Morgan Stanley reported third quarter earnings below analysts' estimates due, in part, to a decline in trading revenues in its high-yield bond portfolio. On October 5, 2000, Morgan Stanley announced the retirement of the co-head of its high-yield bond department. The next day, representatives from the New York Stock Exchange informed Morgan Stanley that rumors about Morgan Stanley facing $1 billion in losses in its high-yield bond portfolio were circulating on the exchange floor. Public and private investors attributed these losses to bond holdings in the telecommunications industry, a sector experiencing significant business turmoil at the time. Between October 5 and October 10, 2000, Morgan Stanley's stock price dropped 19%, from $92 to $74.50, despite repeated assertions by Morgan Stanley that the rumors of losses were "greatly exaggerated." In response to market speculation regarding the amount of its high-yield bond losses, Morgan Stanley issued a press release on October 11, 2000, stating, among other things, that the effect of markdowns in its high-yield portfolio reduced third quarter earnings by less than $.04 per share, that markdowns in the fourth quarter were approximately the same magnitude, and that Morgan Stanley expected any additional markdowns for the quarter not to be material. + After its fourth quarter closed on November 30, 2000, Morgan Stanley reported fourth quarter results that were based, in part, on overvaluations of certain bonds in its high-yield bond portfolio. The majority of the overvaluations occurred with bonds in the telecommunications industry. For those bonds, Morgan Stanley believed that market conditions rendered third-party price quotations unreliable. In such market conditions, GAAP required Morgan Stanley to use its best efforts to determine the fair value of the bonds, which is the price at which a willing buyer and a willing seller would enter into a current exchange. Instead of following GAAP to determine the fair value for those bonds, Morgan Stanley valued those bonds by "taking a longer view of the market" and essentially put its subjective opinion about the value of the bonds ahead of prices quoted by external pricing sources. In effect, Morgan Stanley valued its positions at the price at which it thought a willing buyer and seller should enter into an exchange, rather than at the price at which a willing buyer and a willing seller would enter into a current exchange. + In using its own view of the value of certain high-yield bonds, Morgan Stanley almost always overvalued those particular bonds relative to other market participants. By contrast, Morgan Stanley rarely valued those bonds lower than other market participants, including Morgan Stanley's own mutual funds that held some of the same high-yield bonds. By the end of the fiscal year, Morgan Stanley had overvalued its high-yield bond portfolio by about $75 million, representing approximately 7% of its portfolio. Additionally, the magnitude of the overvaluation increased as the high-yield bond market deteriorated in the fourth quarter of 2000. Specifically, the amount by which Morgan Stanley overvalued certain bonds in its high-yield bond portfolio increased significantly from about $40 million by the end of the third quarter of fiscal year 2000 to approximately $75 million by the close of the fourth quarter of fiscal year 2000. Overall, Morgan Stanley's failure to follow GAAP caused it to overstate its fourth quarter principal transaction trading revenue by about $47 million, or 4.8%, and inflate quarterly earnings by 1.3%. + Morgan Stanley also violated Section 13(b)(2)(A) of the Exchange Act and deviated from the requirement in paragraphs 7.10 and 7.12 of the American Institute of Certified Public Accountants' audit and accounting guide Brokers and Dealers in Securities when it failed to maintain documentation that supported certain bond valuations. Specifically, Morgan Stanley was unable to produce sufficient contemporaneous documentation to support its bond valuations. The documentation provided by Morgan Stanley after the fact merely represented the type of analysis that it undertook to value certain bond positions, rather than support the actual accounting. Furthermore, Morgan Stanley's internal controls were inadequate under Section 13(b)(2)(B) of the Exchange Act as they failed to ensure that the company value its high-yield bond positions in accordance with GAAP. Morgan Stanley's internal controls only were able to identify possibly overvalued positions through a variance analysis. Once identified, however, the inadequate internal controls operated to further Morgan Stanley's GAAP violations by allowing subjectivity to lead to the overvaluation of the bonds. Morgan Stanley's failure to follow GAAP when valuing its bond portfolio and its lax internal controls caused it to include inaccurate financial results for the fourth quarter of its fiscal year 2000 on a Form 8-K filed on December 19, 2000 with the Commission in violation of Section 13(a) of the Exchange Act and Rules 12b-20 and 13a-11. + + Legal Analysis + + A. Violations of Section 13(a) of the Exchange Act and Rules 12b-20, 13a-1, 13a-11 and 13a-13 + Section 13(a) of the Exchange Act requires issuers of registered securities to file periodic reports with the Commission containing information prescribed by specific Commission rules. Rules 13a-1, 13a-11, and 13a-13 require, respectively, the filing of Forms 10-K, 8-K, and 10-Q. Rule 12b-20 requires, in addition to information required in periodic reports by Commission rules, such further information as may be necessary to make the required statements not misleading. Among other things, Morgan Stanley is required to comply with GAAP in its financial statements filed with the Commission. Morgan Stanley failed to do so in the following respects. + As discussed above, regarding its aircraft impairment valuations, Morgan Stanley's improper use of base value to determine fair value caused Morgan Stanley to overstate the fair value of certain aircraft in its leasing portfolio and, as a consequence, take a smaller impairment charge for those aircraft than it should have taken for the fourth fiscal quarter of 2001 and for the third fiscal quarter of 2002. In addition, its inappropriate use of the value provided by the appraisal with the highest portfolio value to determine fair value for the first fiscal quarter of 2003 resulted in further underreporting of the catch-up impairments of its aircraft for prior reporting periods that it recorded in that quarter. + Morgan Stanley also valued certain positions in its high-yield portfolio without giving sufficient weight to objective external criteria and instead used an unsupported internal analysis to give its valuations an upward bias. Morgan Stanley's valuations exceeded those that GAAP would have allowed. Morgan Stanley's overvaluations resulted in it overstating its trading revenue and earnings in a filing with the Commission disclosing financial results for the fourth quarter of fiscal year 2000. These misstatements were of particular significance because of Morgan Stanley's October 11, 2000 press release stating that bond losses were "greatly exaggerated," which heightened the importance of its valuation of these bonds. + As a result of the above-described aircraft impairment valuations and high-yield bond portfolio valuations, Morgan Stanley filed financial statements for the fourth quarter of fiscal year 2000, the fourth quarter of fiscal year 2001, the third quarter of fiscal year 2002 and the first fiscal quarter of 2003, which did not comply with GAAP. Accordingly, Morgan Stanley violated Section 13(a) of the Exchange Act and Rules 12b-20, 13a-1, 13a-11 and 13a-13. + + B. Violations of Sections 13(b)(2)(A) and (B) of the Exchange Act + Section 13(b)(2)(A) of the Exchange Act requires issuers to "make and keep books, records, and accounts, which in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the issuer." Additionally, Section 13(b)(2)(B) of the Exchange Act requires issuers to devise and maintain a system of internal accounting controls sufficient to provide reasonable assurances that transactions are recorded as necessary to permit preparation of financial statements in conformity with generally accepted accounting principles and to maintain accountability for assets. As described above, Morgan Stanley's use of base value for certain of its aircraft and its subsequent use of the highest portfolio market valuations inflated the value of the aircraft on its balance sheet and reduced the impairment charges reflected in Morgan Stanley's income statement. Similarly, Morgan Stanley failed to value certain bond positions in accordance with GAAP and thus inaccurately stated the value of those positions in its books and records. Additionally, Morgan Stanley failed to maintain sufficient documentation that supported its bond valuations. Morgan Stanley's internal controls were not adequate to ensure that Morgan Stanley valued either its bond positions or its aircraft in accordance with GAAP. Accordingly, Morgan Stanley violated Sections 13(b)(2)(A) and (B) of the Exchange Act. + + IV. + In view of the foregoing, the Commission deems it appropriate to impose the sanctions agreed to in Respondent's Offer. + ACCORDINGLY, THE COMMISSION HEREBY ORDERS THAT, pursuant to Section 21C of the Exchange Act, Morgan Stanley cease and desist from committing or causing any violations of, and committing or causing any future violations of, Sections 13(a), 13(b)(2)(A), and 13(b)(2)(B) of the Exchange Act, and Exchange Act Rules 12b-20, 13a-1, 13a-11, and 13a-13. + + By the Commission. + + + + + Jonathan G. Katz + Secretary + + + Endnotes + 1 The findings herein are made pursuant to Respondent's Offer of Settlement and are not binding on any other person or entity in this or any other proceeding. + + +See also the Order in this matter --> + + + + + + + + + + + + + + + + + + + + + + + + + + Return to top + + + + + SEC homepage + + + + + + + + + + + + + + About the SEC + + + + + + Budget & Performance + + + Careers + + + Commission Votes + + + Contact + + + Contracts + + + + + + + + Transparency + + + + + + Accessibility & Disability + + + Super Intelligence + + + FOIA + + + Inspector General + + + No FEAR Act Data + + + Ombuds + + + SEC Excess Personal Property Guidance + + + + + + + + Websites + + + + + + Investor.gov + + + Related Sites + + + USA.gov + + + + + + + + Site Information + + + + + + Plain Writing + + + Privacy & Security + + + Site Map + + + + + + + + + + + + + + + + + + Stay connected. 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Proc. File No. 3-11735 + + In the Matter of + Steven Woghin, Esq., + Respondent. + + : : : : : : : : : + ORDER INSTITUTING ADMINISTRATIVE PROCEEDINGS, PURSUANT TO RULE 102(e) OF THE COMMISSION'S RULES OF PRACTICE, MAKING FINDINGS, AND IMPOSING REMEDIAL SANCTIONS + I. + The Securities and Exchange Commission ("Commission") deems it appropriate and in the public interest that public administrative proceedings be, and hereby are, instituted against Steven Woghin ("Woghin" or "Respondent"), pursuant to Rule 102(e)(3) of the Commission's Rules of Practice. 1 + + II. + In anticipation of the institution of these proceedings, Respondent has submitted an Offer of Settlement (the "Offer") which the Commission has determined to accept. Solely for the purpose of these proceedings and any other proceedings brought by or on behalf of the Commission, or to which the Commission is a party, and without admitting or denying the findings herein, except as to the Commission's jurisdiction over him and the subject matter of these proceedings, and the findings contained in Section III.3 below, which are admitted, Respondent consents to the entry of this Order Instituting Administrative Proceedings Pursuant to Rule 102(e) of the Commission's Rules of Practice, Making Findings, and Imposing Remedial Sanctions ("Order"), as set forth below. + + III. + On the basis of this Order and Respondent's Offer, the Commission finds that: + 1. Woghin, 57, resides in Cold Spring Harbor, New York and has been an attorney licensed to practice in the State of New York. He served as Senior Vice President and General Counsel of Computer Associates International, Inc. ("CA") during the relevant period, from January 1998 through September 2000. + 2. CA was, at all relevant times, a Delaware corporation headquartered in Islandia, New York. CA licenses software for computer mainframes and client server systems. At all relevant times, CA's common stock was registered with the Commission pursuant to Section 12(b) of the Securities Exchange Act of 1934 ("Exchange Act"), and traded on the New York Stock Exchange. + 3. On September 22, 2004, the Commission filed a complaint against Woghin in SEC v. Steven Woghin , (Civil Action No. 04 Civ. 4087 (ILG) (EDNY)). On October 1, 2004, the court entered an order permanently enjoining Woghin, by consent, from future violations of Section 17(a) of the Securities Act of 1933 and Sections 10(b) and 13(b)(5) of the Exchange Act and Rules 10b-5 and 13b2-1 thereunder, and aiding and abetting violations of Sections 10(b), 13(a), 13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act and Rules 10b-5, 12b-20, 13a-1 and 13a-13 thereunder. + 4. The Commission's complaint alleged, among other things, that Woghin engaged in a fraudulent scheme which resulted in CA improperly recording revenue and filing materially false and misleading financial statements on CA's Forms 10-K and 10-Q for the period from January 1, 1998 through September 30, 2000. The complaint alleged that Woghin engaged in a number of improper practices that fraudulently increased CA's annual and quarterly revenue and net income in a departure from generally accepted accounting principles ("GAAP"). These practices included, among other things, drafting a backdated contract and allowing attorneys he supervised to create backdated contracts. In addition, the complaint alleged that Woghin participated in concealing the existence of CA's fraudulent revenue recognition practices, including by counseling other employees to keep information from CA's outside counsel and the Commission staff. + + IV. + In view of the foregoing, the Commission deems it appropriate and in the public interest to impose the sanctions agreed to in Respondent Woghin's Offer. + Accordingly, it is hereby ORDERED, effective immediately, that: + Woghin is suspended from appearing or practicing before the Commission as an attorney. + + By the Commission. + + + + + Jonathan G. Katz + Secretary + + + Endnotes + 1 Rule 102(e)(3)(i) provides, in relevant part, that: "The Commission, with due regard to the public interest and without preliminary hearing, may, by order, . . . suspend from appearing or practicing before it any . . . attorney . . . who has been by name . . . permanently enjoined by any court of competent jurisdiction, by reason of his or her misconduct in an action brought by the Commission, from violating or aiding and abetting the violation of any provision of the Federal securities laws or of the rules and regulations thereunder." + + +See also the Order in this matter --> + + + + + + + + + + + + + + + + + + + + + + + + + + Return to top + + + + + SEC homepage + + + + + + + + + + + + + + About the SEC + + + + + + Budget & Performance + + + Careers + + + Commission Votes + + + Contact + + + Contracts + + + + + + + + Transparency + + + + + + Accessibility & Disability + + + Super Intelligence + + + FOIA + + + Inspector General + + + No FEAR Act Data + + + Ombuds + + + SEC Excess Personal Property Guidance + + + + + + + + Websites + + + + + + Investor.gov + + + Related Sites + + + USA.gov + + + + + + + + Site Information + + + + + + Plain Writing + + + Privacy & Security + + + Site Map + + + + + + + + + + + + + + + + + + Stay connected. 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Proc. File No. 3-11736 + + In the Matter of + FISCHER IMAGING CORPORATION, + Respondent. + + : : : : : : : : : + ORDER INSTITUTING CEASE-AND-DESIST PROCEEDINGS, MAKING FINDINGS, AND IMPOSING A CEASE-AND-DESIST ORDER PURSUANT TO SECTION 8A OF THE SECURITIES ACT OF 1933 AND SECTION 21C OF THE SECURITIES EXCHANGE ACT OF 1934 + I. + The Securities and Exchange Commission ("Commission") deems it appropriate that cease-and-desist proceedings be, and hereby are, instituted pursuant to Section 8A of the Securities Act of 1933 ("Securities Act") and Section 21C of the Securities Exchange Act of 1934 ("Exchange Act"), against Fischer Imaging Corporation ("Fischer" or "Respondent"). + + II. + In anticipation of the institution of these proceedings, Respondent has submitted an Offer of Settlement (the "Offer") which the Commission has determined to accept. Solely for the purpose of these proceedings and any other proceedings brought by or on behalf of the Commission, or to which the Commission is a party, and without admitting or denying the findings herein, except as to the Commission's jurisdiction over it and the subject matter of these proceedings, which are admitted, Respondent consents to the entry of this Order Instituting Cease-and-Desist Proceedings, Making Findings, and Imposing a Cease-and-Desist Order Pursuant to Section 8A of the Securities Act of 1933 and Section 21C of the Securities Exchange Act of 1934 ("Order"), as set forth below. + + III. + On the basis of this Order and Respondent's Offer, the Commission finds that: + 1. Fischer, a Delaware corporation based in Denver, Colorado, designs, manufactures, markets, and services specialty medical imaging systems used for the diagnosis and screening of disease. Fischer stock is registered under Section 12(g) of the Exchange Act. Fischer stock traded on the Nasdaq National Market System until it was delisted on July 7, 2003. + 2. Fischer materially misstated figures reported for its revenue, inventory, net income, and gross profit in its financial statements for the first three quarters of 2000; the year ended December 31, 2000; the first three quarters of 2001; the year ended December 31, 2001; and the first three quarters of 2002. Fischer included its misleading financial results in press releases and filings with the Commission relating to these periods. Fischer also filed registration statements on Form S-3 on September 22, 2000 and on Form S-8 on March 16, 2001, which incorporate by reference the materially misstated figures reported in Fischer's periodic filings. + 3. Fischer misstated its revenue because it improperly recognized revenue from transactions for which its customers had not accepted delivery. Rather than shipping equipment to these customers, Fischer stored the equipment at third party warehouses where the equipment remained insured and controlled by Fischer. Revenue recognition was inappropriate on some of these same purported sales because they were subject to outstanding contingencies, such as cancellation rights, provisions delaying payment until products were resold, and rights of return. At the end of each period during the relevant timeframe, Fischer provided false or misleading documents to its outside auditors that concealed Fischer's improper revenue recognition. Fischer knew, or was reckless in not knowing, about its improper revenue recognition. + 4. Fischer overstated its inventory account by improperly valuing its excess and obsolete inventory associated with discontinued product lines. Fischer also overstated its inventory account because it valued malfunctioning parts customers had returned as if they were operational and because it double-counted certain of its raw materials. Fischer knew, or was reckless in not knowing, about its misstatement of inventory. + 5. As a result of Fischer's improper revenue recognition and overstatement of inventory, Fischer materially misstated its net income in its press releases and filings with the Commission relating to the relevant periods. Fischer knew, or was reckless in not knowing, about its misstatement of net income. + 6. Additionally, Fischer improperly classified labor and overhead expenses associated with its service business as other operating expenses rather than costs of sales. Because of their improper classification, Fischer failed to include these expenses in its calculation of gross profit. As a result, Fischer materially overstated its gross profit in its press releases and filings with the Commission relating to the relevant periods. Fischer knew, or was reckless in not knowing, about its misstatement of gross profit. + 7. As a result of the conduct described above, Fischer, through certain of its officers and personnel, violated Section 17(a) of the Securities Act, Section 10(b) of the Exchange Act, and Rule 10b-5 thereunder, which prohibit fraudulent conduct in the offer and sale of securities and in connection with the purchase or sale of securities. + 8. Also as a result of the conduct described above, Fischer, through certain of its officers and personnel, violated Section 13(a) of the Exchange Act and Rules 13a-1, 13a-13, and 12b-20 thereunder. + 9. Because Fischer improperly recorded its revenue, inventory, net income, and costs of sales, its books, records, and accounts, did not, in reasonable detail, accurately and fairly reflect its transactions and dispositions of assets. + 10. In addition, Fischer, through certain of its officers and personnel, failed to implement internal accounting controls that were sufficient to provide reasonable assurances that its revenue, inventory, net income, and costs of sales were accurately stated in accordance with generally accepted accounting principles. + 11. As a result of the conduct described above, Fischer, through certain of its officers and personnel, violated Section 13(b)(2)(A) of the Exchange Act, which requires reporting companies to make and keep books, records, and accounts which, in reasonable detail, accurately and fairly reflect their transactions and dispositions of their assets. + 12. Lastly, as a result of the conduct described above, Fischer, through certain of its officers and personnel, violated Sections 13(b)(2)(B) and 13(b)(5) of the Exchange Act and Rule 13b2-1 thereunder, which require all reporting companies to devise and maintain a system of internal accounting controls sufficient to provide reasonable assurances that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles; and prohibit persons from knowingly circumventing or knowingly failing to implement a system of internal accounting controls, knowingly falsifying any book, record or account, and directly or indirectly falsifying or causing to be falsified any book, record, or account. + + Fischer's Remedial Efforts + In determining to accept the Offer, the Commission considered remedial acts promptly undertaken by Respondent and cooperation afforded the Commission staff. + + + Undertakings + Respondent undertakes to cooperate fully with the Commission in any and all investigations, litigations or other proceedings brought by the Commission relating to or arising from the matters described in the Order, and agrees: + To comply with any and all reasonable requests by the Commission's staff for company documents or other information;   + To be interviewed, and to make its officers, directors, employees, agents and other representatives available to be interviewed, by the Commission's staff at such times as the Commission's staff reasonably may direct;   + To appear and testify, and to make its officers, directors, employees, agents and other representatives available to appear and testify in such investigations, depositions, hearings, or trials as the Commission's staff reasonably may direct; and   + That in connection with any (i) testimony of Respondent or its officers, directors, employees, agents and other representatives to be conducted by testimony session, deposition, hearing or trial, or (ii) requests for documents or other information, that any notice or subpoena for such may be addressed to its counsel, and be served by mail or facsimile.   + In determining whether to accept the Offer, the Commission has considered these undertakings. + + IV. + In view of the foregoing, the Commission deems it appropriate to impose the sanctions agreed to in Respondent Fischer's Offer. + Accordingly, it is hereby ORDERED that: + Respondent Fischer cease and desist from committing or causing any violations and any future violations of Section 17(a) of the Securities Act and Sections 10(b), 13(a), 13(b)(2)(A), 13(b)(2)(B), and 13(b)(5) of the Exchange Act and Rules 10b-5, 12b-20, 13a-1, 13a-13 and 13b2-1 thereunder. + + By the Commission. + + + + + Jonathan G. Katz + Secretary + + + + +See also the Order in this matter --> + + + + + + + + + + + + + + + + + + + + + + + + + + Return to top + + + + + SEC homepage + + + + + + + + + + + + + + About the SEC + + + + + + Budget & Performance + + + Careers + + + Commission Votes + + + Contact + + + Contracts + + + + + + + + Transparency + + + + + + Accessibility & Disability + + + Super Intelligence + + + FOIA + + + Inspector General + + + No FEAR Act Data + + + Ombuds + + + SEC Excess Personal Property Guidance + + + + + + + + Websites + + + + + + Investor.gov + + + Related Sites + + + USA.gov + + + + + + + + Site Information + + + + + + Plain Writing + + + Privacy & Security + + + Site Map + + + + + + + + + + + + + + + + + + Stay connected. 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Colwell, CPA, + + + + + + + + + + + + Wesley H. Colwell, CPA, + + + + + + + + + + + + + + + + + + + + + Securities Exchange Act of 1934 +Release No. 50664 / November 15, 2004 + + Accounting And Auditing Enforcement +Release No. 2135 / November 15, 2004 + + Admin. Proc. File No. 3-11737 + + In the Matter of + Wesley H. Colwell, CPA, + Respondent. + + : : : : : : : : : + ORDER INSTITUTING ADMINISTRATIVE PROCEEDINGS PURSUANT TO RULE 102(e) OF THE COMMISSION'S RULES OF PRACTICE, MAKING FINDINGS, AND IMPOSING REMEDIAL SANCTION + I. + The Securities and Exchange Commission (the "Commission") deems it appropriate and in the public interest that public administrative proceedings be, and hereby are, instituted against Wesley H. Colwell ("Respondent" or "Colwell") pursuant to Rule 102(e)(3)(i) of the Commission's Rules of Practice. 1 + + II. + In anticipation of the institution of these proceedings, Respondent has submitted an Offer of Settlement (the "Offer") which the Commission has determined to accept. Solely for the purpose of these proceedings and any other proceedings brought by or on behalf of the Commission, or to which the Commission is a party, and without admitting or denying the findings herein, except as to the Commission's jurisdiction over him and the subject matter of these proceedings, and the findings contained in Section III., below, which are admitted, Respondent consents to the entry of this Order Instituting Administrative Proceedings Pursuant to Rule 102(e) of the Commission's Rules of Practice, Making Findings, and Imposing Remedial Sanctions ("Order"), as set forth below. + + III. + On the basis of this Order and Respondent's Offer, the Commission finds that: + A. Colwell, age 44, joined Enron in late 1999 and in February 2000 became Chief Accounting Officer of Enron North America (ENA), home to Enron Corp.'s oil and gas trading business. Colwell remained in that position until January 2002, when UBS Warburg Energy Services LLC purchased ENA's business. At all relevant times, Colwell was a certified public accountant licensed to practice in the States of Texas and Oklahoma. + B. On October 9, 2004, the Commission filed a complaint against Colwell in the United States District Court for the Southern District of Texas, entitled SEC v. Wesley H. Colwell, (Civil Action No. H-03-4308). On October 20, 2004, the court entered its Final Judgment against Colwell, which, among other things, permanently enjoined Colwell, by consent, from future violations of Sections 10(b), 13(a), 13b(2) and 13(b)(5) of the Securities Exchange Act of 1934 ("Exchange Act"), and Rules 10b-5, 12b-20, 13a-1, 13a-13 and 13b2-1 thereunder. The court also ordered Colwell to pay $275,000 in disgorgement, prejudgment interest of $25,000 and a civil money penalty of $200,000, for a total of $500,000. + C. The Commission's complaint alleged, among other things, that Colwell, in coordination with other Enron employees, manipulated Enron's publicly reported earnings through a variety of devices designed to produce material false and misleading financial results, including misuse of reserve accounts, concealment of losses, inflation of asset values, and deliberate use of improper accounting treatment for transactions. + + IV. + In view of the foregoing, the Commission deems it appropriate and in the public interest to impose the sanction agreed to in Respondent Colwell's Offer. + Accordingly, it is hereby ORDERED, effective immediately, that: + A. Colwell is suspended from appearing or practicing before the Commission as an accountant. + B. After four years from the date of entry of this Order, Respondent may request that the Commission consider his reinstatement by submitting an application (attention: Office of the Chief Accountant) to resume appearing or practicing before the Commission as: + a preparer or reviewer, or a person responsible for the preparation or review, of any public company's financial statements that are filed with the Commission. Such an application must satisfy the Commission that Respondent's work in his practice before the Commission will be reviewed either by the independent audit committee of the public company for which he works or in some other acceptable manner, as long as he practices before the Commission in this capacity; and/or   + an independent accountant. Such an application must satisfy the Commission that:   + Respondent, or the public accounting firm with which he is associated, is registered with the Public Company Accounting Oversight Board ("Board") in accordance with the Sarbanes-Oxley Act of 2002, and such registration continues to be effective;   + Respondent, or the registered public accounting firm with which he is associated, has been inspected by the Board and that inspection did not identify any criticisms of or potential defects in the respondent's or the firm's quality control system that would indicate that the respondent will not receive appropriate supervision or, if the Board has not conducted an inspection, has received an unqualified report relating to his, or the firm's, most recent peer review conducted in accordance with the guidelines adopted by the former SEC Practice Section of the American Institute of Certified Public Accountants Division for CPA Firms or an organization providing equivalent oversight and quality control functions;   + Respondent has resolved all disciplinary issues with the Board, and has complied with all terms and conditions of any sanctions imposed by the Board (other than reinstatement by the Commission); and   + Respondent acknowledges his responsibility, as long as Respondent appears or practices before the Commission as an independent accountant, to comply with all requirements of the Commission and the Board, including, but not limited to, all requirements relating to registration, inspections, concurring partner reviews and quality control standards.   + C. The Commission will consider an application by Respondent to resume appearing or practicing before the Commission provided that his state CPA license is current and he has resolved all other disciplinary issues with the applicable state boards of accountancy. However, if state licensure is dependant on reinstatement by the Commission, the Commission will consider an application on its other merits. The Commission's review may include consideration of, in addition to the matters referenced above, any other matters relating to Respondent's character, integrity, professional conduct, or qualifications to appear or practice before the Commission. + + By the Commission. + + + + + Jonathan G. Katz + Secretary + + + Endnotes + 1 Rule 102(e)(3)(i) provides, in relevant part, that: + The Commission, with due regard to the public interest and without preliminary hearing, may, by order, ... suspend from appearing or practicing before it any ... accountant ... who has been by name ... permanently enjoined by any court of competent jurisdiction, by reason of his or her misconduct in an action brought by the Commission, from violating or aiding and abetting the violation of any provision of the Federal securities laws or of the rules and regulations thereunder. + + + +See also the Order in this matter --> + + + + + + + + + + + + + + + + + + + + + + + + + + Return to top + + + + + SEC homepage + + + + + + + + + + + + + + About the SEC + + + + + + Budget & Performance + + + Careers + + + Commission Votes + + + Contact + + + Contracts + + + + + + + + Transparency + + + + + + Accessibility & Disability + + + Super Intelligence + + + FOIA + + + Inspector General + + + No FEAR Act Data + + + Ombuds + + + SEC Excess Personal Property Guidance + + + + + + + + Websites + + + + + + Investor.gov + + + Related Sites + + + USA.gov + + + + + + + + Site Information + + + + + + Plain Writing + + + Privacy & Security + + + Site Map + + + + + + + + + + + + + + + + + + Stay connected. 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Black, et al. + + + + + + + + + + + + Conrad M. Black, et al. + + + + + + + + + + + + + + + + + + + U.S. SECURITIES AND EXCHANGE COMMISSION + Litigation Release No. 18969 / November 15, 2004 + + Accounting and Auditing Enforcement +Release No. 2136 / November 15, 2004 + + U.S. Securities and Exchange Commission v. Conrad M. Black, et al., U.S. District Court for the Northern District of Illinois, Case No. 04C03761 (N.D. Ill. 2004) + + SEC FILES FRAUD CHARGES AGAINST CONRAD BLACK, F. DAVID RADLER AND HOLLINGER INC. + + Washington, D.C., Nov. 15, 2004 - The Securities and Exchange Commission announced today that it has filed an enforcement action in the U.S. District Court, Northern District of Illinois, against Hollinger International's former Chairman and CEO Conrad M. Black, former Deputy Chairman and COO F. David Radler, and Hollinger, Inc., a Canadian public holding company controlled by Black. + The Commission's complaint alleges that from approximately 1999 through 2003, Black, Radler and Hollinger, Inc. engaged in a fraudulent and deceptive scheme to divert cash and assets from Hollinger International, Inc., a U. S. public company and a subsidiary of Hollinger, Inc., and concealed their self-dealing from Hollinger International's public shareholders. + The Commission's complaint alleges that Black and Radler violated Sections 10(b), 13(b)(5) and 14(a) of the Securities Exchange Act of 1934 ("Exchange Act") and Rules 10b-5, 13b2-1, 14a-3 and 14a-9 thereunder, and, as control persons of Hollinger International, Sections 13(a) and 13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act and Rules 12b-20, 13a-1, and 13a-13 thereunder and that Black also violated Exchange Act Rule 13a-14. The complaint further alleges that Hollinger, Inc. violated Sections 10(b), 13(a), 13(b)(5) of the Exchange Act and Rules 10b-5, 13a-1, 13a-16 and13b2-1 thereunder and, as a control person of Hollinger International, Sections 13(a) and 13(b)(2)(A), 13(b)(2)(B) and 14(a) of the Exchange Act and Rules 12b-20, 13a-1, 13a-13, 14a-3 and 14a-9 thereunder. + The SEC's complaint requests that the Court: + enjoin the defendants from further violations of the securities laws,   + order the defendants to disgorge their ill-gotten gains and pay pre-judgment interest,   + order the defendants to pay civil penalties,   + bar Black and Radler from serving as an officer or director of a public company, and   + impose a voting trust upon the shares of Hollinger International held directly or indirectly by Black and Hollinger, Inc.   + The SEC's complaint further alleges, among other things, that, + Black, Radler and Hollinger, Inc. engaged in a scheme to defraud Hollinger International shareholders through a series of related party transactions by which Black and Radler diverted to themselves, other corporate insiders and Hollinger, Inc. approximately $85 million of the proceeds from Hollinger International's sale of newspaper publications through purported "non-competition" payments.   + Black and Radler further defrauded public shareholders by orchestrating the sale of certain of Hollinger International's newspaper publications at below-market prices to another privately-held company owned and controlled by Black and Radler, including the sale of one publication for $1.00.   + In February 2003, Black, without obtaining the necessary approval from Hollinger International's Audit Committee, authorized the investment of $2.5 million of Hollinger International's funds in a venture capital fund with which Black and two other directors of Hollinger International were affiliated.   + In order to perpetrate their fraudulent scheme, Black and Radler misled Hollinger International's Audit Committee and Board of Directors concerning the related party transactions. Black and Radler also misrepresented and omitted to state material facts regarding these transactions in Hollinger Internationals filings with the Commission and during Hollinger International shareholder meetings.   + In November 2003, Black approved a press release issued by Hollinger International in which he misled the investing public about his intention to devote his time to an effort to sell Hollinger International assets for the benefit of all of Hollinger International shareholders (the "Strategic Process") and not to undermine that process by engaging in transactions for the benefit of himself and Hollinger, Inc.   + Previously, on Jan. 16, 2004, the SEC obtained a federal court order against the Chicago-based Hollinger International, Inc. alleging that from at least 1999 through 2003, the company's Commission filings contained misstatements and omitted material facts regarding transfers of certain corporate assets to certain of Hollinger International's insiders and related entities (SEC v. Hollinger International, Inc.). + On the same date, the SEC obtained a federal court order to ensure that the work of the Special Committee of Hollinger International's board of directors - including its efforts to recover and preserve corporate assets - continued under the jurisdiction and oversight of the court. Hollinger International consented to the entry of the order, which also permanently enjoined the company from violating the reporting and internal control provisions of the federal securities laws. + Under that order (See SEC Lit. Rel. 18551, Jan. 16, 2004), Hollinger International is required to maintain its Special Committee to, among other things, continue its investigation of alleged misconduct and its efforts to recover and maintain corporate assets. In the event the Special Committee's authority were in any way impaired, including through a change in control of the company, Richard C. Breeden (the current Counsel to the Special Committee) would serve as a court-ordered Special Monitor to protect the interests of Hollinger International shareholders. + The SEC acknowledges the assistance and cooperation of the Ontario Securities Commission in the investigation of this matter. + + + SEC Complaint in this matter + + + + + + + + + + + + + + + + + + + + + + + + + + Return to top + + + + + SEC homepage + + + + + + + + + + + + + + About the SEC + + + + + + Budget & Performance + + + Careers + + + Commission Votes + + + Contact + + + Contracts + + + + + + + + Transparency + + + + + + Accessibility & Disability + + + Super Intelligence + + + FOIA + + + Inspector General + + + No FEAR Act Data + + + Ombuds + + + SEC Excess Personal Property Guidance + + + + + + + + Websites + + + + + + Investor.gov + + + Related Sites + + + USA.gov + + + + + + + + Site Information + + + + + + Plain Writing + + + Privacy & Security + + + Site Map + + + + + + + + + + + + + + + + + + Stay connected. 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Proc. File No. 3-11741 + + In the Matter of + ROBOTIC VISION SYSTEMS, INC., + Respondent. + + : : : : : : : : : + ORDER INSTITUTING CEASE-AND-DESIST PROCEEDINGS, MAKING FINDINGS, AND IMPOSING CEASE-AND-DESIST ORDER PURSUANT TO SECTION 21C OF THE SECURITIES EXCHANGE ACT OF 1934 + I. + The Securities and Exchange Commission ("Commission") deems it appropriate that cease-and-desist proceedings be, and hereby are, instituted pursuant to Section 21C of the Securities Exchange Act of 1934 ("Exchange Act"), against Robotic Vision Systems, Inc. ("Robotic" or "Respondent"). + + II. + In anticipation of the institution of these cease-and-desist proceedings, Respondent has submitted an Offer of Settlement ("Offer") which the Commission has determined to accept. Solely for the purpose of these proceedings and any other proceedings brought by or on behalf of the Commission, or to which the Commission is a party, and without admitting or denying the findings herein, except as to the Commission's jurisdiction over it and over the subject matter of these proceedings, which are admitted, Respondent consents to the entry of this Order Instituting Cease-and-Desist Proceedings, Making Findings, and Imposing Cease-and-Desist Order Pursuant to Section 21C of the Securities Exchange Act of 1934 ("Order"), as set forth below. + + III. + On the basis of this Order and the Offer, the Commission finds 1 that: + + A. SUMMARY + 1. This matter involves material overstatements of revenue and income by Robotic in two public filings with the Commission in 2000. On May 21, 2001, Robotic filed an amended annual report with the Commission that revealed that, for fiscal year 2000 (ended September 30), the company had overstated its revenue by 2.1% ($4.74 million) and its net income by 13.5% ($1.45 million). The restatement also revealed that, for the third fiscal quarter of 2000 (ended June 30), Robotic had overstated its revenue by 3.4% ($2.1 million) and its net income by 9.7% ($517,000). + 2. The restatement of Robotic's financial results for 2000 was necessitated by the discovery of improper recognition of revenue at the company's Acuity CiMatrix ("ACIM") division. Between December 1999 and September 2000, Robotic negotiated numerous purported sales to its distributors and customers that contained non-standard terms that deferred, conditioned or even negated their obligation to pay for the products. + + B. FACTS + 3. Robotic is a Delaware corporation currently based in Nashua, New Hampshire. During the relevant time period, Robotic's corporate offices, as well as the offices of its ACIM division, were located in Canton, Massachusetts. Robotic's ACIM division manufactures bar code reading systems and other computer systems that inspect products. At all relevant times, Robotic's common stock was registered with the Commission pursuant to Section 12(g) of the Exchange Act and was traded on the NASDAQ National Market System, and the company was required to file annual and quarterly reports with the Commission pursuant to Section 13(a) of the Exchange Act. + 4. Between August and December 2000, Robotic materially misstated its revenue and income in its financial statements filed with the Commission and in press releases reporting its financial results. In its annual report on Form 10-K for its fiscal year ended September 30, 2000, Robotic overstated its revenue by $4.74 million, or 2.1%, and its net income by $1.45 million, or 13.5%. In its quarterly report on Form 10-Q for its third quarter ended June 30, 2000, Robotic overstated its revenue by $2.1 million, or 3.4%, and its net income by $517,000, or 9.7%. In May 2001, Robotic announced that it would restate its financial statements. + 5. ACIM's senior vice-president of worldwide sales had unchecked authority to negotiate and approve discounts, extended payment periods and other non-standard terms. The senior vice-president also had unchecked authority to authorize product returns. There was no procedure to ensure that non-standard terms were entered into ACIM's computer system. + 6. Robotic's misstatements arose because the company improperly booked revenue from non-standard transactions with its distributors and customers. Between December 1999 and September 2000, ACIM entered into approximately 36 purported sales to its distributors and customers which deferred, conditioned or even negated their obligation to pay for the products. For example, the distributors and customers often had no obligation to pay ACIM until they had sold the products to their own end users. Sometimes, the distributors and customers received an absolute right to return the products to ACIM if they were unable to sell them (a right which they frequently exercised). In other instances, the distributors and customers took possession of the products with explicit instructions to deliver them to a designated end user who would actually pay ACIM, and received a "handling fee" or other credit in exchange for their agreement to take the products on an interim basis. ACIM improperly recognized approximately $4.74 million of revenue on the purported sales as soon as the products were shipped to the distributors and customers. This premature recognition of revenue constituted a failure to comply with generally accepted accounting principles ("GAAP"). + 7. By late July 2000, Robotic's CFO, corporate controller and the ACIM division president knew or should have known about the improper recognition of revenue. In July 2000, ACIM's controller and its collections manager informed Robotic's corporate controller about certain contingent transactions, including that some of ACIM's outstanding accounts receivable reflected amounts due from distributors and customers who claimed they had a right of return, or that they did not have to pay ACIM until they sold the products through to end users. Around this time, the ACIM controller sent to the Robotic corporate controller a list of ACIM's largest accounts receivable, which reflected the contingent transactions; this and subsequent lists came to be known within Robotic as "top 10 lists." The ACIM controller also informed Robotic's corporate controller that one of the transactions was a ship-in-place transaction, and that he had not been informed of these terms, contrary to Robotic's procedure. 2 Finally, in late July 2000, a member of Robotic's board of directors informed Robotic's corporate controller that he had heard of a distributor claiming to have a right of return, and that he was concerned that recognizing revenue from the transaction might have been improper. The corporate controller informed the CFO of this transaction. The CFO reviewed the source documents associated with this transaction and confirmed that it involved consignment terms, and that it should not have been recorded as revenue. + 8. On August 12, 2000, Robotic filed a quarterly report on Form 10-Q for the third fiscal quarter (ended June 30). The Form 10-Q was signed by Robotic's CFO. The quarterly financial results reported on the Form 10-Q were materially misleading because they included revenue from transactions in which the distributors and customers had no obligation to pay, or only a contingent obligation to pay. + 9. On October 12, 2000, November 2, 2000 and November 29, 2000, ACIM's collections manager circulated revised "top 10 lists" to, among others, Robotic's corporate controller. The list included comments disclosing that many of the accounts were overdue because distributors and customers were claiming their obligation to pay was deferred or contingent on reselling the products. During the rest of October and November, Robotic's CFO and corporate controller met often with ACIM's controller and ACIM's collections manager, who discussed in detail the non-standard terms ACIM had with certain distributors and customers. Despite their awareness of the problematic transactions, neither Robotic's CFO nor its corporate controller took steps to correct the improper accounting, or to inform Robotic's auditors. + 10. On December 28, 2000, Robotic filed an annual report on Form 10-K for the fiscal year 2000 (ended September 30). The Form 10-K was signed by Robotic's CFO. The financial results reported on the Form 10-K were materially misleading because they included revenue from transactions in which the distributors' and customers' obligations to pay were contingent, deferred or did not exist. + 11. In late January 2001, Robotic's outside auditors reviewed a distributor confirmation that indicated transactions that may have had contingent terms, which precipitated an inquiry by the auditors and Robotic's management into the matter. Based on the inquiry, Robotic's audit committee undertook an internal investigation that revealed the breadth of the non-standard deals on which revenue was improperly recognized. + 12. On May 15, 2001, Robotic announced its intention to restate its financial results for its fiscal year ended September 30, 2000. + + C. VIOLATIONS + + Robotic Violated Section 10(b) of the Exchange Act and Rule 10b-5 Thereunder + 13. Section 10(b) of the Exchange Act and Rule 10b-5 thereunder prohibit materially false or misleading statements or omissions made in connection with purchase or sale of any security. Violations of Section 10(b) and Rule 10b-5 occur when an issuer makes material misstatements in registration statements or periodic reports filed with the Commission, including financial statements, and trading occurs thereafter in the issuer's securities. Basic Inc. v. Levinson , 485 U.S. 224, 231 (1988). + 14. Materiality is established if a reasonable investor would have considered the misrepresented or omitted fact important when deciding whether to buy, sell or hold the securities in question. Id. at 231-232. Information regarding the financial condition of an issuer is presumptively material. SEC v. Blavin , 760 F.2d 706, 711 (6th Cir. 1985). + 15. As set forth above, Robotic filed a materially misleading Form 10-Q for its third fiscal quarter ended June 30, 2000 and a materially misleading Form 10-K for the fiscal year ended September 30, 2000. In addition, as set forth above, Robotic's CFO and corporate controller knew or were reckless in not knowing that Robotic's financial results were materially overstated, and their scienter can be attributed to the company. Accordingly, Robotic violated Section 10(b) of the Exchange Act and Rule 10b-5 thereunder. + + Robotic Violated Section 13(a) of the Exchange Act and Rules 12b-20, 13a-1 and 13a-13 Thereunder + 16. Section 13(a) of the Exchange Act and Rules 13a-1 and 13a-13 thereunder require issuers of registered securities to file annual and quarterly reports with the Commission. It is implicit in this requirement that the information provided be accurate. See United States v. Bilzerian , 926 F.2d 1285, 1298 (2d Cir.), cert. Denied , 502 U.S. 813 (1991); SEC v. Kalvex, Inc. , 425 F.Supp. 310, 316 (S.D.N.Y. 1975). Regulation S-X requires that financial statements filed with the Commission pursuant to Section 13(a) of the Exchange Act be prepared in accordance with GAAP or such statements will be presumed to be misleading or inaccurate. In addition, Exchange Act Rule 12b-20 requires that these periodic reports contain all further material information necessary to make the required statements, in light of the circumstances under which they are made, not misleading. The issuer reporting provisions are violated when false and misleading reports are filed. + 17. Section 13(a) of the Exchange Act and Rules 12b-20, 13a-1 and 13a-13 are violated when an issuer files false and misleading reports with the Commission. SEC v. Falstaff Brewing Corp. , 629 F.2d 62, 67 (D.C. Cir. 1980). No showing of scienter is necessary to establish a violation of these provisions. SEC v. McNulty , 137 F.3d 732, 740-41 (2nd Cir. 1998); SEC v. Savoy Industries, Inc. , 587 F.2d 1149, 1167 (D.C. Cir. 1978); SEC v. Wills , 472 F.Supp.1250, 1268 (D.D.C. 1978). + 18. As set forth above, Robotic filed a Form 10-Q for the third fiscal quarter of 2000 and a Form 10-K for the fiscal year 2000 that materially misstated the company's revenue and net income. Accordingly, Robotic violated Section 13(a) of the Exchange Act and Rules 12b-20, 13a-1 and 13a-13 thereunder. + + Robotic Violated Sections 13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act + 19. Section 13(b)(2) of the Exchange Act provides, in pertinent part, that every reporting company must: (A) make and keep books, records and accounts which, in reasonable detail, accurately and fairly reflect the transactions and disposition of the assets of the issuer; and (B) devise and maintain a system of internal controls sufficient to provide reasonable assurances that transactions are recorded as necessary to permit the preparation of financial statements in conformity with GAAP. These provisions require an issuer to employ and supervise reliable personnel, to maintain reasonable assurances that transactions are executed as authorized, to properly record transactions on an issuer's books and, at reasonable intervals, to compare accounting records with physical assets. SEC v. World-Wide Coin Investments, Ltd. , 567 F.Supp. 724, 750 (N.D.Ga. 1983). + 20. As set forth above, Robotic maintained false and misleading books, records and accounts which, among other things, materially overstated the company's revenue and net income for the third fiscal quarter of 2000 and the fiscal year 2000. Accordingly, Robotic violated Section 13(b)(2)(A) of the Exchange Act. + 21. In addition, as set forth above, Robotic's system of internal accounting controls was not sufficient to provide reasonable assurances that transactions were recorded as necessary to permit the preparation of financial statements in conformity with GAAP. Accordingly, Robotic violated Section 13(b)(2)(B) of the Exchange Act. + + IV. + In view of the foregoing, the Commission deems it appropriate to impose the sanctions agreed to in Respondent Robotic's Offer. + Accordingly, it is hereby ORDERED that Robotic cease and desist from committing or causing any violations and any future violations of Sections 10(b), 13(a), 13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act and Rules 10b-5, 12b-20, 13a-1 and 13a-13 thereunder. + + By the Commission. + + + + + Jonathan G. Katz + Secretary + + + Endnotes + 1 The findings herein are made pursuant to Respondent's Offer of Settlement and are not binding on any other person or entity in this or any other proceeding. + 2 In addition to the consignment nature of the deal, this transaction did not meet the conditions for revenue recognition on bill-and-hold sales. See In the Matter of Stewart Parness , Securities Exchange Act Rel. No. 23507, Accounting and Auditing Enforcement Release No. 108 (August 5, 1986). See also Staff Accounting Bulletin 101, Revenue Recognition in Financial Statements (December 3, 1999). + + +See also the Order in this matter --> + + + + + + + + + + + + + + + + + + + + + + + + + + Return to top + + + + + SEC homepage + + + + + + + + + + + + + + About the SEC + + + + + + Budget & Performance + + + Careers + + + Commission Votes + + + Contact + + + Contracts + + + + + + + + Transparency + + + + + + Accessibility & Disability + + + Super Intelligence + + + FOIA + + + Inspector General + + + No FEAR Act Data + + + Ombuds + + + SEC Excess Personal Property Guidance + + + + + + + + Websites + + + + + + Investor.gov + + + Related Sites + + + USA.gov + + + + + + + + Site Information + + + + + + Plain Writing + + + Privacy & Security + + + Site Map + + + + + + + + + + + + + + + + + + Stay connected. 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Proc. File No. 3-11742 + + In the Matter of + GARY MOE and ID INTEGRATION,, + Respondents. + + : : : : : : : : : + ORDER INSTITUTING CEASE-AND-DESIST PROCEEDINGS, MAKING FINDINGS, AND IMPOSING CEASE-AND-DESIST ORDERS PURSUANT TO SECTION 21C OF THE SECURITIES EXCHANGE ACT OF 1934 + I. + The Securities and Exchange Commission ("Commission") deems it appropriate that cease-and-desist proceedings be, and hereby are, instituted pursuant to Section 21C of the Securities Exchange Act of 1934 ("Exchange Act") against Gary Moe ("Moe") and ID Integration ("IDI"). + + II. + In anticipation of the institution of these proceedings, Respondents Moe and IDI have submitted Offers of Settlement (the "Offers") that the Commission has determined to accept. Solely for the purpose of these proceedings and any other proceedings brought by or on behalf of the Commission, or to which the Commission is a party, and without admitting or denying the findings herein, except as to the Commission's jurisdiction over them and over the subject matter of these proceedings, which are admitted, Respondents Moe and IDI consent to the entry of this Order Instituting Cease-and-Desist Proceedings, Making Findings, and Imposing Cease-and-Desist Orders Pursuant to Section 21C of the Securities Exchange Act of 1934 ("Order"), as set forth below. + + + III. + On the basis of this Order and the Respondents Moe's and IDI's Offers, the Commission finds 1 that: + + A. RESPONDENTS AND RELATED PARTY + + Respondents + 1. Moe, age 42, lives in Everett, Washington. He is the vice president of IDI, a company he co-founded in 1999. Moe has a B.S. in chemical engineering from the University of Washington. + 2. IDI is a privately-held company headquartered in Renton, Washington. IDI is a distributor and systems integrator of marketing and bar code systems, products which enable IDI's customers to permanently identify and mark machine parts for tracking and safety purposes. + + Related Party + 3. Robotic Vision Systems, Inc. ("Robotic") is a Delaware corporation currently based in Nashua, New Hampshire. During the relevant time period, Robotic's corporate offices, as well as the offices of its Acuity CiMatrix ("ACIM") division, were located in Canton, Massachusetts. Robotic's ACIM division manufactures bar code reading systems and other computer systems that inspect products. At all relevant times, Robotic's common stock was registered with the Commission pursuant to Section 12(g) of the Exchange Act and was traded on the NASDAQ National Market System, and the company was required to file annual and quarterly reports with the Commission pursuant to Section 13(a) of the Exchange Act. + + B. FACTS + + Summary + 4. This matter concerns Moe's and IDI's causing of Robotic's financial fraud and reporting violations. Between June and September 2000, Moe and IDI entered into two purported sales transactions with Robotic's ACIM division, in which ACIM granted IDI an unconditional right of return. Moe agreed to the second transaction even though only a few of the products from the first transaction had been sold. In September 2000, when negotiating the second transaction, an ACIM executive requested that IDI omit the right of return term from its purchase order so that Robotic could book revenue from the transaction. Moe agreed, and omitted any reference to the right of return. Few of the products from either transaction were ever sold, and IDI returned most of the products to Robotic. In its financial statements for its third quarter ended June 30, 2000 and its fiscal year ended September 30, 2000, Robotic recognized revenue from the transactions with IDI. Recognizing revenue was improper because IDI was not obligated to pay for the products. Together with other similar improper transactions, the IDI transactions caused Robotic's financial statements to be materially overstated. + + Robotic's Conduct + 5. Between August and December 2000, Robotic materially misstated its revenue and income in its financial statements filed with the Commission and in press releases announcing its results. In its annual report on Form 10-K for its fiscal year ended September 30, 2000, Robotic overstated its revenue by $4.74 million, or 2.1%, and its net income by $1.45 million, or 13.5%. In its quarterly report on Form 10-Q for its third quarter ended June 30,2000, Robotic overstated its revenue by $2.1 million, or 3.4%, and its net income by $517,000, or 9.7%. In May 2001, Robotic announced that it would restate its financial results. + 6. Robotic's misstatements arose because the company improperly booked revenue from transactions its ACIM division entered into with distributors and customers. Between December 1999 and September 2000, senior personnel at ACIM entered into approximately 36 purported sales to distributors and customers which deferred, conditioned or even negated their obligation to pay for the products. This premature recognition of revenue constituted a failure to comply with generally accepted accounting principles ("GAAP"). + + Moe and IDI Caused Robotic's Improper Revenue Recognition + 7. At the end of Robotic's fiscal third quarter, in June 2000, as ACIM was striving to generate revenue to make up for a shortfall at another Robotic division, an ACIM executive requested that IDI agree to act as a distributor for a new line of its products. IDI agreed to receive $525,000 worth of the products, and to pay for the products within 90 days. However, ACIM and IDI also agreed that after 90 days, IDI could either return the products without penalty or, with ACIM's consent, extend the payment period. IDI was concerned about its financial exposure in the transaction, and specifically wanted to avoid responsibility for payment of unsold product. The companies also agreed that the transaction would be a "ship in place" transaction, meaning that Robotic would continue to store the products. IDI sold only a few of the products. In its press release announcing its results for its third quarter ended June 30, 2000, Robotic referenced its supposed sales of the new product, stating that such "sales" had reached 1,000 units and $1.9 million. In reality, the vast majority of these purported sales were consignment transactions with IDI and two other distributors, in which there was no firm obligation to pay. + 8. Beginning in July 2000, Robotic's controller, its CFO and a board member learned about the consignment nature of the IDI transaction and that, under its "ship in place" terms, Robotic continued to hold the products. + 9. In August or September 2000, the ACIM executive again contacted Moe, this time requesting that IDI agree to a transaction involving $125,000 worth of a second product, supposedly designed to enhance the capabilities of the first product. Despite the fact that IDI had sold only a few of the first product, Moe agreed to this second transaction as well. The terms were the same as in the June transaction: IDI received indefinite payment terms and an unlimited right to return the products. + 10. On September 2, 2000, the ACIM executive requested in an email that Moe agree to omit the right of return term from IDI's purchase order. The email stated, in pertinent part, that " . . . you cannot state that you have the right to return the product at no cost and at any time. When you do that we can't book the order as revenue." Moe agreed to conceal the contingent nature of the transaction, and he omitted the right of return term from IDI's purchase order. IDI ultimately returned nearly all of the first and second product to Robotic. + + C. VIOLATIONS + Moe and IDI Caused Robotic's Violations of Sections 10(b) and 13(a) of the Exchange Act and Rules 10b-5, 12b-20 and 13a-1 thereunder + 11. Moe and IDI caused Robotic's fraud violations by engaging in two transactions that enabled the company to inflate its revenues. Section 10(b) of the Exchange Act and Rule 10b-5 thereunder proscribe the making of materially false and misleading statements "in connection with the purchase or sale of any security." Violations of Section 10(b) and Rule 10b-5 occur when an issuer makes material misstatements in press releases, registration statements, prospectuses, or periodic reports filed with the Commission and trading thereafter occurs in the issuer's securities. Basic, Inc. v. Levinson , 485 U.S. 224, 231-232 (1988); SEC v. Texas Gulf Sulphur Co. , 401 F.2d 833 (2d Cir. 1968), cert. denied , 394 U.S. 976 (1969). In addition, to establish liability for violations of Section 10(b) and Rule 10b-5, the Commission must prove that a person acted with scienter. See Aaron v. SEC , 446 U.S. 680, 686 n.5 (1980). Recklessness satisfies the scienter requirement. See, e.g., Rolf v. Blyth Eastman Dillon & Co. , 570 F.2d 38, 46 (2d Cir.), cert. denied , 439 U.S. 1039 (1978). + 12. Pursuant to Section 21C of the Exchange Act, a person "causes" a violation where he or she commits an act or omission that the person knew or should have known would contribute to such a violation. Section 3 of the Exchange Act defines "person" as a natural person, company, government, or political subdivision, agency, or instrumentality of a government. The evidence indicates that Moe knew or should have known that by entering into the transactions discussed in this Order, IDI would be assisting Robotic to improperly book revenue. Accordingly, Moe and IDI caused Robotic's violations of Section 10(b) of the Exchange Act and Rule 10b-5 thereunder. + 13. Moe and IDI also caused Robotic's books and records and periodic reporting violations. Section 13(a) of the Exchange Act and Rules 12b-20 and 13a-1 require issuers of registered securities to file an annual report with the Commission. The information provided in the annual report must be accurate and must contain all information necessary to ensure that the statements made in it are not materially misleading. See SEC v. Kalvex, Inc. , 425 F. Supp. 310, 316 (S.D.N.Y. 1975); SEC v. IMC International, Inc. , 384 F. Supp. 889, 893 (N.D. Tex. 1974). Similarly, Regulation S-X requires that financial statements filed with the Commission pursuant to Section 13(a) of the Exchange Act be prepared in accordance with GAAP. No showing of scienter is necessary to establish a violation of Section 13(a) or Rules 12b-20 and 13a-1. See SEC v. Savoy Industries, Inc. , 587 F.2d 1149, 1167 (D.C. Cir. 1978); SEC v. Wills , 472 F. Supp.1250, 1268 (D.D.C. 1978). + 14. By agreeing to the transactions discussed in this order, and by submitting a purchase order which omitted a material term, Moe and IDI enabled Robotic to record revenue improperly, thereby causing the company's financial statements and books and records to be materially inaccurate. Accordingly, Moe and IDI caused Robotic's violations of Section 13(a) of the Exchange Act and Rules 12b-20 and 13a-1 thereunder. + + IV. + In view of the foregoing, the Commission deems it appropriate to impose the sanctions agreed to in Respondents Moe's and IDI's Offers. + Accordingly, pursuant to Section 21C of the Exchange Act, it is hereby ORDERED that: + A. Respondent Moe cease and desist from committing or causing any violations and any future violations of Section 10(b) of the Exchange Act and Rule 10b-5 thereunder and from causing any violations and any future violations of Section 13(a) of the Exchange Act and Rules 12b-20 and 13a-1 thereunder; + B. Respondent IDI cease and desist from committing or causing any violations and any future violations of Sections 10(b) and 13(a) of the Exchange Act and Rules 10b-5, 12b-20 and 13a-1 thereunder. + + By the Commission. + + + + + Jonathan G. Katz + Secretary + + + Endnotes + 1 The findings herein are made pursuant to Respondents Moe's and IDI's Offers of Settlement and are not binding on any other person or entity in this or any other proceeding. + + +See also the Order in this matter --> + + + + + + + + + + + + + + + + + + + + + + + + + + Return to top + + + + + SEC homepage + + + + + + + + + + + + + + About the SEC + + + + + + Budget & Performance + + + Careers + + + Commission Votes + + + Contact + + + Contracts + + + + + + + + Transparency + + + + + + Accessibility & Disability + + + Super Intelligence + + + FOIA + + + Inspector General + + + No FEAR Act Data + + + Ombuds + + + SEC Excess Personal Property Guidance + + + + + + + + Websites + + + + + + Investor.gov + + + Related Sites + + + USA.gov + + + + + + + + Site Information + + + + + + Plain Writing + + + Privacy & Security + + + Site Map + + + + + + + + + + + + + + + + + + Stay connected. 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Proc. File No. 3-11743 + + In the Matter of + eFunds Corporation, + Respondent. + + : : : : : : : : : + ORDER INSTITUTING CEASE-AND-DESIST PROCEEDINGS, MAKING FINDINGS AND IMPOSING A CEASE-AND-DESIST ORDER PURSUANT TO SECTION 21C OF THE SECURITIES EXCHANGE ACT OF 1934 + I. + The Securities and Exchange Commission ("Commission") deems it appropriate that public cease-and-desist proceedings be, and hereby are, instituted pursuant to Section 21C of the Securities Exchange Act of 1934 ("Exchange Act") against eFunds Corporation ("eFunds" or "Respondent"). + + II. + In anticipation of the institution of these proceedings, Respondent has submitted an Offer of Settlement (the "Offer") which the Commission has determined to accept. Solely for the purpose of these proceedings and any other proceedings brought by or on behalf of the Commission, or to which the Commission is a party, and without admitting or denying the findings herein, except as to the Commission's jurisdiction over it and the subject matter of these proceedings, which are admitted, Respondent consents to the entry of this Order Instituting Cease-and-Desist Proceedings, Making Findings and Imposing a Cease-and-Desist Order Pursuant to Section 21C of the Securities Exchange Act of 1934 ("Order"), as set forth below. + + III. + On the basis of this Order and Respondent's Offer, the Commission finds 1 that: + + Respondent + 1. eFunds, a Delaware corporation with its principal executive office in Scottsdale, Arizona, processes electronic payments including debit card and automated teller machine ("ATM") transactions. eFunds' common stock is registered with the Commission pursuant to Section 12(b) of the Exchange Act, and trades on the New York Stock Exchange. Before its listing on the NYSE, during the period of the conduct discussed herein, eFunds' common stock was registered under Section 12(g) of the Exchange Act and traded on the NASDAQ National Market System. + + Other Relevant Entities + 2. Access Cash International, L.L.C. ("Access Cash"), a Delaware limited liability company, headquartered in Saint Paul, Minnesota, was a privately held company primarily in the business of deploying and managing ATMs. In March 2000, eFunds paid $20 million to acquire an approximately 24 percent interest in Access Cash. On October 10, 2001, eFunds purchased the remaining 76 percent of Access Cash. Access Cash's securities were never listed on any exchange and the company never filed periodic reports with the Commission. + 3. ATM Holding, Inc., a Delaware corporation, was a holding company created and owned by the founders of Access Cash in March 2000 to facilitate eFunds' acquisition of an approximately 24 percent interest in Access Cash. ATM Holding possessed no assets other than a 76 percent ownership interest in Access Cash. On October 10, 2001, eFunds purchased the remaining 76 percent of Access Cash by purchasing ATM Holding. ATM Holding's securities were never listed on any exchange and the company never filed periodic reports with the Commission. + + eFunds' Transactions with Access Cash & ATM Holding + 4. In eFunds' financial statements filed with its Form 10-Q for the second quarter of 2001, eFunds improperly recognized $2.1 million in revenue from a transaction with Access Cash, an affiliated entity. eFunds' improper revenue recognition overstated net income by 11.5 percent in the second quarter of 2001. Without the improper revenue recognition, eFunds would not have met consensus analysts' expectations for that quarter. + 5. On September 1, 2000, eFunds and Access Cash entered into a management agreement whereby Access Cash agreed to assign its future ATM deployment and management revenues to eFunds, in exchange for eFunds' agreement to assume responsibility for management of the ATM business and to pay a monthly management fee, initially set at approximately $5.2 million per month ("Management Agreement"). The amount of the management fee was designed to approximate Access Cash's historical revenue from its ATM deployment and management business. The Management Agreement explicitly excluded eFunds' management of Access Cash's ATM equipment sales business. + 6. On March 1, 2001, Access Cash attempted to exercise an option to cancel the Management Agreement, effective September 1, 2001. eFunds challenged Access Cash's ability to terminate the Management Agreement and instead sought to expand the Management Agreement going forward by including eFunds' management of Access Cash's equipment sales business. Specifically, eFunds sought to amend the Management Agreement so that, in exchange for eFunds paying an additional management fee to Access Cash and taking responsibility for the equipment sales business, Access Cash would assign its equipment sales revenue to eFunds. + 7. During June 2001 negotiations, eFunds and Access Cash agreed to provisions amending the Management Agreement to include eFunds' management of Access Cash's equipment sales business. Specifically, starting July 1, 2001, eFunds agreed to pay an additional management fee of $700,000 per month and to assume responsibility for ATM equipment sales. In return, starting July 1, 2001, Access Cash agreed to assign its equipment sale revenues to eFunds, which in the preceding months had been approximately $700,000 per month. In the proposed amendment, eFunds and Access Cash further agreed to resolve their prior disagreements as to Access Cash's prior attempts to terminate the Management Agreement by extending the term through March 31, 2002. + 8. As part of the proposed amendment, eFunds also attempted to settle past disputes regarding the implementation of the Management Agreement by requesting that Access Cash make a penalty payment in exchange for a release of all eFunds' potential claims. eFunds further requested that Access Cash make the penalty payment by assigning to eFunds Access Cash's second quarter 2001 equipment sales revenues, which were expected to be approximately $2.1 million for the quarter. + 9. Access Cash initially refused to make the penalty payment requested by eFunds. In order to obtain Access Cash's penalty payment in the second quarter of 2001, certain eFunds executives agreed to include a provision whereby eFunds would pay Access Cash an "additional sales assistance consulting fee" of $250,000 per month for the remaining nine-month term of the Management Agreement, for a total of $2.25 million. Certain eFunds executives knew that Access Cash did not have to perform any additional work to receive the additional sales assistance consulting fee and that eFunds was obligated to pay the fee for the entire remaining term of the Management Agreement, even if either party terminated the Management Agreement early. With the inclusion of the additional sales assistance consulting fee, Access Cash agreed to make the penalty payment. On June 30, 2001, eFunds and Access Cash executed the amendment to the Management Agreement (the "Amendment Agreement"). + 10. During negotiations between eFunds and Access Cash regarding the Amendment Agreement, ATM Holding continued its ongoing efforts to sell to eFunds the remaining 76 percent of Access Cash. On June 30, 2001, Access Cash's chief executive officer informed an eFunds executive that, while he had signed the Amendment Agreement, he would not return an executed copy to eFunds until eFunds and ATM Holding had finalized a separate agreement whereby eFunds would commit to purchase the remainder of Access Cash for a mutually agreeable price and over a mutually agreeable timeframe. In response, certain eFunds executives committed to finalize an agreement between eFunds and ATM Holding. + 11. On July 2, 2001, eFunds and ATM Holding executed a commitment letter, whereby eFunds agreed to a timetable in which it would purchase the remaining 76 percent of Access Cash based upon a total valuation of $57 million (the "Commitment Letter"). The Commitment Letter also contained provisions that provided that eFunds would pay ATM Holding various penalty payments totaling $1.5 million if the acquisition was not completed by certain milestone dates through March 31, 2002. + 12. On August 14, 2001, eFunds filed its Form 10-Q for the second quarter ended June 30, 2001, reporting as revenue approximately $2.1 million of equipment sales revenues that were assigned by Access Cash as the purported penalty payment under the Amendment Agreement. + 13. In October 2001, eFunds acquired the remaining 76 percent of Access Cash from ATM Holding and from a minority interest holder of Access Cash. The acquisition resulted in the termination of the Management Agreement, the Amendment Agreement and the Commitment Letter, including any payments thereunder. + 14. On November 14, 2001, eFunds filed its Form 10-Q for the third quarter ended September 30, 2001, reporting approximately $2.4 million of equipment sales revenue received from Access Cash and $3.2 million paid to Access Cash and ATM Holding, under the terms of the Amendment Agreement and the Commitment Letter. + 15. In February 2002, in response to questions raised by Access Cash's former chief financial officer, the audit committee of eFunds' board of directors conducted a review of the circumstances under which eFunds and Access Cash entered into the Amendment Agreement and eFunds and ATM Holding entered into the Commitment Letter. Based on the review, eFunds concluded that the Amendment Agreement and the Commitment Letter were interdependent and therefore should have been treated as one agreement that became effective in July 2001. eFunds further determined that equipment sales revenues assigned to it by Access Cash under the Amendment Agreement, which were originally recorded as eFunds revenues, and fees paid to Access Cash and ATM Holding under the Amendment Agreement and the Commitment Letter, which were originally recorded as eFunds expenses, should have been accounted for as advances and repayments on the purchase price for ATM Holding's remaining equity interest in Access Cash. This resulted in a $1.3 million net reduction in the purchase price paid by eFunds for the remaining equity interests in Access Cash. + 16. On March 4, 2002, eFunds restated its financial statements accompanying its Forms 10-Q for the second and third quarter of 2001. For the second quarter of 2001, as restated, eFunds' revenue declined from $128.2 million to $126.0 million, a decrease of 1.7 percent, and its net income declined from $8.7 million to $7.7 million, a decrease of 11.5 percent. For the third quarter of 2001, as restated, eFunds' revenue declined from $135.4 million to $133 million, a decrease of 1.8 percent, and net income increased from $13.2 million to $13.6 million, an increase of 3 percent. + + Violations + 17. Section 13(a) of the Exchange Act requires all issuers with securities registered under Section 12 of the Exchange Act to file periodic and other reports with the Commission containing such information as the Commission's rules prescribe. Pursuant to Section 13(a), the Commission promulgated Rule 13a-13 that requires issuers to file quarterly reports. The reporting requirements necessarily include the requirement that the issuer supply accurate information. In addition, Rule 12b-20 requires that reports contain such further material information as may be necessary to make the required statements, in light of the circumstances under which they were made, not misleading. As a result of the conduct described in paragraphs III.1. through III.16. above, in its Forms 10-Q for the second and third quarters of 2001, eFunds violated Section 13(a) of the Exchange Act and Rules 13a-13 and 12b-20 thereunder. + 18. As a result of the conduct described in paragraphs III.1. through III.16. above, eFunds violated Section 13(b)(2)(A) of the Exchange Act which requires public companies to make and keep books and records which accurately and fairly reflect its transactions and dispositions of assets. eFunds failed to keep accurate books and records regarding its transactions with Access Cash and ATM Holding. + 19. As a result of the conduct described in paragraphs III.1. through III.16. above, eFunds violated Section 13(b)(2)(B) of the Exchange Act which requires public companies to devise and maintain a system of internal accounting controls sufficient to provide reasonable assurance that, among other things, transactions were recorded as necessary to permit preparation of financial statements in conformity with Generally Accepted Accounting Principles and to maintain accountability of assets. eFunds failed to devise and maintain a system of internal accounting to ensure that transactions were properly recorded. + + IV. + In determining to accept the Offer, the Commission considered remedial acts promptly undertaken by Respondent and cooperation afforded the Commission staff. + + V. + In view of the foregoing, the Commission deems it appropriate to impose the sanctions agreed to in Respondent eFunds' Offer. + Accordingly, it is hereby ORDERED that pursuant to Section 21C of the Exchange Act, Respondent cease and desist from committing or causing any violations and any future violations of Sections 13(a), 13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act and Rules 12b-20 and 13a-13 thereunder. + + + + By the Commission. + + + + + Jonathan G. Katz + Secretary + + + + Endnotes + 1 The findings herein are made pursuant to Respondent's Offer of Settlement and are not binding on any other person or entity in this or any other proceeding. + + +See also the Order in this matter --> + + + + + + + + + + + + + + + + + + + + + + + + + + Return to top + + + + + SEC homepage + + + + + + + + + + + + + + About the SEC + + + + + + Budget & Performance + + + Careers + + + Commission Votes + + + Contact + + + Contracts + + + + + + + + Transparency + + + + + + Accessibility & Disability + + + Super Intelligence + + + FOIA + + + Inspector General + + + No FEAR Act Data + + + Ombuds + + + SEC Excess Personal Property Guidance + + + + + + + + Websites + + + + + + Investor.gov + + + Related Sites + + + USA.gov + + + + + + + + Site Information + + + + + + Plain Writing + + + Privacy & Security + + + Site Map + + + + + + + + + + + + + + + + + + Stay connected. 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Lester + + + + + + + + + + + + Jerry K. Lester + + + + + + + + + + + + + + + + + + + + + Securities Exchange Act of 1934 +Release No. 50707 / November 19, 2004 + + Accounting And Auditing Enforcement +Release No. 2140 / November 19, 2004 + + Admin. Proc. File No. 3-11744 + + In the Matter of + Jerry K. Lester, + Respondent. + + : : : : : : : : : + ORDER INSTITUTING CEASE-AND-DESIST PROCEEDINGS, MAKING FINDINGS AND IMPOSING A CEASE-AND-DESIST ORDER PURSUANT TO SECTION 21C OF THE SECURITIES EXCHANGE ACT OF 1934 + I. + The Securities and Exchange Commission ("Commission") deems it appropriate that public cease-and-desist proceedings be, and hereby are, instituted pursuant to Section 21C of the Securities Exchange Act of 1934 ("Exchange Act") against Jerry K. Lester ("Lester" or "Respondent"). + + II. + In anticipation of the institution of these proceedings, Respondent has submitted an Offer of Settlement (the "Offer") which the Commission has determined to accept. Solely for the purpose of these proceedings and any other proceedings brought by or on behalf of the Commission, or to which the Commission is a party, and without admitting or denying the findings herein, except as to the Commission's jurisdiction over him and the subject matter of these proceedings, which are admitted, Respondent consents to the entry of this Order Instituting Cease-and-Desist Proceedings, Making Findings and Imposing a Cease-and-Desist Order Pursuant to Section 21C of the Securities Exchange Act of 1934 ("Order"), as set forth below. + + III. + On the basis of this Order and Respondent's Offer, the Commission finds 1 that: + 1. eFunds, a Delaware corporation with its principal executive office in Scottsdale, Arizona, processes electronic payments including debit card and automated teller machine ("ATM") transactions. eFunds also sells products to help financial institutions, retailers and other businesses that accept debit payments to determine the likelihood of account fraud and identity manipulation. eFunds' common stock is registered with the Commission pursuant to Section 12(b) of the Exchange Act, and trades on the New York Stock Exchange. Before its listing on the NYSE, during the period of the conduct discussed herein, eFunds' common stock was registered under Section 12(g) of the Exchange Act and traded on the NASDAQ National Market System. + 2. Access Cash International, L.L.C. ("Access Cash"), a Delaware limited liability company, headquartered in Saint Paul, Minnesota, was a privately held company primarily in the business of deploying and managing ATMs. In March 2000, eFunds paid $20 million to acquire an approximately 24 percent interest in Access Cash. + 3. ATM Holding, Inc., a Delaware corporation, was a holding company created and owned by the founders of Access Cash in March 2000 to facilitate eFunds' acquisition of an approximately 24 percent interest in Access Cash. ATM Holding possessed no assets other than a 76 percent ownership interest in Access Cash. + 4. Lester, age 52, a resident of Austin, Texas, was president of eFunds' financial institutions and networks division from November 2000 until September 2001. Lester has no disciplinary history and has never been registered with the Commission. + 5. In financial statements filed with its Form 10-Q for the second quarter of 2001, eFunds improperly recognized $2.1 million in revenue from a transaction with Access Cash. For the second quarter of 2001, eFunds' improper revenue recognition overstated revenue by approximately 1.7 percent, inflated net earnings by more than 11.5 percent and enabled the company to meet consensus analysts' expectations. + 6. On September 1, 2000, Lester helped negotiate a management agreement between eFunds and Access Cash whereby Access Cash agreed to assign its future ATM deployment and management revenues to eFunds, in exchange for eFunds' agreement to assume responsibility for management of the ATM business and to pay a monthly management fee, initially set at approximately $5.2 million per month ("Management Agreement"). The amount of the management fee was designed to approximate Access Cash's historical revenue from its ATM deployment and management business. + 7. On March 1, 2001, Access Cash attempted to exercise an option to cancel the Management Agreement, effective September 1, 2001. eFunds challenged Access Cash's ability to terminate the Management Agreement and instead sought to expand the Management agreement going forward by including eFunds' management of Access Cash's equipment sales business. + 8. During June 2001 negotiations, eFunds and Access Cash agreed to provisions amending the Management Agreement to include eFunds' management of Access Cash's equipment sales business going forward ("Amendment Agreement"). eFunds and Access Cash further agreed to extend the term of the Management Agreement through March 31, 2002. + 9. As part of the proposed Amendment Agreement, eFunds also attempted to settle past disputes regarding the implementation of the Management Agreement by requesting that Access Cash make a penalty payment in exchange for a release of all eFunds' potential claims. eFunds requested that Access Cash make the penalty payment by assigning to eFunds Access Cash's second quarter 2001 equipment sales revenues, which were expected to be approximately $2.1 million for the quarter. + 10. Access Cash initially refused to make the penalty payment requested by eFunds. In order to obtain Access Cash's penalty payment in the second quarter of 2001, Lester and other eFunds executives agreed to include a provision whereby eFunds would pay Access Cash an additional sales assistance consulting fee of $250,000 per month for the remaining nine-month term of the Management Agreement, for a total of $2.25 million. Lester knew that eFunds was obligated to pay the additional sales assistance consulting fee regardless of how much consulting, if any, that Access Cash performed. Lester also knew that eFunds was obligated to pay the fee for the entire remaining term of the Management Agreement, with the exception of an acquisition of Access Cash by eFunds, even if either party terminated the Management Agreement early. With the inclusion of the additional sales assistance consulting fee, Access Cash agreed to make the penalty payment as part of the amendment to the Management Agreement. + 11. During negotiations between eFunds and Access Cash regarding the Amendment Agreement, ATM Holding continued its ongoing efforts to sell to eFunds the remaining 76 percent of Access Cash. On June 30, 2001, Access Cash's chief executive officer informed Lester that, while he had signed the Amendment Agreement, he would not return an executed copy to eFunds until eFunds and ATM Holding had finalized a separate agreement whereby eFunds would commit to purchase the remainder of Access Cash for a mutually agreeable price and over a mutually agreeable timeframe ("Commitment Letter"). + 12. On July 2, 2001, eFunds and ATM Holding executed a commitment letter, whereby eFunds agreed to a timetable in which it would purchase the remaining 76 percent of Access Cash based upon a total valuation of $57 million. The Commitment Letter also contained provisions that provided that eFunds would pay ATM Holding various penalty payments totaling $1.5 million if the acquisition was not completed by certain milestone dates through March 31, 2002. + 13. On August 14, 2001, eFunds filed its Form 10-Q for the second quarter ended June 30, 2001, reporting as revenue the $2.1 million penalty payment assigned by Access Cash pursuant to the Amendment Agreement. + 14. Lester knew or should have known that, under generally accepted accounting principles ("GAAP), eFunds' agreement to repay Access Cash's penalty payment through future, consulting payments over nine months prohibited eFunds from recognizing Access Cash's penalty payment as revenue in the second quarter of 2001. Lester further knew or should have known that the Amendment Agreement and Commitment Letter were linked. Therefore, Lester knew or should have known that because the Commitment Letter had not been executed until the third quarter of 2001, it was not appropriate for eFunds to recognize revenue from the Amendment Agreement in the second quarter of 2001. + 15. On March 4, 2002, eFunds restated its financial statements accompanying its Forms 10-Q for the second and third quarter of 2001. eFunds concluded that the Amendment Agreement and the Commitment Letter were interdependent under GAAP and therefore should have been treated as one agreement that became effective in July 2001. eFunds further determined that equipment sales revenues assigned to it by Access Cash under the Amendment Agreement, which were originally recorded as eFunds revenues, and fees paid to Access Cash and ATM Holding under the Amendment Agreement and the Commitment Letter, which were originally recorded as eFunds expenses, should have been accounted for as advances and repayments on the purchase price for ATM Holding's remaining equity interest in Access Cash. This resulted in a $1.3 million net reduction in the purchase price paid by eFunds for the remaining equity interests in Access Cash. For the second quarter of 2001, as restated, eFunds' revenue declined from $128.2 million to $126.0 million, a decrease of 1.7 percent, and its net income declined from $8.7 million to $7.7 million, a decrease of 11.5 percent. For the third quarter of 2001, as restated, eFunds' revenue declined from $135.4 million to $133 million, a decrease of 1.8 percent, and net income increased from $13.2 million to $13.6 million, an increase of 3 percent. + + Violations + 16. Section 13(b)(5) of the Exchange Act provides that: "No person shall knowingly circumvent or knowingly fail to implement a system of internal accounting controls or knowingly falsify any book, record, or account described in [Section 13(b)(2)]." By engaging in the conduct described in paragraphs III.1. through III.15. above, Lester committed violations of Section 13(b)(5) of the Exchange Act. + 17. Section 13(a) of the Exchange Act requires all issuers with securities registered under Section 12 of the Exchange Act to file periodic and other reports with the Commission containing such information as the Commission's rules prescribe. Pursuant to Section 13(a), the Commission promulgated Rule 13a-13 that requires issuers to file quarterly reports. In addition, Rule 12b-20 requires that reports contain such further material information as may be necessary to make the required statements, in light of the circumstances under which they were made, not misleading. As a result of the conduct described in paragraphs III.1. through III.15. above, Lester was a cause of eFunds' violations of Section 13(a) of the Exchange Act and Rules 12b-20 and 13a-13. + 18. Section 13(b)(2)(A) of the Exchange Act states that every Section 12 registrant must "make and keep books, records, and accounts, which, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the issuer." Rule 13b2-1 provides that no person shall, directly or indirectly, falsify or cause to be falsified, any book, record, or account subject to Section 13(b)(2)(A). As a result of the conduct described in paragraphs III.1. through III.15. above, Lester committed violations of Rule 13b2-1 of the Exchange Act, and was a cause of eFunds' violations of Section 13(b)(2)(A) of the Exchange Act. + + + Undertakings + 19. Respondent undertakes to cooperate with the Commission staff in preparing for and presenting any civil litigation or administrative proceeding concerning any transaction or related transaction that is the subject of the Order. Respondent understands that if he fails to comply with these undertakings, the Commission reserves the right to reopen this proceeding and reconsider the appropriateness of the Order imposed. + 20. In determining whether to accept the Offer, the Commission has considered these undertakings. + + IV. + In view of the foregoing, the Commission deems it appropriate to impose the sanctions agreed to in Respondent's Offer. + Accordingly, it is hereby ORDERED that: + 1. Respondent cease and desist from committing or causing any violations and any future violations of Section 13(b)(5) of the Exchange Act and Rule 13b2-1 thereunder, and from causing any violations and any future violations of Sections 13(a) and 13(b)(2)(A) of the Exchange Act and Rules 12b-20 and 13a-13 thereunder; + 2. Respondent, within 10 days of the entry of this Order, pay disgorgement and prejudgment interest in the total amount of $21,782.44 to the United States Treasury. Such payment shall be: (A) made by United States postal money order, certified check, bank cashier's check or bank money order; (B) made payable to the Securities and Exchange Commission; (C) hand-delivered or mailed to the Office of Financial Management, Securities and Exchange Commission, Operations Center, 6432 General Green Way, Alexandria, Stop 0-3, VA 22312; and (D) submitted under cover letter that identifies Jerry K. Lester as a Respondent in these proceedings, the file number of these proceedings, a copy of which cover letter and money order or check shall be sent to Donald M. Hoerl, Associate Regional Director, Division of Enforcement, Securities and Exchange Commission, Central Regional Office, 1801 California Street, Suite 1500, Denver, CO 80202. + + + By the Commission. + + + + + Jonathan G. Katz + Secretary + + + Endnotes + 1 The findings herein are made pursuant to Respondent's Offer of Settlement and are not binding on any other person or entity in this or any other proceeding. + + + +See also the Order in this matter --> + + + + + + + + + + + + + + + + + + + + + + + + + + Return to top + + + + + SEC homepage + + + + + + + + + + + + + + About the SEC + + + + + + Budget & Performance + + + Careers + + + Commission Votes + + + Contact + + + Contracts + + + + + + + + Transparency + + + + + + Accessibility & Disability + + + Super Intelligence + + + FOIA + + + Inspector General + + + No FEAR Act Data + + + Ombuds + + + SEC Excess Personal Property Guidance + + + + + + + + Websites + + + + + + Investor.gov + + + Related Sites + + + USA.gov + + + + + + + + Site Information + + + + + + Plain Writing + + + Privacy & Security + + + Site Map + + + + + + + + + + + + + + + + + + Stay connected. 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Bristow and Nikhil Sinha + + + + + + + + + + + + Paul H. Bristow and Nikhil Sinha + + + + + + + + + + + + + + + + + + + U.S. SECURITIES AND EXCHANGE COMMISSION + Litigation Release No. 18981 / November 19, 2004 + + Accounting and Auditing Enforcement +Release No. 2141 / November 19, 2004 + + Securities and Exchange Commission v. Paul H. Bristow and Nikhil Sinha, Civil Action No. CIV04-2601-PHX-FJM + + The Commission today filed civil charges against eFunds Corp.'s former chief financial officer, Paul H. Bristow, of Halliburton, Ontario, Canada, and former executive vice president of the business enterprise group, Nikhil Sinha, of Austin, Texas. eFunds, a Delaware corporation with its principal office in Scottsdale, Arizona, processes electronic payments including debit card and automated teller machine transactions. The Commission's complaint alleges that in the second quarter of 2001, eFunds improperly recognized $2.1 million in revenue from a purported settlement payment by an affiliated entity. The complaint alleges eFunds' recognition of the settlement payment as revenue was not appropriate because, among other things, eFunds agreed, in the third quarter of 2001, to reimburse the affiliated entity by paying future consulting fees that would approximate the amount of the settlement payment. The complaint further alleges that Bristow and Sinha each reviewed and approved the arrangement to repay the settlement payment to the affiliated entity, knowing that the future consulting fees would approximate the amount of the settlement payment, and that they were reckless in causing eFunds to recognize the $2.1 million as revenue in the second quarter of 2001. + Bristow, without admitting or denying the allegations in the Complaint, has consented to the entry of a Final Judgment against him enjoining him from violating Sections 10(b) and 13(b)(5) of the Securities Exchange Act of 1934 ("Exchange Act") and Rules 10b-5 and 13b2-1 thereunder, and from aiding and abetting violations of Sections 13(a) and 13(b)(2)(A) of the Exchange Act and Rules 12b-20 and 13a-13 thereunder. The Final Judgment also requires Bristow to pay $53,680 in disgorgement plus $6,999.89 in prejudgment interest and imposes a $30,000 civil penalty for his wrongdoing. + Sinha, without admitting or denying the allegations in the Complaint, has consented to the entry of a Final Judgment enjoining him from violating Section 13(b)(5) of the Exchange Act and Rule 13b2-1 thereunder, and from aiding and abetting violations of Sections 13(a) and 13(b)(2)(A) of the Exchange Act and Rules 12b-20 and 13a-13 thereunder. The Final Judgment also requires Sinha to pay $58,152 in disgorgement plus $6,717.56 in prejudgment interest and imposes a $25,000 civil penalty for his wrongdoing. + + SEC Complaint in this matter + + + + + + + + + + + + + + + + + + + + + + + + + + Return to top + + + + + SEC homepage + + + + + + + + + + + + + + About the SEC + + + + + + Budget & Performance + + + Careers + + + Commission Votes + + + Contact + + + Contracts + + + + + + + + Transparency + + + + + + Accessibility & Disability + + + Super Intelligence + + + FOIA + + + Inspector General + + + No FEAR Act Data + + + Ombuds + + + SEC Excess Personal Property Guidance + + + + + + + + Websites + + + + + + Investor.gov + + + Related Sites + + + USA.gov + + + + + + + + Site Information + + + + + + Plain Writing + + + Privacy & Security + + + Site Map + + + + + + + + + + + + + + + + + + Stay connected. 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Oakes + + + + + + + + + + + + Bruce D. Oakes + + + + + + + + + + + + + + + + + + + + + Securities Exchange Act of 1934 +Release No. 50743 / November 29, 2004 + + Accounting And Auditing Enforcement +Release No. . 2142 / November 29, 2004 + + Admin. Proc. File No. 3-11746 + + In the Matter of + BRUCE D. OAKES, + Respondent. + + : : : : : : : : : + ORDER INSTITUTING ADMINISTRATIVE AND CEASE-AND-DESIST PROCEEDINGS, MAKING FINDINGS, AND IMPOSING REMEDIAL SANCTIONS AND A CEASE-AND-DESIST ORDER PURSUANT TO SECTIONS 15(b) AND 21C OF THE SECURITIES EXCHANGE ACT OF 1934 + I. + The Securities and Exchange Commission ("Commission") deems it appropriate and in the public interest that public administrative and cease-and-desist proceedings be, and hereby are, instituted pursuant to Sections 15(b) and 21C of the Securities Exchange Act of 1934 ("Exchange Act") against Bruce D. Oakes ("Respondent" or "Oakes"). + + II. + In anticipation of the institution of these proceedings, Respondent has submitted an Offer of Settlement ("Offer") which the Commission has determined to accept. Solely for the purpose of these proceedings and any other proceedings brought by or on behalf of the Commission, or to which the Commission is a party, and without admitting or denying the findings herein, except as to the Commission's jurisdiction over Respondent and the subject matter of these proceedings, Respondent consents to the entry of this Order Instituting Administrative and Cease-and-Desist Proceedings, Making Findings, and Imposing Remedial Sanctions and a Cease-and-Desist Order Pursuant to Sections 15(b) and 21C of the Securities Exchange Act of 1934 ("Order"), as set forth below. + + III. + On the basis of this Order and Respondent's Offer, the Commission finds 1 that: + Respondent + 1. Oakes, age 38, resides in Ballwin, Missouri. Oakes was the chief operating officer and registered financial operations principal ("FINOP") for Eisner Securities, Inc. ("ESI") from its inception in 1996 until it ceased conducting business in September 2001. Oakes also held the title of president from January 2001 until September 2001. + + Related Individual and Entity + 2. Joseph E. Erwin ("Erwin"), age 42, currently is incarcerated at the Eglin Federal Prison Camp in Florida. On January 23, 2001, in the United States District Court for the Southern District of Ohio, Eastern Division, Erwin pled guilty to one count of mail fraud (18 U.S.C. §1341) and one count of wire fraud (18 U.S.C. §1343) related to his misappropriation of ESI's customers' funds. Erwin subsequently was sentenced to ten years incarceration and ordered to make restitution of $2,013,404.15. From 1997 through September 2000, Erwin was a registered representative and branch manager for ESI. + 3. ESI, formerly headquartered in St. Louis, Missouri, was registered with the Commission as a broker-dealer from May 15, 1996 until December 2, 2001. On September 26, 2001, ESI notified the Commission and the NASD that it was not in compliance with its $50,000 minimum net capital requirement and was ceasing operations immediately. On October 2, 2001, ESI filed a Form BDW with the Commission that voluntarily withdrew its registration as a broker-dealer. On October 30, 2001, ESI was placed in SIPC liquidation. On December 2, 2001, ESI's Form BDW became effective. + + Facts + 4. ESI was an introducing broker, carrying and clearing its customer accounts on a fully-disclosed basis through a clearing firm. ESI's clearing firm retained customer funds, generated statements for ESI's customers, and effectuated transactions in ESI's customers' accounts at the direction of ESI. ESI's minimum net capital requirement was $50,000. + 5. In 1997, Oakes hired Erwin as a branch manager. Erwin joined ESI with a fully-functioning branch office in Columbus, Ohio. At the time Oakes hired Erwin, Oakes knew Erwin had a disciplinary history that included termination from a previous position for improper transfer of funds. However, Oakes did not place Erwin on heightened scrutiny. Instead, Oakes granted Erwin special access to ESI's clearing firm's computer system, which included the ability to change customer addresses. Erwin used his access to the clearing firm's computer to change customer addresses to addresses he controlled and then submitted check requests from the accounts. Erwin forged signatures on the checks he received and deposited the funds in accounts he controlled. Erwin generated and mailed fake statements to the customers. + 6. In September 2000, Oakes terminated Erwin's association with ESI after discovering that Erwin had misappropriated approximately $2 million from at least 11 ESI customer accounts since being hired. By October 2000, ESI had created a spreadsheet of the exact amount misappropriated from each customer account, totaling approximately $2 million. Erwin's misappropriations represented more than 100% of ESI's total assets. + 7. In November 2000, ESI sent letters to most, if not all, of the customers affected by Erwin's misappropriations promising to handle their claims directly by March 31, 2001 if the carrier of ESI's Errors and Omissions professional liability insurance policy ("E&O policy") had not paid the claims by then. ESI had a $1 million E&O policy. ESI's claim under that policy was denied in October 2000. + 8. In December 2000, ESI, through counsel, sent letters to most, if not all, of the customers affected by Erwin's misappropriations identifying the exact amount of each customer's loss and saying that "[ESI] intends to restore your loss as promptly as possible." The December 2000 letters went on to offer to restore to the customers 50% of the amount misappropriated from their accounts, in cash, immediately, with the remaining 50% paid out over 18 months, with interest. At the time that ESI made these offers to repay its customers, ESI did not have sufficient reserves to pay the up-front 50% cash reimbursements. + 9. From at least March through September 2001, ESI admitted the liability created by Erwin's misappropriations during merger negotiations with another broker-dealer. From the beginning of negotiations, ESI discussed establishing a $4 million "holdback" escrow fund to pay any settlements or judgments arising from Erwin's misappropriations or other litigation matters. + 10. At all relevant times, Oakes knew the facts set forth in paragraphs 6 through 9 above. + ESI Failed to Include Erwin's Misappropriations as a Liability in its Net Capital Computations, Quarterly FOCUS Reports, and Books and Records + 11. Paragraph 8 of Statement of Financial Accounting Standards No. 5 ("FAS 5") required ESI to accrue the amount misappropriated as a liability if it was probable that a liability had been incurred as a result of Erwin's misappropriations and if the amount of loss could be reasonably estimated. Under this analysis, it was probable that a liability had been incurred by ESI because Erwin was an ESI branch manager and he had stolen ESI's customers' funds using the special access that ESI granted him to the clearing firm's computer. Further, ESI never disputed its liability with the customers affected by Erwin's misappropriations. The amount of loss for Erwin's misappropriations also was estimated by at least October 2000 when ESI created a spreadsheet of the exact amount misappropriated from each customer account. + 12. From at least October 2000 through September 2001, ESI did not include the liability owed to customers resulting from Erwin's misappropriations in ESI's net capital computations, and books and records. ESI also did not include the liability owed to customers resulting from Erwin's misappropriations in ESI's FOCUS reports filed with the National Association of Securities Dealers ("NASD") for the quarters ended December 31, 2000, March 31, 2001, and June 30, 2001. Oakes was responsible for reviewing and approving the filing of ESI's quarterly FOCUS reports with the NASD. Had ESI accrued Erwin's misappropriations as a liability between October 2000 and September 2001, then its net capital computations, books and records, and FOCUS reports would have reflected a net capital deficit ranging between $1.7 million and $2 million. + 13. ESI also did not include the liability incurred as a result of Erwin's misappropriations in its audited financial statements for its fiscal year ended December 31, 2000, which were filed with the Commission on February 28, 2001 under Oakes' signature. + Oakes Established ESI's Compliance Policies, Procedures, and Practices that Allowed Erwin's Fraud + 14. Oakes was in charge of compliance and was responsible for establishing ESI's supervisory policies, procedures, and practices. Oakes failed reasonably to supervise Erwin with a view toward detecting and/or preventing Erwin's violations of the federal securities laws by instituting an inadequate supervisory system at ESI as follows: + ESI's policies and procedures did not contain provisions for supervision of branch managers. In practice, ESI did not have a supervisory structure for branch managers.   + ESI's policies and procedures did not provide for heightened supervision of registered representatives who had disciplinary histories. In practice, ESI did not supervise Erwin with a heightened degree of scrutiny.   + ESI's policies and procedures did not contain adequate provisions to detect and/or prevent Erwin's fraudulent use of his access to the clearing firm's computer system. For example, ESI's clearing firm provided ESI with online access to reports that would have revealed any address changes for ESI customer account numbers. Oakes knew this information was available online, but he did not review it, and he did not establish any policies or procedures to ensure that other ESI employees reviewed the information. Moreover, although ESI had a policy and procedure that required all customer address change requests be submitted in writing to ESI's home office with written confirmation sent to the customers' old addresses, ESI did not have a system to implement the policy and procedure. Consequently, no one at ESI sent customers written confirmation of address changes.   + ESI's policies and procedures did not provide for the verification of written customer signatures and ESI did not verify written customer signatures on documents that, among other things, involved disbursement of customer funds.   + Legal Analysis + ESI's Net Capital Violations + 15. From at least October 2000 through September 2001, ESI violated Section 15(c)(3) of the Exchange Act and Rule 15c3-1. During this period, by use of the mails, or means or instrumentalities of interstate commerce, ESI effected transactions in, or induced or attempted to induce the purchase or sale of, securities (other than an exempted security (except a government security) or commercial paper, bankers' acceptances or commercial bills) in contravention of the rules and regulations prescribed by the Commission as necessary or appropriate in the public interest or for the protection of investors to provide safeguards with respect to the financial responsibility and related practices of brokers and dealers. Rule 15c3-1, known as the "net capital rule," requires a broker-dealer to maintain a certain minimum ratio of net capital to aggregate indebtedness so that the broker-dealer's assets will be sufficiently liquid to enable it to meet all of its current obligations. From at least October 2000 through September 2001, ESI had a net capital deficit ranging between $1.7 and $2 million as a result of the liability created by Erwin's misappropriations. + ESI's Books and Records Violations + 16. Section 17(a) of the Exchange Act and Rule 17a-3 thereunder require that every registered broker-dealer make and keep current books and records reflecting, among other things, all liabilities and the firm's net capital computations. Rule 17a-5 also requires that registered broker-dealers such as ESI file quarterly FOCUS reports with the NASD and annual audited financial statements with the Commission. Implicit in these provisions is the requirement that information contained in a required book or record be accurate. + 17. From at least October 2000 through September 2001, ESI did not include the liability owed to customers resulting from Erwin's misappropriations in its net capital computations, and books and records. ESI also did not include the liability owed to customers resulting from Erwin's misappropriations in its FOCUS reports filed with the NASD for the quarters ended December 31, 2000, March 31, 2001, and June 30, 2001. ESI also filed with the Commission its audited financial statements for its fiscal year ended December 31, 2000, which failed to include a liability for Erwin's misappropriations. Had ESI accrued Erwin's misappropriations as a liability between October 2000 and September 2001, then its net capital computations, books and records, and FOCUS reports would have reflected a net capital deficit ranging between $1.7 million and $2 million. Accordingly, ESI violated Section 17(a) of the Exchange Act and Rules 17a-3 and 17a-5 thereunder. + ESI's Notice Provision Violations + 18. Section 17(a) of the Exchange Act and Rule 17a-11(b)(1) requires broker-dealers, like ESI, whose net capital declines below the minimum required pursuant to Rule 15c3-1 to give notice to the Commission of this fact, the same day. Rule 17a-11(d) also requires broker-dealers who fail to make or keep current books and records required by Rules 17a-3 to give notice to the Commission of this fact, the same day, specifying the books and records which have not been made or which are not current. + 19. ESI failed to provide any notice or report to the Commission that it was out of compliance with its minimum net capital requirement and that it failed to keep current books and records from at least October 2000 through September 2001. Therefore, ESI violated Section 17(a) of the Exchange Act and Rule 17a-11 thereunder. + Oakes Caused ESI's Net Capital, Books and Records, and Notice Violations + 20. Section 21C of the Exchange Act authorizes the Commission to bring a cease-and-desist proceeding against a person whose acts or omissions are a cause of an Exchange Act violation. Pursuant to Section 21C(a), a respondent is a cause of another's violation if he knew or should have known that his act would contribute to the violation. As described above, ESI violated Sections 15(c)(3) and 17(a) of the Exchange Act and Rules 15c3-1, 17a-3, 17a-5, and 17a-11 thereunder. Oakes knew or should have known that his conduct as described above would contribute to ESI's violations. Accordingly, based on the conduct described above, Oakes caused ESI's violations of Sections 15(c)(3) and 17(a) of the Exchange Act and Rules 15c3-1, 17a-3, 17a-5, and 17a-11 thereunder. + Oakes Failed Reasonably to Supervise Erwin + 21. Section 15(b)(6)(A) of the Exchange Act provides that the Commission can impose various sanctions against individuals who fail reasonably to supervise others within the meaning of Section 15(b)(4)(E). Based on the conduct described above, Oakes failed reasonably to supervise Erwin with a view to detecting and/or preventing violations by Erwin of the federal securities laws. + Civil Penalties + Respondent has submitted a sworn Statement of Financial Condition dated November 6, 2003 and other evidence and has asserted his inability to pay a civil penalty. + IV. + In view of the foregoing, the Commission deems it appropriate and in the public interest to impose the sanctions specified in Respondent's Offer. + ACCORDINGLY, IT IS HEREBY ORDERED: + A. Pursuant to Section 21C of the Exchange Act, Respondent shall cease and desist from causing any violations and any future violations of Sections 15(c) and 17(a) of the Exchange Act and Rules 15c3-1, 17a-3, 17a-5, and 17a-11 thereunder; + B. Pursuant to Section 15(b)(6) of the Exchange Act Respondent be, and hereby is barred from association with any broker or dealer with the right to reapply for association in a non-supervisory capacity after two (2) years to the appropriate self-regulatory organization, or if there is none, to the Commission; + C. Any reapplication for association by the Respondent will be subject to the applicable laws and regulations governing the reentry process, and reentry may be conditioned upon a number of factors, including, but not limited to, the satisfaction of any or all of the following: (a) any disgorgement ordered against the Respondent, whether or not the Commission has fully or partially waived payment of such disgorgement; (b) any arbitration award related to the conduct that served as the basis for the Commission order; (c) any self-regulatory organization arbitration award to a customer, whether or not related to the conduct that served as the basis for the Commission order; and (d) any restitution order by a self-regulatory organization, whether or not related to the conduct that served as the basis for the Commission order; + D. Based upon Respondent's sworn representations in his Statement of Financial Condition dated November 3, 2003 and other documents submitted to the Commission, the Commission is not imposing a penalty against Respondent. + E. The Division of Enforcement ("Division") may, at any time following the entry of this Order, petition the Commission to: (1) reopen this matter to consider whether Respondent provided accurate and complete financial information at the time such representations were made; and (2) seek an order directing payment of the maximum civil penalty allowable under the law. No other issue shall be considered in connection with this petition other than whether the financial information provided by Respondent was fraudulent, misleading, inaccurate, or incomplete in any material respect. Respondent may not, by way of defense to any such petition: (1) contest the findings in this Order; (2) assert that payment of a penalty should not be ordered; (3) contest the imposition of the maximum penalty allowable under the law; or (4) assert any defense to liability or remedy, including, but not limited to, any statute of limitations defense. + + By the Commission. + + + + + Jonathan G. Katz + Secretary + + + Endnotes + 1 The findings herein are made pursuant to Respondent's Offer and are not binding on any other person or entity in this or any other proceeding. + + +See also the Order in this matter --> + + + + + + + + + + + + + + + + + + + + + + + + + + Return to top + + + + + SEC homepage + + + + + + + + + + + + + + About the SEC + + + + + + Budget & Performance + + + Careers + + + Commission Votes + + + Contact + + + Contracts + + + + + + + + Transparency + + + + + + Accessibility & Disability + + + Super Intelligence + + + FOIA + + + Inspector General + + + No FEAR Act Data + + + Ombuds + + + SEC Excess Personal Property Guidance + + + + + + + + Websites + + + + + + Investor.gov + + + Related Sites + + + USA.gov + + + + + + + + Site Information + + + + + + Plain Writing + + + Privacy & Security + + + Site Map + + + + + + + + + + + + + + + + + + Stay connected. 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Dairaghi, C.P.A. + + + + + + + + + + + + Charles A. Dairaghi, C.P.A. + + + + + + + + + + + + + + + + + + + + + Securities Exchange Act of 1934 +Release No. 50744 / November 29, 2004 + + Accounting And Auditing Enforcement +Release No. 2143 / November 29, 2004 + + Admin. Proc. File No. 3-11747 + + In the Matter of + CHARLES A. DAIRAGHI, C.P.A., + Respondent. + + : : : : : : : : : + ORDER INSTITUTING PUBLIC ADMINISTRATIVE PROCEEDINGS, MAKING FINDINGS AND IMPOSING REMEDIAL SANCTIONS PURSUANT TO RULE 102(e) OF THE COMMISSION'S RULES OF PRACTICE + I. + The Securities and Exchange Commission ("Commission") deems it appropriate that public administrative proceedings be, and hereby are, instituted against Charles A. Dairaghi, C.P.A., ("Dairaghi" or "Respondent") pursuant to Rule 102(e)(1)(ii). 1 + II. + In anticipation of the institution of these proceedings, Dairaghi has submitted an Offer of Settlement ("Offer"), which the Commission has determined to accept. Solely for the purpose of these proceedings and any other proceedings brought by or on behalf of the Commission, or to which the Commission is a party, Dairaghi consents to the issuance of this Order and to the entry of the findings and imposition of the remedial sanctions set forth below, without admitting or denying the Commission's findings, except that Dairaghi admits that the Commission has jurisdiction over him and over the subject matter of this proceeding. + III. + On the basis of this Order and the Respondent's Offer, the Commission finds 2 that: + + Summary + 1. Charles A. Dairaghi ("Dairaghi"), a certified public accountant, was the chief financial officer for Eisner Securities, Inc. ("ESI") from June 2000 through September 2001. In September 2000, ESI terminated Joseph E. Erwin ("Erwin"), the former manager of its Columbus, Ohio branch office, after discovering that he had misappropriated approximately $2 million from at least 11 ESI customer accounts from 1997 through 2000. 3 Erwin misappropriated the funds by abusing the special access he had been given to ESI's clearing firm's computer system. ESI's liabilities stemming from the misappropriation resulted in its SIPC liquidation in October 2001. From October 2000 until it ceased conducting business in September 2001, ESI failed to include the liability to customers incurred as a result of Erwin's misappropriations in its net capital computations, quarterly FOCUS reports, and underlying books and records, which were prepared by Dairaghi. + + Respondent + 2. Charles A. Dairaghi, age 38, resides in St. Louis, Missouri. Dairaghi has been licensed in Missouri as a certified public accountant since 1989. He also has been licensed by the National Association of Securities Dealers ("NASD") as a financial and operations principal ("FINOP") since July 2001. Dairaghi is a partial owner of Saxony Securities, Inc. ("Saxony"), a broker-dealer that began operations in February 2002. Prior to entry of the Order, Dairaghi was also the registered FINOP for Saxony. + + Related Entity and Individual + 3. ESI, formerly headquartered in St. Louis, Missouri, was registered with the Commission as a broker-dealer from May 15, 1996 until December 2, 2001. On September 26, 2001, ESI notified the Commission and the NASD that it was not in compliance with its $50,000 minimum net capital requirement and was ceasing operations immediately. On October 2, 2001, ESI filed a Form BDW with the Commission that voluntarily withdrew its registration as a broker-dealer. On October 30, 2001, ESI was placed in SIPC liquidation. On December 2, 2001, ESI's Form BDW became effective. ESI was a member of the NASD. + 4. Bruce D. Oakes ("Oakes"), age 39, resides in Ballwin, Missouri and was ESI's chief operating officer and registered FINOP from its inception in 1996 until it ceased conducting business in September 2001. Oakes also held the title of president from January 2001 until September 2001. + Facts + 5. ESI was an introducing broker, carrying and clearing its customer accounts on a fully-disclosed basis through a clearing firm. ESI's clearing firm retained customer funds, generated statements for ESI's customers, and effectuated transactions in ESI's customers' accounts at the direction of ESI. ESI's minimum net capital requirement was $50,000. + 6. Oakes hired Erwin in 1997 and granted him direct access to ESI's clearing firm's computer system, which included the ability to change customer addresses. Erwin used his access to the clearing firm's computer to change customer addresses to addresses he controlled and then submitted check requests from the accounts. Erwin forged signatures on the checks he received and deposited the funds in accounts he controlled. Erwin generated and mailed fake statements to the customers. + 7. In September 2000, ESI terminated Erwin after discovering that he had misappropriated approximately $2 million from at least 11 ESI customer accounts since being hired. By October 2000, ESI had created a spreadsheet of the exact amount misappropriated from each customer account, totaling approximately $2 million. Erwin's misappropriations represented more than 100% of ESI's total assets. Dairaghi knew in September 2000 that ESI had terminated Erwin for misappropriating approximately $2 million in customer funds and that ESI had created a spreadsheet reflecting his misappropriations by the next month. + 8. In November 2000, ESI sent letters to most, if not all, of the customers affected by Erwin's misappropriations promising to handle their claims directly by March 31, 2001 if the carrier of ESI's Errors and Omissions professional liability insurance policy ("E&O policy") had not paid the claims by then. ESI had a $1 million E&O policy. ESI's claim under that policy was denied in October 2000, which Dairaghi knew at the time of the denial. Dairaghi did not know at the time about ESI's November letter to the customers affected by Erwin's misappropriations. + 9. In December 2000, ESI, through counsel, sent letters to most, if not all, of the customers affected by Erwin's misappropriations identifying the exact amount of each customer's loss and saying that "[ESI] intends to restore your loss as promptly as possible." The December 2000 letters went on to offer to restore to the customers 50% of the amount misappropriated from their accounts, in cash, immediately, with the remaining 50% paid out over 18 months, with interest. ESI did not have sufficient reserves to pay the 50% cash reimbursements. Dairaghi did not know at the time about ESI's December 2000 letters through counsel to the customers affected by Erwin's misappropriations offering to restore their losses. + 10. From at least March through September 2001, ESI admitted the liability created by Erwin's misappropriations during merger negotiations with another broker-dealer. From the beginning of negotiations, ESI discussed establishing a $4 million "holdback" escrow fund to pay any settlements or judgments arising from Erwin's misappropriations or other litigation matters. Dairaghi knew at the time that the $4 million holdback escrow fund was part of the merger negotiations. + Dairaghi Failed to Include Erwin's Misappropriations as a Liability in ESI's Net Capital Computations, Quarterly Focus Reports, and Books and Records + 11. Dairaghi's duties as ESI's chief financial officer included calculating ESI's net capital computations, preparing payroll, preparing ESI's quarterly FOCUS reports, and maintaining ESI's books and records. Oakes supervised Dairaghi and signed ESI's FOCUS reports. + 12. Paragraph 8 of Statement of Financial Accounting Standards No. 5 ("FAS 5") required ESI to accrue the amount misappropriated as a liability if it was probable that a liability had been incurred as a result of Erwin's misappropriations and if the amount of loss could be reasonably estimated. Under this analysis, it was probable that a liability had been incurred by ESI because Erwin was an ESI branch manager and he stole ESI's customers' funds using the special access that ESI granted him to the clearing firm's computer. Further, ESI never disputed its liability with the customers affected by Erwin's misappropriations. The amount of loss for Erwin's misappropriations also was estimated by at least October 2000 when ESI created a spreadsheet of the exact amount misappropriated from each customer account. + 13. From at least October 2000 through September 2001, ESI did not include the liability owed to customers resulting from Erwin's misappropriations in its net capital computations, and books and records, which Dairaghi prepared. ESI also did not include the liability owed to customers resulting from Erwin's misappropriations in its FOCUS reports filed with the NASD for the quarters ended December 31, 2000, March 31, 2001, and June 30, 2001, which Dairaghi prepared. Had ESI accrued Erwin's misappropriations as a liability between October 2000 and September 2001, then those records would have reflected a net capital deficit ranging between $1.7 million and $2 million. + 14. Dairaghi's failure to accrue a liability for Erwin's misappropriations in ESI's net capital computations, books and records, and FOCUS reports from at least October 2000 through September 2001 was reckless, or at a minimum, highly unreasonable. Under FAS 5, the amount stolen was a liability required to be accrued upon discovery in September 2000 and was estimated by at least October 2000. Moreover, given the information Dairaghi did know about Erwin's misappropriations, his ignorance of the November and December 2000 letters was reckless, or at a minimum, highly unreasonable. Finally, Dairaghi's failure to accrue a liability for Erwin's misappropriations was reckless, or at a minimum, highly unreasonable because he knew from at least March 2001 that ESI was negotiating a $4 million holdback escrow fund to pay any settlements or judgments arising from Erwin's misappropriations or other litigation matters as part of merger negotiations. + Dairaghi's Statements to ESI's Auditors and ESI's Failure to Record Erwin's Liability on its Financial Statements + 15. Dairaghi prepared ESI's financial statements for its fiscal year ended December 31, 2000 for audit by ESI's auditors, Rubin, Brown, Gornstein & Co, LLP ("RBG"). During the planning stage of RBG's audit in the Fall of 2000, Dairaghi informed RBG about Erwin's $2 million misappropriation. Nonetheless, Dairaghi did not include the liability owed to customers as a result of Erwin's misappropriations in the ESI financial statements audited by RBG. + 16. By correspondence dated February 2, 2001 under signature of Oakes and Dairaghi, ESI submitted its management representation letter to RBG. Although Dairaghi had informed RBG about Erwin's misappropriations during the planning stage of the ESI audit, in this letter Oakes and Dairaghi informed RBG that (1) "we are not aware of any . . . instances of errors or fraud involving management or employees that could have a material effect on the financial statements," and (2) "there are no unasserted claims or assessments that our lawyer has advised us are probable of assertion and must be disclosed in accordance with Statements of the Financial Accounting Standard No. 5." + 17. By correspondence dated February 23, 2001, ESI's counsel sent RBG an attorney letter that contradicted, rather than confirmed, ESI's management representation letter by disclosing two pending NASD arbitrations and ten unasserted claims related to Erwin's misappropriations. In the attorney letter, ESI's counsel referenced his December 2000 correspondence offering to restore customer losses, saying that his firm "has contacted each customer on behalf of ESI and initiated discussions in order to resolve any matters pertaining to Mr. Erwin's acts." Dairaghi received a copy of the attorney letter. Dairaghi did not read the section of the attorney letter that disclosed the unasserted claims, which contradicted the representations Dairaghi had made in ESI's management representation letter. + 18. ESI did not include the liability incurred as a result of Erwin's misappropriations in its audited financial statements for its fiscal year ended December 31, 2000, which were filed with the Commission on February 28, 2001. + 19. Dairaghi's failure to accrue a liability for Erwin's misappropriations in the financial statements that RBG audited was reckless, or at a minimum, highly unreasonable. Likewise, Dairaghi's conduct relative to ESI's management representation letter to RBG was reckless, or at a minimum, highly unreasonable. At the time Dairaghi signed ESI's management representation letter representing that there were no instances of fraud by ESI's management or employees, Erwin already had pled guilty on federal mail and wire fraud charges related to his misappropriations. Finally, Dairaghi's failure to read the section related to unasserted claims in the attorney letter to RBG, which contradicted the representations Dairaghi previously made to RBG in ESI's management representation letter, was reckless, or at a minimum, highly unreasonable. + 20. Dairaghi engaged in the above conduct when he knew, or should have known, that heightened scrutiny was warranted. The amount of Erwin's misappropriations exceeded ESI's total assets. Moreover, Erwin's thefts exposed ESI to potential claims for customer losses and to possible regulatory action. + Dairaghi Engaged in Improper Professional Conduct + 21. Dairaghi had a duty to ensure that ESI's financial statements and FOCUS reports were prepared in accordance with GAAP, including FAS 5. As a result of Dairaghi's reckless or highly unreasonable conduct under circumstances warranting heightened scrutiny, ESI's financial statements were not prepared in accordance with GAAP because no liability was accrued for Erwin's misappropriations, as required by FAS 5. As a result, ESI's net capital computations, quarterly FOCUS reports, books and records, and annual audited financial statements also were inaccurate. + Accordingly, by engaging in the conduct alleged in paragraphs 1 through 21 above, Dairaghi engaged in improper professional conduct within the meaning of Rule 102(e) of the Commission's Rules of Practice in that his conduct: (i) constituted intentional or knowing conduct, including reckless conduct, that resulted in a violation of applicable professional standards; or (ii) constituted negligent conduct, consisting of a single instance of highly unreasonable conduct that resulted in a violation of applicable professional standards in circumstances in which Dairaghi knew, or should have known, that heightened scrutiny was warranted. + IV. + + FINDINGS + On the basis of this Order and the Respondent's Offer, the Commission finds that Dairaghi engaged in improper professional conduct for purposes of Rule 102(e) of the Commission's Rules of Practice. + + V. + + UNDERTAKINGS + In connection with this proceeding and any related judicial or administrative proceeding or investigation commenced by the Commission or to which the Commission is a party, the Respondent undertakes to: (i) produce documents within his possession, custody or control and provide interviews at the request of the Commission staff; (ii) accept service by mail or facsimile transmission of subpoenas for documents or testimony at depositions, hearings or trials; (iii) in connection with such subpoena, waive the territorial limits on service contained in Fed. R. Civ. P. 45 or applicable local rules for such subpoenas, and waive the requirements of Fed. R. Civ. P. 28; (iv) appoint John Short of the law firm of Blackwell, Sanders, Peper, Martin LLP as agent to receive such service; (v) give truthful and accurate information and testimony and not assert any evidentiary or other privilege other than the attorney-client and work product privileges; and (vi) in the event of his failure to testify truthfully or to comply with the above requirements, be subject to contempt proceedings, charges of perjury and/or charges of obstruction of justice. + In determining whether to accept the Offer, the Commission considered these undertakings. + + VI. + + ORDER + In view of the foregoing, the Commission deems it appropriate to impose the sanctions agreed to in Respondent's Offer. + Accordingly, it is hereby ORDERED, effective immediately, that: + A. Respondent is denied the privilege of appearing or practicing before the Commission as an accountant. + B. After one year from the date of this Order, Respondent may request that the Commission consider his reinstatement by submitting an application (attention: Office of the Chief Accountant) to resume appearing or practicing before the Commission as: + a preparer or reviewer, or a person responsible for the preparation or review, of any broker-dealer's financial statements that are filed with the Commission or any self-regulatory organization. Such an application must satisfy the Commission that Respondent's work in his practice before the Commission (or his work related to financial statements filed with any self-regulatory organization) will be reviewed either by an independent auditor or in some other acceptable manner for a period of twenty-four months from his assumption of such a position; and/or,   + a preparer or reviewer, or a person responsible for the preparation or review, of any public company's financial statements that are filed with the Commission. Such an application must satisfy the Commission that Respondent's work in his practice before the Commission will be reviewed either by the independent audit committee of the public company for which he works or in some other acceptable manner, as long as he practices before the Commission in this capacity; and/or   + an independent accountant. Such an application must satisfy the Commission that:   + Respondent, or the public accounting firm with which he is associated, is registered with the Public Company Accounting Oversight Board ("Board") in accordance with the Sarbanes-Oxley Act of 2002, and such registration continues to be effective;   + Respondent, or the registered public accounting firm with which he is associated, has been inspected by the Board and that inspection did not identify any criticisms of or potential defects in the respondent's or the firm's quality control system that would indicate that the respondent will not receive appropriate supervision or, if the Board has not conducted an inspection, has received an unqualified report relating to his, or the firm's, most recent peer review conducted in accordance with the guidelines adopted by the former SEC Practice Section of the American Institute of Certified Public Accountants Division for CPA Firms or an organization providing equivalent oversight and quality control functions;   + Respondent has resolved all disciplinary issues with the Board, and has complied with all terms and conditions of any sanctions imposed by the Board (other than reinstatement by the Commission); and   + Respondent acknowledges his responsibility, as long as Respondent appears or practices before the Commission as an independent accountant, to comply with all requirements of the Commission and the Board, including, but not limited to, all requirements relating to registration, inspections, concurring partner reviews and quality control standards.   + C. The Commission will consider an application by Respondent to resume appearing or practicing before the Commission provided that his state CPA license is current and he has resolved all other disciplinary issues with the applicable state boards of accountancy. However, if state licensure is dependant on reinstatement by the Commission, the Commission will consider an application on its other merits. The Commission's review may include consideration of, in addition to the matters referenced above, any other matters relating to Respondent's character, integrity, professional conduct, or qualifications to appear or practice before the Commission. + + By the Commission. + + + + + Jonathan G. Katz + Secretary + + + Endnotes + 1 Rule 102(e) of the Commission's Rules of Practice provides, in pertinent part: + + (1) The Commission may censure a person or deny, temporarily or permanently, the privilege of appearing or practicing before it in any way to any person who is found by the Commission after notice and opportunity for hearing in the matter..: + (ii) To be lacking in character or integrity or to have engaged in unethical or improper professional conduct…; + (iv) With respect to persons licensed to practice as accountants, "improper professional conduct" under Rule 102(e)(1)(ii) means: (A) intentional or knowing conduct, including reckless conduct, that results in a violation of applicable professional standards; or (B) either of the following two types of negligent conduct: (1) a single instance of highly unreasonable conduct that results in a violation of applicable professional standards in circumstances in which an accountant knows, or should know, that heightened scrutiny is warranted… + + 2 The findings herein are not binding on anyone other than the Respondent. + 3 On January 23, 2001, in the United States District Court for the Southern District of Ohio, Eastern Division, Erwin pled guilty to one count of mail fraud (18 U.S.C. §1341) and one count of wire fraud (18 U.S.C. §1343), and was subsequently sentenced to ten years incarceration and ordered to make restitution of $2,013,404.15. + + + +See also the Order in this matter --> + + + + + + + + + + + + + + + + + + + + + + + + + + Return to top + + + + + SEC homepage + + + + + + + + + + + + + + About the SEC + + + + + + Budget & Performance + + + Careers + + + Commission Votes + + + Contact + + + Contracts + + + + + + + + Transparency + + + + + + Accessibility & Disability + + + Super Intelligence + + + FOIA + + + Inspector General + + + No FEAR Act Data + + + Ombuds + + + SEC Excess Personal Property Guidance + + + + + + + + Websites + + + + + + Investor.gov + + + Related Sites + + + USA.gov + + + + + + + + Site Information + + + + + + Plain Writing + + + Privacy & Security + + + Site Map + + + + + + + + + + + + + + + + + + Stay connected. 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Rubin, CPA and Michael W. Lewis, CPA Robert G. Mahony, Administrative Law Judge + + + + + + + + + + + + Kenneth L. Rubin, CPA and Michael W. Lewis, CPA Robert G. Mahony, Administrative Law Judge + + + + + + + + + + + + + + + + + + + + + Securities Exchange Act of 1934 +Release No. 50745 / November 29, 2004 + + Accounting And Auditing Enforcement +Release No. 2144 / November 29, 2004 + + Admin. Proc. File No. 3-11748 + + PUBLIC ADMINISTRATIVE PROCEEDINGS INSTITUTED AGAINST KENNETH L. RUBIN, CPA, AND MICHAEL W. LEWIS, CPA, ALLEGING IMPROPER PROFESSIONAL CONDUCT + + The Securities and Exchange Commission announced today that it has instituted public administrative proceedings pursuant to Rule 102(e) of the Commission's Rules of Practice to determine whether Kenneth L. Rubin, CPA, (Rubin) and Michael W. Lewis, CPA, (Lewis) engaged in improper professional conduct in the performance of their audit of Eisner Securities, Inc. (ESI) for its fiscal year ended December 31, 2000. Rubin and Lewis are both Certified Public Accountants licensed in Missouri. Rubin is a partner and Lewis is a manager with the accounting firm of Rubin, Brown, Gornstein & Co., LLP (RBG) in St. Louis, Missouri. + In the Order Instituting Proceedings (Order), the Division of Enforcement (Division) and the Office of the Chief Accountant (OCA) allege that Rubin and Lewis failed to comply with professional auditing standards in connection with their audit of ESI's 2000 year end financial statements. The Division and OCA allege that Rubin and Lewis failed to exercise due professional care and to exercise professional skepticism in performing the ESI audit, and that they failed to render an accurate audit report. The Division and OCA allege that ESI was a broker-dealer located in St. Louis, Missouri, that was placed in SIPC liquidation in October 2001. The Division and OCA allege that from at least October 2000 until it ceased conducting business in September 2001, ESI failed to accrue a liability for more than $2 million that was misappropriated from at least 11 customer accounts by a former ESI branch manager. The Division and OCA allege that Rubin and Lewis flagged the misappropriations as a key client issue in planning the ESI audit and that Rubin and Lewis were in possession of conflicting information regarding the effect of the misappropriations on ESI's financial statements. The Division and OCA allege that Rubin and Lewis nonetheless failed to obtain sufficient competent evidential matter to evaluate the effect of the $2 million misappropriation on ESI's financial statements. + The Division and OCA allege that RBG rendered an audit report containing an unqualified opinion on ESI's financial statements for its fiscal year ended December 31, 2000. The Division and OCA allege that RBG did not disclose in its report, or require accrual in the financial statements, a liability for the unasserted claims identified in the attorney letter. The Division and OCA allege that RBG's report inaccurately represented that ESI's financial statements for the year ended December 31, 2000 were prepared in conformity with GAAP and that RBG's audit was performed in accordance with GAAS. The Division and OCA allege that ESI's financial statements were not in conformity with GAAP because no accrual was made for the misappropriations. + A hearing will be held before an Administrative Law Judge to determine whether the allegations in the Order are true, to provide Rubin and Lewis an opportunity to dispute these allegations, and to determine whether the Commission should censure or deny them, temporarily or permanently, the privilege of appearing or practicing before the Commission. The Commission directed that an administrative law judge shall issue an initial decision in this matter within 300 days from the date of service of the Order. + + + +See also the Order in this matter + + + + + + + + + + + + Resources + + + + + the Order in this matter + + + + + + + + + + + + + + + + + + + + + + + + Return to top + + + + + SEC homepage + + + + + + + + + + + + + + About the SEC + + + + + + Budget & Performance + + + Careers + + + Commission Votes + + + Contact + + + Contracts + + + + + + + + Transparency + + + + + + Accessibility & Disability + + + Super Intelligence + + + FOIA + + + Inspector General + + + No FEAR Act Data + + + Ombuds + + + SEC Excess Personal Property Guidance + + + + + + + + Websites + + + + + + Investor.gov + + + Related Sites + + + USA.gov + + + + + + + + Site Information + + + + + + Plain Writing + + + Privacy & Security + + + Site Map + + + + + + + + + + + + + + + + + + Stay connected. 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American International Group, Inc., Civil Action No. 1:04CV02070 (GK)(D.D.C. filed November 30, 2004) + + AMERICAN INTERNATIONAL GROUP, INC. AGREES TO SETTLE CHARGES OF VIOLATIONS OF ANTIFRAUD AND OTHER PROVISIONS OF THE FEDERAL SECURITIES LAWS + + The Securities and Exchange Commission ("Commission") today filed a civil action against American International Group, Inc. ("Defendant AIG") for violating antifraud provisions of the federal securities laws and for aiding and abetting violations of reporting and record-keeping provisions of those laws. The Commission's action arises out of the conduct of Defendant AIG, primarily through its wholly owned subsidiary AIG Financial Products Corp. ("AIG-FP"), (collectively referred to as "AIG") in developing, marketing, and entering into transactions that purported to enable a public company to remove certain assets from its balance sheet. Defendant AIG, without admitting or denying the allegations in the Commission's Complaint has consented to the issuance of a final judgment (1) permanently enjoining it from violating, and from aiding and abetting violations of, certain provisions of the federal securities laws, (2) ordering it to comply with its undertaking to retain an independent consultant to examine certain prior transactions and to establish a transaction review committee to review future transactions, and (3) ordering Defendant AIG to disgorge the amount of fees that it received. In consenting to settle the Commission's action and related, criminal charges, AIG has agreed to pay disgorgement, plus prejudgment interest, and penalties totaling $126,366,000. + In its Complaint, filed in the United States District Court for the District of Columbia, the Commission alleged that from at least March 2001 through January 2002, Defendant AIG, primarily through AIG-FP, developed a product called a Contributed Guaranteed Alternative Investment Trust Security ("C-GAITS"), marketed that product to several public companies, and ultimately entered into three C-GAITS transactions with one such company, The PNC Financial Services Group, Inc. ("PNC"). For a fee, AIG offered to establish a special purpose entity ("SPE") to which the counter-party would transfer troubled or other potentially volatile assets. AIG represented that, under generally accepted accounting principles ("GAAP"), the SPE would not be consolidated on the counter-party's financial statements. The counter-party thus would be able to avoid charges to its income statement resulting from declines in the value of the assets transferred to the SPE. The transaction that AIG developed and marketed, however, did not satisfy the requirements of GAAP for nonconsolidation of SPEs. + The Commission alleged that while AIG was marketing the product, independent auditors for some potential counter-parties raised issues about whether certain features of the C-GAITS product could cause the product not to satisfy the GAAP requirements for nonconsolidation of SPEs. AIG did not inform the other potential counter-parties of these issues, except in one instance in which a potential counter-party used the same independent auditor as the potential counter-party that had communicated the issue to AIG. The Commission further alleged that AIG entered into three C-GAITS transactions with PNC to enable PNC to remove a total of $762 million in loan and venture-capital assets from its balance sheet. AIG was reckless in not knowing that these transactions did not satisfy the GAAP requirements for nonconsolidation of the assets by PNC. + In its Complaint, the Commission alleged the following: + The applicable accounting standards, GAAP, in part, provided that, for nonconsolidation by the counter-party to be appropriate, the majority owner of the SPE, i.e. AIG, had to be an independent third party who made a substantive capital investment in the SPE and had substantive risks and rewards of ownership of the assets of the SPE. Three percent was the minimally acceptable amount to indicate a substantive capital investment. Fees paid to the owner of the SPE for structuring the transaction would be treated as a return of the owner's initial capital investment.   + The C-GAITS product provided for the counter-party to contribute troubled or other potentially volatile assets and cash to the SPE. In exchange, the counter-party would receive a class of nonvoting, noncumulative convertible preferred stock. The cash that the counter-party contributed would be used to purchase a 30-year zero coupon note that, at maturity, would pay an amount equal to the counter-party's initial capital investment in the SPE. As initially proposed, AIG would issue the zero coupon note. The C-GAITS product additionally provided for AIG to contribute cash equal to 3% of the total assets of the SPE. In return, AIG would receive a separate class of preferred stock and voting common stock. The cash that AIG contributed would be used to purchase highly rated debt securities. The earnings on those securities would be used to pay AIG a dividend, which AIG would receive regardless of the performance of the assets that the counter-party had contributed. The C-GAITS product also provided for AIG to be paid an annual fee from assets or earnings on assets contributed by the counter-party.   + AIG retained a national accounting firm, National Accounting Firm A, to provide advice in the development and marketing of the C-GAITS product. National Accounting Firm A provided AIG with opinion letters (each a "SAS-50 letter") regarding the treatment under GAAP of the C-GAITS product by the counter-party. Those opinion letters, however, did not address certain features of the C-GAITS product that AIG proposed to prospective counter-parties.   + On or about April 23, 2001, a partner at National Accounting Firm A informed an AIG employee of a concern that National Accounting Firm A had that the purchase of a zero coupon note issued by AIG in connection with a proposed C-GAITS transaction could be treated as a return of AIG's capital investment. National Accounting Firm A finalized a SAS-50 letter without identifying an issuer of the zero coupon note or specifying whether AIG could be the issuer. AIG, however, continued to propose the C-GAITS product to prospective counter-parties with a zero coupon note issued by AIG but did not inform those prospective counter-parties of National Accounting Firm A's concerns about the issuance of such a note. AIG's marketing material informed prospective counter-parties that the contemplated accounting treatment for the C-GAITS transaction was "based upon advice from [National Accounting Firm A]."   + The C-GAITS product provided for AIG to be paid an annual fee by either the counter-party directly or the SPE from assets or earnings on assets contributed by the counter-party. On May 29, 2001, an employee of a prospective counter-party, National Insurance Company A, informed at least one AIG employee of AIG of "soft spots" in the accounting for the C-GAITS product that National Insurance Company A's outside auditor, National Accounting Firm B, had discussed earlier that day. Those "soft spots" included whether AIG's capital investment might fall below the minimum (3%) capital investment required by GAAP for nonconsolidation of the SPE by National Insurance Company A if AIG received a "large prepayment" of its fees or if its fees were not received in exchange for services rendered by AIG. By the end of that day, AIG modified the proposed C GAITS structure for National Insurance Company A to increase AIG's capital investment from 3% to 5%. AIG did not inform other potential counter-parties of the issues that National Insurance Company A had raised, except in one instance involving a potential C-GAITS transaction with National Insurance Company B, which used the same outside auditor as National Insurance Company A.   + Only PNC entered into a C-GAITS transaction. From June 28, 2001, through November 30, 2001, PNC and AIG entered into three C-GAITS transactions. Through these transactions (each known as a "PAGIC" transaction), PNC sought to remove a total of $762 million of loan and venture capital assets from its balance sheet and thus to avoid charges to its income statement from declines in the value of these assets.   + The C-GAITS transaction that AIG initially proposed to PNC provided for AIG to issue a 30-year zero coupon note to be purchased and held by the SPE. On June 18, 2001, PNC requested that AIG change the issuer. PNC explained to an AIG employee that National Accounting Firm A, which also was PNC's outside auditor, had informed PNC that it believed there was a risk that the Commission might view the issuance of a zero coupon note by AIG to be a return of the capital invested by AIG. AIG agreed to the requested change.   + Even with the change in the issuer of the zero coupon note, the PAGIC transactions did not satisfy the GAAP requirements for nonconsolidation. As AIG intended, the fees that it was were primarily for structuring the PAGIC transactions and, as a result, reduced AIG's capital investment below the 3% level. Also, the PAGIC transactions did not satisfy GAAP requirements because AIG did not have substantive risks and rewards of ownership of the assets of the SPE. Because PNC improperly treated the transfers of assets in the PAGIC transactions as sales of those assets that permitted PNC not to report them in its financial statements and regulatory reports, PNC made materially false and misleading disclosures about its financial condition and performance in filings with the Commission and in press releases.   + AIG received $39.821 million in fees for entering into the three PAGIC transactions.   + The Commission further alleged in its Complaint that Defendant AIG (a) recklessly made misstatements of material facts, and omitted to state material facts, about whether the C-GAITS product satisfied the GAAP requirements for nonconsolidation of an SPE and (b) entered into the three PAGIC transactions with PNC that it was reckless in not knowing did not satisfy the GAAP requirements for nonconsolidation of the SPEs by PNC. + Defendant AIG, without admitting or denying the allegations in the Complaint, has consented to the issuance of a final judgment (a) permanently enjoining it from violating of Section 10(b) of the Securities Exchange Act of 1934 ("Exchange Act"), Exchange Act Rule 10b-5, and Section 17(a) of the Securities Act of 1933 and from aiding and abetting violations of Sections 13(a) and 13(b)(2)(A) of the Exchange Act and Exchange Act Rules 12b-1, 13a-1, and 13a-13, (b) ordering it to disgorge the $39,821,000 in fees that it received, plus prejudgment interest of $6,545,000, which will be paid to the victim restitution fund established in connection with the prior resolution of criminal charges by the Department of Justice against a PNC subsidiary and (c) ordering Defendant AIG to retain an independent consultant to examine certain of its prior transactions and to establish a Transaction Review Committee to review the appropriateness of certain future transactions. The independent consultant will conduct an examination of transactions that Defendant AIG entered into with a public company between January 1, 2000 and the date of the final judgment that involved the use of SPEs or variable interest entities, or that were marketed or entered into by Defendant AIG with a primary purpose of enabling a public company to obtain an accounting or financial reporting result. The Transaction Review Committee will review transactions proposed to be undertaken with a public company that were or are developed, marketed, or proposed by Defenant AIG or a public company and that involve heightened legal, reputational, or regulatory risk, including transactions with a primary purpose of enabling a public company to obtain an accounting or financial result. The independent consultant will conduct a review related to certain policies and procedures adopted by the Transactional Review Committee. + Separately today, the Fraud Section of the Criminal Division of the Department of Justice ("Fraud Section") announced a resolution of related, criminal charges against Defendant AIG and two of its subsidiaries. In resolving the civil and criminal charges, AIG has agreed to pay disgorgement and penalties totaling $126 million. Today's civil and criminal actions are the result of investigations by the Commission, the Fraud Section, and the Pittsburgh office of the Federal Bureau of Investigation. + The Commission previously brought a prior settled proceeding against PNC. For further information See In the Matter of The PNC Financial Services Group, Inc., Securities Act Release No. 33-8112, Exchange Act Release No. 34-46225, July 18, 2002. 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Frank, Albert M. Abbood, Darrell Edquist, David C. Kirkpatrick, David N. Bixler, Thomas L. Taylor and Randall M. Stone + + + + + + + + + + + + John Paul Orr, Michael J. Frank, Albert M. Abbood, Darrell Edquist, David C. Kirkpatrick, David N. Bixler, Thomas L. Taylor and Randall M. Stone + + + + + + + + + + + + + + + + + + + U.S. SECURITIES AND EXCHANGE COMMISSION + Litigation Release No. 18989 / December 2, 2004 + + Accounting and Auditing Enforcement +Release No. 2147 / December 2, 2004 + + Securities and Exchange Commission v. John Paul Orr, Michael J. Frank, Albert M. Abbood, Darrell Edquist, David C. Kirkpatrick, David N. Bixler, Thomas L. Taylor and Randall M. Stone, 04 Civ. 74702 (Roberts, J.) (E.D. Michigan, filed December 2, 2004) + + SEC Charges Three Former Kmart Executives and Representatives Of Four Major Vendors With $24 Million Accounting Fraud + + The Securities and Exchange Commission today filed civil fraud charges against three former Kmart executives and several current and former employees of Eastman Kodak Company, Coca Cola Enterprises Inc. and PepsiCo Inc.'s wholly-owned subsidiaries, Pepsi-Cola Company and Frito-Lay, Inc. The SEC's Complaint, which was filed in the United States District Court for the Eastern District of Michigan, alleges that these individuals caused Kmart to issue materially false financial statements by improperly accounting for millions of dollars worth of vendor "allowances." Kmart obtained allowances from its vendors for various promotional and marketing activities. According to the Complaint, defendants caused Kmart to recognize allowances prematurely on the basis of false information provided to the company's accounting department. A number of vendor representatives participated in the fraud by co-signing false and misleading accounting documents, executing side agreements, and, in some instances, providing false or misleading third party confirmations to Kmart's independent auditor, Pricewaterhouse- Coopers LLP. As a result, Kmart's net income for the fourth quarter and fiscal year ended January 31, 2001, was overstated by approximately $24 million or 10 percent, as originally reported. The company restated its financial statements after filing for bankruptcy to correct these and other accounting errors. + The Kmart defendants are John Paul Orr, former Divisional Vice President of Kmart's photo division; Michael K. Frank, former Divisional Vice President and General Merchandise Manager of Kmart's food and consumables division; and Albert M. Abbood, former Divisional Vice President of non-perishable products in Kmart's food and consumables division. Without admitting or denying the allegations of the Complaint, Frank and Abbood consented to final judgments permanently enjoining them from violations of Sections 10(b) and 13(b)(5) of the Securities Exchange Act of 1934 and Rules 10b-5, 13b2-1 and 13b2-2 thereunder and from aiding and abetting violations of Sections 13(a) of the Exchange Act and Rules 13a-1 and 12b-20 thereunder. Frank consented to a five year officer and director bar, and Abbood agreed to pay a $50,000 civil penalty. The proposed final judgment against Frank does not impose a civil penalty based upon his demonstrated inability to pay. + The vendor defendants are Darrell Edquist, a former Vice President and General Manager of Eastman Kodak Company; David C. Kirkpatrick, a former National Sales Director for Coca Cola Enterprises, Inc.; David N. Bixler, a former National Sales Director of PepsiCo's Pepsi-Cola division and current Vice President and General Manager of PepsiCo; Randall M. Stone, a former National Account Manager for PepsiCo's Frito-Lay division; and Thomas L. Taylor, a former Director of Sales for PepsiCo's Frito-Lay division. Without admitting or denying the allegations of the Complaint, Edquist consented to a final judgment permanently enjoining him from violations of Sections 10(b) and 13(b)(5) of the Exchange Act and Rules 10b-5, 13b2-1 and 13b2-2 thereunder and from aiding and abetting violations of Sections 13(a) of the Exchange Act and Rules 13a-1 and 12b-20 thereunder and directing that he pay a $55,000 civil penalty. Without admitting or denying the allegations of the Complaint, Stone consented to a final judgment permanently enjoining him from violations of Sections 10(b) and 13(b)(5) of the Exchange Act and Rules 10b-5 and 13b2-1 thereunder and from aiding and abetting violations of Sections 13(a) of the Exchange Act and Rules 13a-1 and 12b-20 thereunder and directing that he pay a $30,000 civil penalty. Without admitting or denying the charges against him, Taylor consented to an administrative order to cease and desist from committing or causing violations of Section 13(a) of the Exchange Act and Rules 13a-1, 12b-20 and 13b2-1 thereunder and a final judgment directing that he pay a $25,000 civil penalty. + The SEC's Kmart investigation is continuing. + + + SEC Complaint in this matter + + + + + + + + + + + + + + + + + + + + + + + + + + Return to top + + + + + SEC homepage + + + + + + + + + + + + + + About the SEC + + + + + + Budget & Performance + + + Careers + + + Commission Votes + + + Contact + + + Contracts + + + + + + + + Transparency + + + + + + Accessibility & Disability + + + Super Intelligence + + + FOIA + + + Inspector General + + + No FEAR Act Data + + + Ombuds + + + SEC Excess Personal Property Guidance + + + + + + + + Websites + + + + + + Investor.gov + + + Related Sites + + + USA.gov + + + + + + + + Site Information + + + + + + Plain Writing + + + Privacy & Security + + + Site Map + + + + + + + + + + + + + + + + + + Stay connected. 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Taylor + + + + + + + + + + + + Thomas L. Taylor + + + + + + + + + + + + + + + + + + + + + Securities Exchange Act of 1934 +Release No. 50783 / December 2, 2004 + + Accounting And Auditing Enforcement +Release No. 2148 / December 2, 2004 + + Admin. Proc. File No. 3-11764 + + In the Matter of + Thomas L. Taylor, + Respondent. + + : : : : : : : : : + ORDER INSTITUTING CEASE-AND-DESIST PROCEEDINGS, MAKING FINDINGS, AND IMPOSING A CEASE-AND-DESIST ORDER PURSUANT TO SECTION 21C OF THE SECURITIES EXCHANGE ACT OF 1934 + I. + The Securities and Exchange Commission ("Commission") deems it appropriate that cease-and-desist proceedings be, and hereby are, instituted pursuant to Section 21C of the Securities Exchange Act of 1934 ("Exchange Act"), against Thomas L. Taylor ("Taylor" or "Respondent"). + + II. + In anticipation of the institution of these proceedings, Taylor has submitted an Offer of Settlement (the "Offer") which the Commission has determined to accept. Solely for the purpose of these proceedings and any other proceedings brought by or on behalf of the Commission, or to which the Commission is a party, and without admitting or denying the findings herein, except as to the Commission's jurisdiction over him and the subject matter of these proceedings, which are admitted, Taylor consents to the entry of this Order Instituting Cease-and-Desist Proceedings, Making Findings, and Imposing a Cease-and-Desist Order Pursuant to Section 21C of the Securities Exchange Act of 1934 ("Order"), as set forth below. + + + III. + + On the basis of this Order and Taylor's Offer, the Commission finds that: + A. RELEVANT ENTITIES + 1. Kmart + Kmart Corporation ("Kmart" or the "company") was a Michigan Corporation headquartered in Troy, Michigan, during the relevant period. On January 22, 2002, Kmart filed a voluntary petition for reorganization relief under Chapter 11 of the Bankruptcy code. The company's common stock was registered with the Commission pursuant to 12(b) of the Exchange Act [15 U.S.C. § 78l(b)] and traded on the New York Stock Exchange until December 19, 2002, when trading was suspended. Kmart's fiscal year ends the last Wednesday in January. + 2. PepsiCo/Frito-Lay + PepsiCo Inc. ("PepsiCo") is a North Carolina corporation headquartered in Purchase, New York. PepsiCo is one of the world's largest beverage and snack companies and a major Kmart vendor. PepsiCo's common stock is registered with the Commission pursuant to Section 12(b) of the Exchange Act and is listed on the New York and Chicago Stock Exchanges. + Pepsi's business was organized into several divisions during the relevant period, including Frito-Lay, Inc. ("Frito-Lay"). Frito-Lay manufactures, markets and sells to independent distributors and retailers brand name snacks such as Lay's, Doritos, Cheetos, Fritos, Tostitos, Ruffles, Rold Gold, Sun Chips and Cracker Jack. Frito-Lay's divisional headquarters are in Plano, Texas, and it has a field office in Plymouth, Michigan. + B. RESPONDENT + Thomas L. Taylor ("Taylor") was Frito-Lay's Director of Sales in charge of the Kmart snack account during the relevant period. Taylor worked out of Frito-Lay's Plano, Texas, headquarters. + C. FACTS + 1. Kmart Improperly Recognized Vendor Allowances + Kmart improperly recognized millions of dollars worth of vendor "allowances" prior to bankruptcy. Kmart obtained allowances from its vendors for various promotional and marketing activities. A significant number of allowances were recognized prematurely - or "pulled forward" -- on the basis of false information provided to Kmart's accounting department, while the true terms of the payments were set forth in undisclosed side agreements. As a result of these accounting irregularities, Kmart's cost of goods sold was understated, and earnings were materially overstated, for the fourth quarter of fiscal year ended January 31, 2001. + 2. Kmart's Vendor Allowance Tracking System ("VATS") Forms + The principal document involved in the pulling forward of vendor allowances was Kmart's Vendor Allowance Tracking System ("VATS") form. VATS forms summarized the basic terms of vendor allowances for the company's accounting department. Bookkeepers inputted information from the VATS form into the company's computerized accounting system, where it was eventually posted to the general ledger. To ensure proper accounting for an allowance, the VATS form should have reflected the true purpose of, and effective dates for, the payment. To pull forward an allowance, this information was misrepresented on the VATS form to make it look like the payment was for past performance, when in truth it related to future obligations. Kmart had a number of safeguards designed to ensure the accuracy of the VATS forms and proper recognition of vendor allowances. These included the requirement that vendors co-sign VATS forms. + 3. Taylor Co-Signed Three Misstated VATS Forms + Towards the end of Kmart's fiscal year ended January 31, 2001 ("fiscal year 2000"), Taylor learned that Kmart needed Frito-Lay's help in overcoming a profit shortfall in the food and consumables division. As Taylor was aware, this projected shortfall was caused in part by Frito-Lay's refusal to pay Kmart a $2.3 million "growth incentive" in late-December 2000. With Taylor's knowledge and assistance, Frito-Lay agreed to make a $2.8 million "space payment" in January 2001. Taylor understood that the purpose of the $2.8 million was to secure favorable placement of Frito-Lay product within Kmart stores during calendar year 2001. Taylor understood this in part because around the same time he helped draft a written agreement that explained the $2.8 million was a "pre-payment" of allowances to be earned by Kmart during calendar year 2001. + Taylor co-signed VATS form Nos. 224301, 224302, 224303 on January 4, 2001. These VATS forms misrepresented the effective dates of the allowances as 1/1/01 to 1/31/01. They were also misleading in that they failed to indicate that the $2.8 million was a "prepayment" against calendar year 2001 activity. On or about January 19, 2001, Kmart's accounting personnel entered the false or misleading VATS information into the company's computerized accounting system, where it was eventually posted to the general ledger. As a result, Kmart's cost of goods sold was understated by $2.8 million in fiscal year 2000. + 4. Kmart's Earnings Were Overstated + On March 13, 2001 Kmart filed its Form 10-K for the period ended January 31, 2001 ("fiscal year 2000"). According to the financial statements incorporated into the Form 10-K, Kmart reported net income for the fourth quarter of $249 million or $0.48 per share, exceeding Wall Street analyst expectations of $0.47 by a penny. Kmart's accounting irregularities caused net income for the quarter to be overstated by approximately 1.135 percent. + + D. CONCLUSION + As a result of the foregoing, Taylor committed violations of Rule 13b2-1 of the Exchange Act and caused Kmart's violations of Sections 13(a) of the Exchange Act and Rules 12b-20 and 13a-1 promulgated thereunder. + IV. + In view of the foregoing, the Commission deems it appropriate to impose the sanctions agreed to in Taylor's Offer. + Accordingly, IT IS HEREBY ORDERED that Respondent Taylor cease and desist from committing or causing any violations and any future violations Rule 13b2-1 of the Exchange Act and causing any violations and any future violations of Sections 13(a) of the Exchange Act and Rules 12b-20 and 13a-1 promulgated thereunder. + + By the Commission. + + + + + Jonathan G. 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Lezak + + + + + + + + + + + + Daniel S. Lezak + + + + + + + + + + + + + + + + + + + + + Securities Exchange Act of 1934 +Release No. 50729 / November 23, 2004 + + Accounting and Auditing Enforcement +Release No. 2149 / November 23, 2004 + + Admin. Proc. File No. 3-11675 + + + + + + + In the Matter of + + DANIEL S. LEZAK + P.O. Box 7202 + Incline Village, Nevada 89452 +   + + + + + + + ORDER DENYING MOTION TO LIFT TEMPORARY SUSPENSION AND DIRECTING HEARING + + + On September 24, 2004, we instituted proceedings against Daniel S. Lezak pursuant to Rule 102(e)(3) of this Commission's Rules of Practice and temporarily suspended him from appearing or practicing before this Commission. 1 Lezak has filed a petition, pursuant to Rule 102(e)(3)(ii), seeking to lift his temporary suspension. + + On September 1, 2004, the District Court entered a permanent injunction against Lezak in an action brought by this Commission. The order permanently enjoined Lezak from violating, directly or indirectly, Section 10(b) of the Securities Exchange Act of 1934 2 and Exchange Act Rule 10b-5, Exchange Act Section 13(b)(5) 3 and Exchange Act Rules 13b2-1 and 13b2-2, 4 Exchange Act Section 13(a) 5 and Exchange Act Rules 12b-20 and 13a-1, 6 and Exchange Act Sections 13(b)(2)(A) and 13(b)(2)(B). 7 + + The Court also made a number of findings of fact. Lezak was president of Madera International, Inc. ("Madera") for several months in 1994 as well as chairman, chief executive officer and chief financial officer of Madera from early 1994 through mid 1996. 8 Thereafter, Lezak served as an advisor and consultant, providing accounting services to Madera until December 1999. 9 The Court found that during 1994, 1995 and 1996, Lezak knowingly signed and caused to be filed with this Commission falsified financial statements, which, among other things, misrepresented ownership interests in, and values of, various timberland properties. 10 The Court further held that Lezak knowingly failed to implement a system of internal accounting controls at Madera to prevent the misuse of its funds. It also determined that Lezak violated Exchange Act Rules 13b2-1 and 13b2-2 by signing a management representation letter in connection with a March 31, 1995 audit of Madera's financial statements in which he asserted that, to the best of his knowledge and belief, the company had satisfactory title to all owned assets including all assets shown on the financial statements. 11 Based on the evidence before it and Lezak's deposition testimony, the Court concluded that this Commission's motion for partial summary judgment against Lezak was appropriate. + + Lezak now requests "that the temporary suspension be lifted and that this matter be dropped as an unnecessary and wasteful procedure." 12 Lezak argues that, although he obtained a license as a certified public accountant ("CPA") in the State of California in the early 1960's, he has not practiced as a CPA since then. He further asserts that he has never practiced (and does not intend to practice in the future) before this Commission. He also contends that he was not a controlling member of the board of directors and appears to suggest that he did not have responsibility for Madera's filings with the Commission. Lezak also requests that we hold this matter in abeyance, pending his appeal of the District Court's decision. + + In opposition to Lezak's petition, the Division of Enforcement argues that "the temporary suspension is in the public interest, the factual and equitable issues Lezak raises in his petition should be addressed at a hearing, and Lezak points to no irreparable injury he will suffer if the temporary suspension remains in effect until a hearing can be held and gives no reason to think he is likely to prevail at such a hearing." 13 The Division asserts that Lezak has, in fact, appeared and practiced before the Commission and that, even if he had not, disciplinary action under Rule 102(e)(3) does not require one to have appeared or practiced before the Commission. The Division further argues that the fact that Lezak was not an active CPA is irrelevant and cites six settled cases in which the Commission has suspended accountants who were unlicensed at the time of the misconduct yet found to have been within the scope of Rule 102(e) of this Commission's Rules of Practice. 14 + + The Division argues that a stay of the suspension pending a hearing is inappropriate. It states that Lezak identifies no immediate need to have the suspension lifted, has not shown a likelihood of succeeding on the merits of his petition and fails to address the district court's incontestable finding that he is likely to engage in future securities violations. 15 The Division also challenges the contention that Lezak's pending appeal of the district court injunction supports holding this action in "abeyance." 16 + + Rule 102(e)(3) permits the Commission to suspend any accountant or other professional or expert who has been permanently enjoined from violating or aiding and abetting the violation of the Federal securities laws or found to have violated or aided and abetted the violation of the Federal securities laws. While Lezak suggests that others were responsible for Madera filings, the Court found that he submitted the financial statements, provided accounting services (which Lezak himself admits) and was Madera's chief financial officer between 1994 and 1996. The findings of the Court, which Lezak is precluded from contesting in this proceeding, as well as the injunction issued against him justify the continuance of his suspension until it can be determined what, if any, action may be appropriate to protect this Commission's processes. 17 As provided in Rule 102(e)(3)(iii), we will set the matter down for a public hearing. + + Accordingly, IT IS ORDERED that the petition of Daniel S. Lezak to lift our order of temporary suspension be, and it hereby is, denied; and it is further + + ORDERED that this proceeding be set down for public hearings before an administrative law judge in accordance with Rule 110 of our Rules of Practice. As specified in Rule 102(e)(3)(iii), the hearings in this matter shall be expedited in accordance with Rule 500. Therefore, it is ORDERED that the administrative law judge shall issue an initial decision no later than 210 days from the date of service of this Order. + + By the Commission. + + + Jonathan G. Katz +Secretary + + + + + Endnotes + + + + + + + + + 1 15 U.S.C. § 78j(b).Rule 102(e)(3) of the Commission's Rules of Practice (17 C.F.R. § 201.102(e)(3)) provides in pertinent part that: + + (I) The Commission, with due regard to the public interest and without preliminary hearing, may, by order, temporarily suspend from appearing or practicing before it any . . . accountant . . . who has been by name: + + (A) Permanently enjoined by any court of competent jurisdiction, by reason of his or her misconduct in an action brought by the Commission, from violating or aiding and abetting the violation of any provision of the Federal securities laws or of the rules and regulations thereunder; or + + (B) Found by any court of competent jurisdiction in an action brought by the Commission to which he or she is a party or found by the Commission in any administrative proceeding to which he or she is a party to have violated (unless the violation was found not to have been willful) or aided and abetted the violation of any provision of the Federal securities laws or of the rules and regulations thereunder. + + 2 15 U.S.C. § 78j(b). + + 3 15 U.S.C. § 78m(b)(5). + + 4 17 C.F.R. §§ 240.13b2-1 and 240.13b2-2. + + 5 15 U.S.C. § 78m(a). + + 6 17 C.F.R. §§ 240.12b-20 and 240.13a-1. + + 7 15 U.S.C. §§ 78m(b)(2)(A) and 78m(b)(2)(B). SEC v. Madera International, Inc., Ramiro M. Fernandez-Moris and Daniel S. Lezak , Civil Action No. 01-1985 (JR), appeal pending , memorandum opinion (D. D.C. Sept. 1, 2004) ("Mem. Op."). + + 8 Mem. Op. at 3. + + 9 Id. + + 10 Id. at 8-14, 20. The financial statements were included in Madera's periodic reports for the quarters ended June 30, 1994, September 30, 1994, December 31, 1994, June 30, 1995 and September 30, 1995 and for the years ended March 31, 1994 and March 31, 1995. + + 11 Id. at 27-28. + + 12 Respondent's Response to Order Instituting Public Administrative Proceedings ("Respondent's Response") at 2 . + + 13 Opposition to Respondent's Response ("Opposition") at 1-2. + + 14 Opposition at 7-8. + + 15 Opposition at 8-9. + + 16 Opposition at 9-10. We have previously held that an appeal of a district court opinion does not alter the effect of an injunction. See Michael T. Studer , Securities Exchange Act Rel. No. 50543 (Oct. 14, 2004), SEC Docket (the pendency of an appeal does not affect the finality and preclusive effect in this proceeding of the court's determinations); Joseph P. Galluzzi , 78 SEC Docket 1125, 1130 n.21 (Aug. 23, 2002) (the pendency of an appeal does not preclude the Commission from acting to protect the public interest). See also Elliott v. SEC , 36 F.3d 86, 87 (11th Cir. 1994) (fact of conviction must be challenged directly on appeal, not in Commission administrative proceeding arising from conviction). Should the decision be reversed on appeal, Lezak may apply for relief. + + 17 See Rule 102(e)(3)(iv) (providing that the petitioner may not contest any finding made against him or her). We do not believe that Lezak is prejudiced by the continuance of his suspension since he asserts "no intent of ever" practicing before the Commission. 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Richard Rambahal, et al., Case Number 04-3086-cv-RED (U.S.D.C. W.D. MO., filed March 4, 2004) + + SEC OBTAINS FINAL JUDGMENT AGAINST RICHARD RAMBAHAL AND PAUL H. KOFTON IN FINANCIAL FRAUD AT DT INDUSTRIES, INC. + + The Securities and Exchange Commission (Commission) announced that on December 2, 2004, the Honorable Richard E. Dorr, Judge in the United States District Court for the Western District of Missouri, entered final judgments against Defendant Richard Rambahal (Rambahal) and Paul H. Kofton (Kofton), which (1) permanently enjoins Rambahal and Kofton from violating Sections 10(b) and 13(b)(5) of the Securities Exchange Act of 1934 (Exchange Act) and Rules 10b-5 and 13b2-1 thereunder and for aiding and abetting DT Industries Inc.'s (DTI) violations of Sections 13(a), 13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act and Rules 12b-20, 13a-1 and 13a-13 thereunder; (2) orders Rambahal to pay disgorgement of $19,400 plus pre-judgment interest thereon in the amount of $9,720 for a total of $29,120; and (3) orders Kofton to pay disgorgement of $7,600 plus prejudgment interest thereon in the amount of $2,270, and also pay a $35,000 civil penalty, for a total payment of $44,870. Rambahal and Kofton consented to the entry of the final judgments without admitting or denying the allegations contained in the Commission's complaint. + The Commission's Complaint alleged that Rambahal, Kofton and others engaged in separate fraudulent schemes at three of DTI's subsidiaries to artificially inflate DTI's financial position. Specifically, the Commission's Complaint alleged that at various times between 1996 and 2000, Rambahal and Kofton knowingly or recklessly failed to properly recognize costs associated with various projects in order to reach their subsidiary's projected earnings targets set by DTI. The Commission's Complaint also alleged that Rambahal and Kofton attempted to conceal their schemes in various ways, including the creation of false supporting documentation. According to the Commission's Complaint, Rambahal's and Kofton's conduct resulted in material misstatements to DTI's financial statements that it filed with the Commission. + This case is still pending against Defendant Michael Lesniewski. + For additional information, see Litigation Release No. 18608 (March 5, 2004). + + SEC Complaint in this matter --> + + + + + + + + + + + + + + + + + + + + + + + + + + Return to top + + + + + SEC homepage + + + + + + + + + + + + + + About the SEC + + + + + + Budget & Performance + + + Careers + + + Commission Votes + + + Contact + + + Contracts + + + + + + + + Transparency + + + + + + Accessibility & Disability + + + Super Intelligence + + + FOIA + + + Inspector General + + + No FEAR Act Data + + + Ombuds + + + SEC Excess Personal Property Guidance + + + + + + + + Websites + + + + + + Investor.gov + + + Related Sites + + + USA.gov + + + + + + + + Site Information + + + + + + Plain Writing + + + Privacy & Security + + + Site Map + + + + + + + + + + + + + + + + + + Stay connected. 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Individuals (SALI) + + + + + Enforcement Data Delivery Standards + + + + + Small Businesses + + + + + Appellate Briefs + + + + + Amicus / Friend of the Court Briefs + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + Home + + + Enforcement and Litigation + + + Administrative Proceedings + + + Grant Thornton LLP, Doeren Mayhew & Co. P.C., Peter M. Behrens, CPA, Marvin J. Morris, CPA, and Benedict P. Rybicki, CPA + + + + + + + + + + + + Grant Thornton LLP, Doeren Mayhew & Co. P.C., Peter M. Behrens, CPA, Marvin J. Morris, CPA, and Benedict P. Rybicki, CPA + + + + + + + + + + + + + + + + + + + + + Securities Exchange Act of 1934 +Release No. 50861 / December 15, 2004 + + Accounting And Auditing Enforcement +Release No. 2151 / December 15, 2004 + + Admin. Proc. File No. 3-11377 + + In the Matter of + GRANT THORNTON LLP, DOEREN MAYHEW & CO. P.C., PETER M. BEHRENS, CPA, MARVIN J. MORRIS, CPA and BENEDICT P. RYBICKI, CPA, + Respondents. + + : : : : : : : : : + NOTICE OF PROPOSED DISTRIBUTION PLAN AND OPPORTUNITY FOR COMMENT + Notice is hereby given, pursuant to Rule 1103 of the Securities and Exchange Commission's ("Commission") Rules on Fair Fund and Disgorgement Plans, 17 C.F.R. §201.1103, that the Division of Enforcement has filed with the Commission its proposed plan ("Distribution Plan") for the distribution of monies placed into a Fair Fund, pursuant to Section 308 of the Sarbanes-Oxley Act of 2002, in In the Matter of Grant Thornton LLP et al. The Commission issued an Order Making Finding and Imposing Remedial Sanctions in this matter on August 5, 2004 (Rel. 34-50148). + OPPORTUNITY FOR COMMENT + Pursuant to this Notice, all interested parties are advised that the Distribution Plan may be obtained by submitting a written request to Peter Chan, United States Securities and Exchange Commission, 175 West Jackson Boulevard, Suite 900, Chicago, IL 60604. Further, all persons desiring to comment on the Distribution Plan may submit their views, in writing, no later than thirty (30) days after the publication of this Notice to the Office of the Secretary, United States Securities and Exchange Commission, 450 Fifth Street, N.W., Washington, D.C. 20549-0609. + THE DISTRIBUTION PLAN + The Distribution Plan provides for distribution of the disgorgement, prejudgment interest and penalties paid by Grant Thornton LLP ("Grant Thornton") and Doeren Mayhew & Co. P.C. ("Doeren Mayhew") in this matter (the "Distribution Fund") to the holders ("claimants") as of January 22, 1999 of MCA's 11% subordinated debentures, Series 1997, due June 1, 2003 ("Series 1997 debentures"). The Distribution Fund consists of the $59,749.41 in disgorgement and prejudgment interest and $1.5 million in penalties paid by Grant Thornton in this matter and the $115,126.86 in disgorgement and prejudgment interest paid by Doeren Mayhew in this matter. Each claimant shall receive a pro rata share of the Distribution Fund after payment of a plan administrator's reasonable fees and reimbursement of a plan administrator's reasonable costs and expenses. Claimants shall be those individuals and entities who invested in MCA's 11% subordinated debentures, Series 1997, due June 1, 2003, or their lawful successors, except for individuals who were employed by MCA. A claimant's pro rata share will be computed by calculating the amount invested by the claimant in MCA's 11% subordinated debentures, Series 1997, due June 1, 2003 as a percentage of the total amount invested in MCA's 11% subordinated debentures, Series 1997, due June 1, 2003. + For the Commission, by its Secretary, pursuant to delegated authority. + + + + Margaret H. McFarland + Deputy Secretary + + + + +See also the Order in this matter --> + + + + + + + + + + + + + + + + + + + + + + + + + + Return to top + + + + + SEC homepage + + + + + + + + + + + + + + About the SEC + + + + + + Budget & Performance + + + Careers + + + Commission Votes + + + Contact + + + Contracts + + + + + + + + Transparency + + + + + + Accessibility & Disability + + + Super Intelligence + + + FOIA + + + Inspector General + + + No FEAR Act Data + + + Ombuds + + + SEC Excess Personal Property Guidance + + + + + + + + Websites + + + + + + Investor.gov + + + Related Sites + + + USA.gov + + + + + + + + Site Information + + + + + + Plain Writing + + + Privacy & Security + + + Site Map + + + + + + + + + + + + + + + + + + Stay connected. 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Geoffrey Layne, James S. Sholeff, Dale Boeth, and Shawn Mcghee + + + + + + + + + + + + R. Geoffrey Layne, James S. Sholeff, Dale Boeth, and Shawn Mcghee + + + + + + + + + + + + + + + + + + + U.S. SECURITIES AND EXCHANGE COMMISSION + Litigation Release No. 18999 / December 15 2004 + + Accounting and Auditing Enforcement +Release No. 2152 / December 15, 2004 + + SECURITIES AND EXCHANGE COMMISSION v. R. GEOFFREY LAYNE, JAMES S. SHOLEFF, DALE BOETH, AND SHAWN MCGHEE, Civil Action No. 04-1500 (E.D. Va.) + + FOUR FORMER PURCHASEPRO EXECUTIVES SETTLE FINANCIAL FRAUD CASE WITH SEC + THE FORMER PURCHASEPRO EXECUTIVES ALSO AGREE TO ENTER GUILTY PLEAS TO RELATED FEDERAL CRIMINAL CHARGES + + The Securities and Exchange Commission today filed a settled civil injunctive action in the United States District Court for the Eastern District of Virginia against four former executives of PurchasePro.com, Inc. for violations of the antifraud, books-and-records, internal accounting controls, periodic reporting and lying-to-auditors provisions of the federal securities laws. According to the complaint, the defendants-R. Geoffrey Layne, James S. Sholeff, Dale Boeth, and Shawn McGhee-participated in a fraudulent scheme to artificially inflate the first quarter 2001 ("Q1 2001") revenues of PurchasePro.com, Inc., a Las Vegas-based Internet company now known as Pro-After, Inc. All four individuals, who were officers or senior employees of PurchasePro, settled the charges without admitting or denying the Commission's allegations. + The Commission's complaint alleges that in Q1 2001 and continuing through April 2001, each defendant took knowing and deliberate steps designed to inflate PurchasePro's revenues in contravention of generally accepted accounting principles ("GAAP"). In particular, the complaint alleges that, Layne, while serving as PurchasePro's Executive Vice President, (i) entered into, and concealed the existence of, reciprocal agreements that rendered it improper to recognize $1 million in revenue from two marketplace license sales to PurchasePro customers; and (ii) took steps to make it falsely appear that a purported "Statement of Work" contract between PurchasePro and AOL, valued at $3.65 million, was executed during Q1 2001, when in fact it was never properly executed. The complaint further alleges that Boeth, PurchasePro's Senior Vice President of Consulting Services, and Sholeff, a PurchasePro Vice President, also took steps to make it falsely appear that the Statement of Work agreement was executed during Q1 2001, and that Sholeff took similar steps with respect to a $3.7 million marketplace license sale. According to the complaint, McGhee, PurchasePro's Chief Operating Officer during the relevant period, took steps to (i) make it falsely appear that a $3.5 million marketplace license sale had been entered into during Q1 2001; and (ii) conceal the existence of reciprocal agreements that rendered it improper to recognize any revenue from that sale. Each of these transactions had a misleading impact on the revenues announced and reported by PurchasePro. As reflected in the complaint, by including these transactions, PurchasePro artificially and materially inflated its publicly announced revenues by at least 34% and its reported revenues by over 37%. + In addition, the complaint alleges that, during April 2001, Layne and Sholeff attempted to conceal their conduct by destroying certain documents. In particular, the complaint alleges that Sholeff and Layne deleted, or requested others to delete, their AOL-related emails, and that Sholeff shredded all of his AOL related documents and destroyed his laptop. The complaint further alleges that in February 2002, Layne and Sholeff lied to the Commission staff during testimony in order to conceal their fraudulent conduct. Finally, the complaint alleges that in April 2001, PurchasePro paid Layne a $200,000 retention bonus and that at or about the same time, PurchasePro paid Boeth a total of $150,000 in retention bonuses. + Based on these factual allegations, the Commission charged: (i) Layne and McGhee with violating Sections 10(b) and 13(b)(5) of the Securities Exchange Act of 1934 ("Exchange Act") and Exchange Act Rules 10b-5, 13b2-1 and 13b2-2, and with aiding and abetting PurchasePro's violations of Exchange Act Sections 13(a), 13(b)(2)(A), and 13(b)(2)(B), and of Exchange Act Rules 12b-20 and 13a-13; (ii) Sholeff with violating Exchange Act Sections 10(b) and 13(b)(5) and Exchange Act Rules 10b-5 and 13b2-1, and with aiding and abetting PurchasePro's violations of Exchange Act Sections 13(a), 13(b)(2)(A), and 13(b)(2)(B), and of Exchange Act Rules 12b-20 and 13a-13; and (iii) Boeth with violating Exchange Act Sections 10(b) and 13(b)(5) and Exchange Act Rules 10b-5, 13b2-1 and 13b2-2. Without admitting or denying the Commission's allegations, each defendant consented to final judgments that would permanently enjoin each of them from violating the foregoing securities law provisions, and that would: (i) in the case of Layne, permanently bar him from acting as an officer or director of any public company, and order Layne to pay disgorgement of $200,000 plus prejudgment interest; (ii) in the case of Sholeff, permanently bar him from acting as an officer or director of any public company, and order Sholeff to pay a $35,000 civil penalty; (iii) in the case of Boeth, permanently bar him from acting as an officer or director of any public company, and order Boeth to pay disgorgement of $150,000 plus prejudgment interest, but waive payment, and not impose a civil penalty, based on Boeth's demonstrated inability to pay; and (iv) in the case of McGhee, bar him for five years from serving as an officer or director of any public company. The final judgment against Layne permits him to offset his payment of disgorgement by the corresponding amount of any restitution he pays in connection with the parallel criminal proceeding described below; while the final judgment against Sholeff permits him to offset his payment of civil penalties by the corresponding amount of any criminal fine he pays in connection with that same parallel criminal proceeding. The final judgments are subject to the approval of the United States District Court. + + Also today, in a related criminal proceeding, the United States Attorneys' office for the Eastern District of Virginia announced that Layne, McGhee, Boeth and Sholeff have each agreed to plead guilty to single felony counts arising from the same circumstances as the Commission's complaint. In particular, Layne will plead to a single felony count of securities fraud; McGhee and Boeth will each plead to a single felony count of conspiracy to commit securities fraud; and Sholeff will plead to a single felony count of perjury arising from false statements that Sholeff made to the SEC staff during the investigation. + The Commission acknowledges the assistance of the United States Department of Justice, the United States Attorney's Office for the Eastern District of Virginia, and the Federal Bureau of Investigation in the investigation of this matter. + The Commission's investigation is continuing. + + + SEC Complaint in this matter + + + + + + + + + + + + + + + + + + + + + + + + + + Return to top + + + + + SEC homepage + + + + + + + + + + + + + + About the SEC + + + + + + Budget & Performance + + + Careers + + + Commission Votes + + + Contact + + + Contracts + + + + + + + + Transparency + + + + + + Accessibility & Disability + + + Super Intelligence + + + FOIA + + + Inspector General + + + No FEAR Act Data + + + Ombuds + + + SEC Excess Personal Property Guidance + + + + + + + + Websites + + + + + + Investor.gov + + + Related Sites + + + USA.gov + + + + + + + + Site Information + + + + + + Plain Writing + + + Privacy & Security + + + Site Map + + + + + + + + + + + + + + + + + + Stay connected. 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Weiss + + + + + + + + !function(){var e=navigator.userAgent,a=document.documentElement,n=a.className;n=n.replace("no-js","js"),/iPad|iPhone|iPod/.test(e)&&!window.MSStream&&(n+=" ua-ios"),a.className=n}(); + {"path":{"baseUrl":"\/","pathPrefix":"","currentPath":"node\/495566","currentPathIsAdmin":false,"isFront":false,"currentLanguage":"en"},"pluralDelimiter":"\u0003","suppressDeprecationErrors":true,"gtag":{"tagId":"","consentMode":false,"otherIds":[],"events":[],"additionalConfigInfo":[]},"ajaxPageState":{"libraries":"eJxdT0GOwzAI_JBdn_oei2DkeINNZLC22devlaZS2wtiBhhmcKNUTPo97jxyaXEH3GJpiZrFhQW38A4cMqgeYQGlV19JFTKpQ-kUmvQKXP7I0cO4tC2kPnbg2wVdFslM0SCHPMs3vsEPPD7J6hgOGdPCKJyoRxxqUuePHjLLAuzVjimenRJGSLW08NoBK9LUn6SHlrytVOlcpJShB63QLSpBx_WkOzHNePol4fRQo_qMPvQ36ZXsAmd99lMNr2t_GUR9n60EyX9a_wePd5ns","theme":"uswds_sec","theme_token":null},"ajaxTrustedUrl":[],"gtm":{"tagId":null,"settings":{"data_layer":"dataLayer","include_classes":false,"allowlist_classes":"","blocklist_classes":"","include_environment":false,"environment_id":"","environment_token":""},"tagIds":["GTM-TD3BKV"]},"data":{"extlink":{"extTarget":false,"extTargetAppendNewWindowDisplay":true,"extTargetAppendNewWindowLabel":"(opens in a new window)","extTargetNoOverride":false,"extNofollow":false,"extTitleNoOverride":false,"extNoreferrer":false,"extFollowNoOverride":false,"extClass":"0","extLabel":"(link is external)","extImgClass":false,"extSubdomains":true,"extExclude":".*\\.gov|http:\/\/www.xbrl.org\/utr\/2013-05-17\/utr.xml|http:\/\/www.xbrl.org\/dtr\/type\/numeric-2009-12-16.xsd|http:\/\/www.xbrl.org\/dtr\/type\/nonNumeric-2009-12-16.xsd|https:\/\/secir.secure.force.com\/ombudsman\/OMMSForm","extInclude":"","extCssExclude":".data-exempt","extCssInclude":"","extCssExplicit":"","extAlert":true,"extAlertText":"You are now leaving the SEC Website. The link you have selected is located on another server. Please click on the OK button below to proceed to the selected site. The SEC does not endorse this web site, its sponsor, or any of the policies, activities, products, or services offered on the site or by any advertiser on the site.","extHideIcons":false,"mailtoClass":"0","telClass":"","mailtoLabel":"(link sends email)","telLabel":"(link is a phone number)","extUseFontAwesome":false,"extIconPlacement":"append","extPreventOrphan":false,"extFaLinkClasses":"fa fa-external-link","extFaMailtoClasses":"fa fa-envelope-o","extAdditionalLinkClasses":"","extAdditionalMailtoClasses":"","extAdditionalTelClasses":"","extFaTelClasses":"fa fa-phone","allowedDomains":null,"extExcludeNoreferrer":""}},"user":{"uid":0,"permissionsHash":"e506dfd1572f94bd1f339f1a7483bfbded31d4a9d2bdfdca3fdbc235153380ee"}} + + + + + + + + + + + + + + Skip to search field + + + + Skip to main content + + + + + + + + + + + + + + + + + + An official website of the United States government + Here’s how you know + + + Here’s how you know + + + + + + + + + + + Official websites use .gov + + + A .gov website belongs to an official government organization in the United States. + + + + + + + + + Secure .gov websites use HTTPS + + + A lock + ( Lock A locked padlock ) + or https:// means you’ve safely connected to the .gov website. 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Weiss + + + + + + + + + + + + Jack D. Weiss + + + + + + + + + + + + + + + + + + + U.S. SECURITIES AND EXCHANGE COMMISSION + Litigation Release No. 19002 / December 17, 2004 + + Accounting and Auditing Enforcement +Release No. 2153 / December 17, 2004 + + Securities and Exchange Commission v. Jack D. Weiss, Case Number 04 Civ 9889 (RPP) (S.D.N.Y.) + + SEC Files Settled Fraud Case Against Jack D. Weiss + + On December 16, 2004, the United States Securities and Exchange Commission filed a settled civil injunctive action in the United States District Court for the Southern District of New York against Jack D. Weiss. The Commission's complaint alleges that Jack D. Weiss, a New York City attorney, aided and abetted a fraudulent scheme to inflate the assets of an Israeli company. In 2000, Direct Capital Investments Ltd. ("DCI"), an Israeli corporate shell whose securities were trading on the Tel Aviv Stock Exchange, was being revived by its promoter, CEO and controlling shareholder, through a private placement of stock in the United States and Israel. DCI publicly reported that it had raised $825,000: $325,000 in Israel and $500,000 in the U.S. In connection with the preparation of the company's June 30, 2000 quarterly financial statements, DCI's independent auditors requested confirmation of its receipt of $300,000 (of the $500,000) from the U.S. offering. At the promoter's request, Weiss submitted two false written confirmations to DCI's attorney claiming that $300,000 from four U.S. investors had been deposited into his escrow account for the purchase of DCI shares. In fact, Weiss held no investor money in escrow at that time. DCI's auditors accepted the false confirmations as authoritative and gave their approval to DCI's financial statements for the quarter ended June 30, 2000, which were published and filed with the Tel Aviv Stock Exchange. + Without admitting or denying the allegations in the complaint, Weiss consented to the entry of a final judgment permanently enjoining him from aiding and abetting violations of Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder and requiring him to pay a civil penalty of $25,000. + The Commission acknowledges the assistance of the Israel Securities Authority in this matter. + + + + SEC Complaint in this matter --> + + + + + + + + + + + + + + + + + + + + + + + + + + Return to top + + + + + SEC homepage + + + + + + + + + + + + + + About the SEC + + + + + + Budget & Performance + + + Careers + + + Commission Votes + + + Contact + + + Contracts + + + + + + + + Transparency + + + + + + Accessibility & Disability + + + Super Intelligence + + + FOIA + + + Inspector General + + + No FEAR Act Data + + + Ombuds + + + SEC Excess Personal Property Guidance + + + + + + + + Websites + + + + + + Investor.gov + + + Related Sites + + + USA.gov + + + + + + + + Site Information + + + + + + Plain Writing + + + Privacy & Security + + + Site Map + + + + + + + + + + + + + + + + + + Stay connected. 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Individuals (SALI) + + + + + Enforcement Data Delivery Standards + + + + + Small Businesses + + + + + Appellate Briefs + + + + + Amicus / Friend of the Court Briefs + + + + + + + + + + + + + + + + + + + + + + + + + + Enforcement & Litigation + + + + + + + Litigation Releases + + + + + Administrative Proceedings + + + + + Administrative Law Judge Orders and Initial Decisions + + + + + Trading Suspensions + + + + + Distributions to Harmed Investors + + + + + Receiverships + + + + + Electronic Filings in Administrative Proceedings (eFAP) + + + + + Rules of Practice + + + + + Applications for Reentry + + + + + Reports of Investigations + + + + + Whistleblower Program + + + + + Public Alert: Unregistered Soliciting Entities (PAUSE) + + + + + SEC Action Lookup - Individuals (SALI) + + + + + Enforcement Data Delivery Standards + + + + + Small Businesses + + + + + Appellate Briefs + + + + + Amicus / Friend of the Court Briefs + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + Home + + + Enforcement and Litigation + + + Litigation Releases + + + Martin Julien Marks + + + + + + + + + + + + Martin Julien Marks + + + + + + + + + + + + + + + + + + + U.S. SECURITIES AND EXCHANGE COMMISSION + Litigation Release No. 19004 / December 17, 2004 + + Accounting and Auditing Enforcement +Release No. 2154 / December 17, 2004 + + SECURITIES AND EXCHANGE COMMISSION v. MARTIN JULIEN MARKS, United States District Court for the Western District of Washington (Seattle Division), Civil Action No. 04-CV-2481 Z + + SEC FILES FRAUD CHARGES AGAINST FORMER CONTROLLER OF SEATTLE CLOTHING COMPANY CUTTER & BUCK + + The Securities and Exchange Commission today announced the filing of fraud charges against Martin Julien Marks, the former President and Chief Operating Officer of Cutter & Buck Inc., a sportswear company based in Seattle, Washington. The charges stem from Marks's role in a scheme to improperly boost the company's revenue by shipping products to warehouses, and his subsequent efforts to conceal the wrongdoing from the company's auditors and shareholders. + Simultaneously with the filing of the complaint, Marks agreed to settle the charges without admitting or denying the Commission's allegations, consenting to orders permanently enjoining him from violations of the antifraud and other provisions of the federal securities laws and requiring him to pay $45,777 in disgorgement and prejudgment interest. Marks also consented to the entry of an order barring him from serving as an officer or director of a public company, and an order prohibiting him from practicing before the Commission as an accountant. + According to the Commission's complaint, filed in the Western District of Washington, Marks pushed Cutter's sales department to avert a revenue shortfall confronting the company in the closing days of the fiscal year ended April 30, 2000. Cutter negotiated deals with three purported distributors under which Cutter would ship them a total of $5.7 million in products. Cutter recognized revenue for the supposed sales, which constituted over 10% of the quarter's revenue. In reality, the distributors had no obligation or ability to pay for any of the goods unless and until Cutter's sales force found actual customers to purchase the products. The distributors essentially acted as warehouses, rendering revenue recognition for the shipments improper under generally accepted accounting principles (known as "GAAP"). Marks signed Cutter's annual Commission filings falsely announcing revenue of $54.6 million for the fourth quarter and $152.5 million for the fiscal year; because these amounts included $5.7 million in bogus revenue on the distributor sales, they overstated Cutter's true quarterly and annual revenue by 12% and 4%, respectively. + By early 2001, when Cutter sales personnel failed to deliver customers for the products, the distributors returned the products to the company. The Commission's complaint alleges that Marks asked Cutter's then-CFO to divide the product returns among multiple sales divisions on the company's financial records in order to conceal the magnitude of the returns from the Company's board of directors and independent auditors. + The Commission's complaint charges Marks with securities fraud (Section 10(b) of the Securities Exchange Act of 1934 ("Exchange Act") and Rule 10b-5 thereunder) and causing Cutter to report false financial information to the Commission (Section 13(a) of the Exchange Act and Rules 12b-20 and 13a-1). The complaint also charges Marks with lying to accountants (Rule 13b2-2 under the Exchange Act), falsifying the company's books and records (Section 13(b)(5) of the Exchange Act and Rule 13b2-1 thereunder), and causing Cutter's failure to maintain accurate books and records and internal controls (Sections 13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act). + + + SEC Complaint in this matter + + + + + + + + + + + + + + + + + + + + + + + + + + Return to top + + + + + SEC homepage + + + + + + + + + + + + + + About the SEC + + + + + + Budget & Performance + + + Careers + + + Commission Votes + + + Contact + + + Contracts + + + + + + + + Transparency + + + + + + Accessibility & Disability + + + Super Intelligence + + + FOIA + + + Inspector General + + + No FEAR Act Data + + + Ombuds + + + SEC Excess Personal Property Guidance + + + + + + + + Websites + + + + + + Investor.gov + + + Related Sites + + + USA.gov + + + + + + + + Site Information + + + + + + Plain Writing + + + Privacy & Security + + + Site Map + + + + + + + + + + + + + + + + + + Stay connected. 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Roberts + + + + + + + + !function(){var e=navigator.userAgent,a=document.documentElement,n=a.className;n=n.replace("no-js","js"),/iPad|iPhone|iPod/.test(e)&&!window.MSStream&&(n+=" ua-ios"),a.className=n}(); + {"path":{"baseUrl":"\/","pathPrefix":"","currentPath":"node\/366011","currentPathIsAdmin":false,"isFront":false,"currentLanguage":"en"},"pluralDelimiter":"\u0003","suppressDeprecationErrors":true,"gtag":{"tagId":"","consentMode":false,"otherIds":[],"events":[],"additionalConfigInfo":[]},"ajaxPageState":{"libraries":"eJxdT0GOwzAI_JBdn_oei2DkeINNZLC22devlaZS2wtiBhhmcKNUTPo97jxyaXEH3GJpiZrFhQW38A4cMqgeYQGlV19JFTKpQ-kUmvQKXP7I0cO4tC2kPnbg2wVdFslM0SCHPMs3vsEPPD7J6hgOGdPCKJyoRxxqUuePHjLLAuzVjimenRJGSLW08NoBK9LUn6SHlrytVOlcpJShB63QLSpBx_WkOzHNePol4fRQo_qMPvQ36ZXsAmd99lMNr2t_GUR9n60EyX9a_wePd5ns","theme":"uswds_sec","theme_token":null},"ajaxTrustedUrl":[],"gtm":{"tagId":null,"settings":{"data_layer":"dataLayer","include_classes":false,"allowlist_classes":"","blocklist_classes":"","include_environment":false,"environment_id":"","environment_token":""},"tagIds":["GTM-TD3BKV"]},"data":{"extlink":{"extTarget":false,"extTargetAppendNewWindowDisplay":true,"extTargetAppendNewWindowLabel":"(opens in a new window)","extTargetNoOverride":false,"extNofollow":false,"extTitleNoOverride":false,"extNoreferrer":false,"extFollowNoOverride":false,"extClass":"0","extLabel":"(link is external)","extImgClass":false,"extSubdomains":true,"extExclude":".*\\.gov|http:\/\/www.xbrl.org\/utr\/2013-05-17\/utr.xml|http:\/\/www.xbrl.org\/dtr\/type\/numeric-2009-12-16.xsd|http:\/\/www.xbrl.org\/dtr\/type\/nonNumeric-2009-12-16.xsd|https:\/\/secir.secure.force.com\/ombudsman\/OMMSForm","extInclude":"","extCssExclude":".data-exempt","extCssInclude":"","extCssExplicit":"","extAlert":true,"extAlertText":"You are now leaving the SEC Website. 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Roberts + + + + + + + + + + + + Keith M. Roberts + + + + + + + + + + + + + + + + + + + + + Securities Exchange Act of 1934 +Release No. 50918 / December 22, 2004 + + Accounting And Auditing Enforcement +Release No. 2155 / December 22, 2004 + + Admin. Proc. File No. 3-11471 + + In the Matter of + KEITH M. ROBERTS, + Respondent. + + : : : : : : : : : + ORDER MAKING FINDINGS AND IMPOSING A CEASE-AND-DESIST ORDER PURSUANT TO SECTION 21C OF THE SECURITIES EXCHANGE ACT OF 1934 + I. + On April 30, 2004 the Securities and Exchange Commission (the "Commission") instituted administrative proceedings against respondent Keith M. Roberts ("Roberts" or "Respondent") pursuant to Section 21C of the Securities Exchange Act of 1934 ("Exchange Act"). + In response to the institution of these proceedings, Roberts has submitted an Offer of Settlement (the "Offer") which the Commission has determined to accept. Solely for the purpose of these proceedings and any other proceedings brought by or on behalf of the Commission, or to which the Commission is a party, and without admitting or denying the findings herein, except as to the Commission's jurisdiction over him and the subject matter of these proceedings, Roberts consents to the entry of this Order Making Findings and Imposing a Cease-and-Desist Order Pursuant to Section 21C of the Securities Exchange Act of 1934, as set forth below. + + II. + On the basis of this Order and Respondent's Offer, the Commission finds that: + + A. Summary + 1. This matter involves Roberts' role in incorrectly recognizing revenue on two transactions by Quadramed Corporation ("Quadramed"), a publicly traded health care technology company, during Roberts' tenure as the company's Chief Financial Officer and General Counsel. During September 1998 and March 1999, Quadramed recognized revenue on two $5 million software licensing transactions that Roberts negotiated with Health+Cast LLC ("HealthCast"), a small start-up software development company. In the September 1998 transaction, Roberts caused Quadramed to guarantee a $12.5 million line of credit for the customer, which HealthCast then used to purchase a $5 million software license from Quadramed. In the March 1999 transaction, Roberts caused Quadramed to pay $11 million to HealthCast for a software license and prepaid royalties. HealthCast used a portion of the payment to finance an additional software purchase from Quadramed. In both instances, HealthCast lacked the financial resources to pay Quadramed for the software licenses and was not currently in a position to use or resell the Quadramed software. HealthCast therefore would not have purchased the Quadramed licenses when it did unless Quadramed was providing HealthCast with the cash necessary to buy Quadramed's software from Quadramed. + 2. Quadramed's recognition of revenue from the transactions violated Generally Accepted Accounting Principles ("GAAP") because collectibility for the transactions was not probable absent financial assistance from Quadramed, and because there was no proper valuation of the licenses and services that were exchanged between Quadramed and HealthCast. Quadramed's improper reporting of revenue for these transactions rendered its filings with the Commission materially misleading. In these filings, Quadramed failed to disclose the full extent of its relationship and agreements with HealthCast, including the questionably non-arm's-length character of the revenue from these two licensing "sales." This prevented investors from understanding the nature of the licensing fees that Quadramed received for the two HealthCast transactions. 1 + + B. Respondent + 3. Roberts, age 39, resides in San Francisco, California. From 1997 to 2000, Roberts was Quadramed's Vice President and General Counsel. From July 1998 to April 1999, Roberts also served as Quadramed's Chief Financial Officer. Roberts is presently the Executive Vice President, General Counsel and Chief Financial Officer of a private company located in Santa Clara, California. + + C. Other Relevant Entity + 4. Quadramed is a Delaware corporation. During the relevant period, the company was headquartered in San Rafael, California, but has subsequently relocated to Reston, Virginia. Quadramed sells information technology and consulting services to hospitals and healthcare professionals, and licenses software products. Quadramed's common stock is registered with the Commission pursuant to Section 12(g) of the Exchange Act. Quadramed was delisted from the Nasdaq stock market in March 2003, and is currently quoted on the NASDAQ bulletin board. + D. The September 1998 Transaction + 5. In July 1998, Roberts met with a small, privately-owned health care company, HealthCast. HealthCast was developing a computer interface that would allow hospitals and doctors to access a variety of medical software programs. Quadramed wanted to have HealthCast incorporate Quadramed's software into the interface. Initially, Quadramed offered to provide HealthCast with a $2 million equity investment and a guarantee for a $4 million line of credit for a total cash infusion of $6 million, if HealthCast would integrate Quadramed's product into the software interface. HealthCast elected, however, not to provide Quadramed with an equity stake. + 6. Eventually, on September 29-30, 1998, Quadramed and its customer entered into a series of related transactions - that was negotiated by Roberts - in which Quadramed arranged bank financing for HealthCast so that HealthCast had $6 million in working capital for development work on the customer interface and another $5 million to pay the licensing fee to Quadramed. Quadramed and its customer simultaneously executed an Investment Agreement, Credit Agreement, Note, Guarantee, Security Agreement, Registration Rights Agreement, Warrant Purchase Agreement, Non-exclusive Reseller Agreement, Escrow Agreement, License Agreement, Non-exclusive Software Agreement and a Development Agreement whereby HealthCast was to become a development unit for Quadramed. Under the terms of the License Agreement, HealthCast agreed to purchase a nonexclusive license of source code from Quadramed for $5 million. Under the terms of the Credit Agreement and Guarantee, Quadramed guaranteed a $12.5 million line of credit for HealthCast, under which the bank would advance revolving loans "for the acquisition of technology rights and in the development of its business and for the purchase of capital equipment and working capital purposes," i.e., for purchasing the $5 million license from Quadramed. Additionally, under the credit agreement, $1.5 million was set aside to cover interest. Thus, when the $1.5 million interest reserve and the $5 million licensing fee are deducted from the $12.5 million Guarantee, Quadramed essentially provided HealthCast with the very same $6 million cash infusion that had been discussed for the equity proposal. + 7. Quadramed's guarantee was supposedly secured by a lien on all of HealthCast's assets. However, HealthCast's financial records for the period ended July 31, 1998, indicate that the company had less than $2 million in total assets on its balance sheets, revenue of less than $500,000 for the first five months of the year, and an operating loss of $2 million. Hence, HealthCast was not creditworthy because it had no financial ability to pay for Quadramed's software absent Quadramed's guarantee of the line of credit. HealthCast drew down from the line of credit in order to pay Quadramed for the software license. Additionally, neither HealthCast nor Quadramed made a reasonable determination of the fair market value of the software license. + 8. Roberts authorized Quadramed's Controller to recognize $4 million in revenue on the sale of the software license to HealthCast in Quadramed's books and records for the quarter ended September 30, 1998. That revenue failed, however, to comply with GAAP due to HealthCast's reliance on the line of credit guaranteed by Quadramed to pay for the transaction. On November 16, 1998, Quadramed filed its Form 10-Q for the third quarter, after previously issuing a press release detailing its financial results. Roberts signed the Form 10-Q as the company's Chief Financial Officer and General Counsel. The 10-Q reported total revenue of $43.8 million and net loss of $2.2 million for the quarter. The improper recognition of revenue from the transaction caused Quadramed's reported revenue to be overstated by about 10% and its reported net loss to be understated by about 218%. + 9. A footnote to Quadramed's Form 10-Q read as follows: + In September 1998, the Company entered into an arrangement to guarantee a line of credit of another company for up to $12,500,000. Outstanding balances under the line of credit accrue interest at 8.5% and are due October 1, 2001. The Company has also entered into a reseller agreement with the same company. Under the terms of the reseller agreement, the Company has a non-exclusive license to resell the company's software. This reseller agreement remains in effect for an initial term of three (3) years, expiring on September 29, 2001, and thereafter is subject to renewal for additional one-year terms. + That footnote involved a material omission because it failed to disclose that the guarantee was made for a customer who was using funds from the line of credit to purchase software from Quadramed. It also failed to disclose that Quadramed was booking revenue from a "customer" in which it had essentially become an investor through the Investment Agreement and related documents. + 10. On March 31, 1999, Quadramed filed its Form 10-K for the fiscal year ended December 31, 1998. Roberts signed the Form 10-K as the company's Chief Financial Officer and General Counsel. The 10-K reported total annual revenue of $159.4 million and a net loss from operations of $14 million. As a result of the improper reciprocal transaction, revenue for the fiscal year was overstated by 2.6% and the company's net loss was understated by 14.6%. As in the Form 10-Q, the Form 10-K mentioned the $12.5 million line of credit guarantee with a "reseller," but omitted any reference to the use of the credit line to pay Quadramed for the $5 million license and to the relationship between Quadramed and HealthCast. + 11. Previously, in August 1998, Roberts had discussed the proposed transactions with Quadramed's independent auditors, who advised Roberts that Quadramed could not record revenue from a hypothetical sale in which Quadramed guaranteed a line of credit for HealthCast unless the guarantee was secured by assets that could be converted to cash. Despite that advice, Roberts based the decision to recognize revenue by relying upon a security interest in largely intangible assets with a speculative value. That reliance upon largely intangible assets with a speculative value did not comply with GAAP. + 12. Quadramed's independent auditors reviewed the company's revenue recognition decisions shortly after the end of each fiscal quarter. At the time the auditors reviewed the transaction in early October 1998, Roberts failed to explain fully to the auditors and Quadramed's Controller the character of the relationship between Quadramed and HealthCast. As a result - and because the payment was not outstanding at the end of the quarter - the independent auditors and the Controller did not analyze the creditworthiness of HealthCast in order to determine whether collectibility was probable for the licensing transaction. Had the auditors reviewed the transaction, they could have seen that HealthCast lacked sufficient cash to pay for the purchase outside of the line of credit guaranteed by Quadramed, and thus that revenue recognition was improper. + 13. Roberts should have known that his failure to explain fully the relationship between Quadramed and HealthCast to the Controller and independent auditors would cause the sale to be recorded improperly on Quadramed's books and records, and would cause material misrepresentations in the company's Form 10-Q for the quarter ended September 30, 1998 and the year ended December 31, 1998. + E. The March 1999 Transaction + 14. In February 1999, HealthCast's CEO contacted Roberts to ask for more money. Roberts and HealthCast's CEO then negotiated another reciprocal transaction in March 1999. HealthCast acquired a $5 million source code license for a suite of software products from Quadramed. In return, Quadramed agreed to prepay non-refundable licensing royalties of $5 million, and to pay HealthCast $6 million for a software license and source code for another software program. + 15. HealthCast lacked sufficient funds to make the $5 million payment to Quadramed. Roberts arranged for Quadramed to wire funds to HealthCast in return for a software license and as prepaid royalties. HealthCast used a portion of those funds to cover the $5 million payment to Quadramed. In late March 1999, HealthCast sent Quadramed a $5 million check. HealthCast's CEO also sent a letter to Roberts, which stated: + In anticipation of funding the transaction contemplated by the Memorandum of Understanding, we are forwarding to you our company check in the amount of $5,000,000. We are providing this with the understanding that you will not present the check for collection at any bank or financial institution until such time as your company wires to us the total sum of $11,000,000 in completion of the various cash transactions agreed upon. + 16. As with the September 1998 transaction, the transactions were structured so that Quadramed would receive HealthCast's payment by the end of the fiscal quarter. As a result, there were no outstanding payments due at the end of the quarter, and the transaction escaped scrutiny by Quadramed's outside auditors. + 17. On May 17, 1999, Quadramed filed its Form 10-Q for the quarter ended March 31, 1999, after issuing a press release detailing the quarterly results. The Form 10-Q was signed by Roberts as the General Counsel. The Form 10-Q reported revenue of $59.6 million and a net loss of $25.6 million. As a result of the improper reciprocal transaction, Quadramed's reported revenue was overstated by about 9% and its reported net loss from operations was understated by about 12%. + 18. Quadramed's Form 10-Q was also deficient because it failed to disclose the related-party character of the transactions with HealthCast and that Quadramed had provided funds to HealthCast to purchase software from Quadramed. + 19. On March 29, 2000, Quadramed filed its Form 10-K for the fiscal year ended December 31, 1999. Roberts reviewed a draft Form 10-K but did not sign the filing. The 10-K reported revenue of $240 million and a net loss from operations of $9.3 million. Because revenue from the $5 million March 1999 transaction should not have been recognized, Quadramed's reported revenue for the fiscal year was overstated by about 2% and its reported net loss was understated by about 23%. As in the Form 10-Q, the Form 10-K omitted any reference to the related-party character of the transactions with HealthCast. + 20. Roberts authorized Quadramed's Controller to improperly recognize $5 million in revenue on the licensing contract with HealthCast in its books and records. The transaction failed to comply with the requirements for recognition under GAAP because HealthCast did not have an independent ability to pay for the transaction until it received funds from Quadramed, and because there was no reliable and/or independent valuation of the consideration being exchanged in this reciprocal transaction. Quadramed also recorded the pre-paid royalties as an asset in its books and records, in violation of GAAP. + 21. Roberts provided the March 31 letter from HealthCast's CEO to Quadramed's outside legal counsel and asked counsel to respond and reject it. However, Roberts did not show the March 31 letter to Quadramed's independent auditors or Controller, or otherwise advise them of HealthCast's financial situation. Roberts also failed to advise the auditors that Quadramed had wired $11 million to HealthCast prior to cashing HealthCast's check. As a result - and because the payment was not outstanding at the end of the quarter - the auditors and the Controller did not analyze the creditworthiness of HealthCast in order to determine whether collectibility was probable for the licensing transaction. Had the auditors reviewed the transaction during the quarterly review process, they could have seen that HealthCast had no means to pay for the purchase outside of the money that was wired from Quadramed, and thus that revenue recognition was improper. + 22. Roberts' failure to inform the Controller and independent auditors about HealthCast's letter and the related nature of all the transactions with HealthCast caused the sale to be recorded improperly on Quadramed's books and records, and caused material misrepresentations in the company's Form 10-Q for the quarter ended March 31, 1999 and the year ended December 31, 1999. + F. Subsequent Events + 23. On June 6, 2003, Quadramed filed restated financial statements for the fiscal years ended December 31, 1999, December 31, 2000 and December 31, 2001. In its restated financial statements, Quadramed reversed the revenue from the March 1999 transaction. The financial statements for the year ended December 31, 1998 were not restated. + G. Legal Conclusions + 24. As a result of the conduct described above, Quadramed reported false and misleading financial results in various Commission filings and public statements. Quadramed also failed to file with the Commission accurate and complete reports, and filed reports that failed to include material information necessary to make its statements not misleading for the periods ended September 30, 1998, December 31, 1998, March 31, 1999 and December 31, 1999. In addition, Quadramed failed to maintain books, records and accounts that, in reasonable detail, accurately and fairly reflected its transactions and dispositions of assets, and failed to maintain a system of internal accounting controls sufficient to provide reasonable assurances that transactions were recorded as necessary to permit the preparation of financial statements in conformity with GAAP. + 25. Based on the foregoing, Roberts caused Quadramed's violations of Sections 13(a) and 13(b)(2)(A) of the Exchange Act and Rules 13a-1 and 13a-13 thereunder, which require all issuers whose securities are registered with the Commission pursuant to Section 12 of the Exchange Act to file with the Commission annual and quarterly reports containing such information as the Commission shall prescribe by its rules and regulations. + 26. Based on the foregoing, Roberts caused Quadramed's violations of Rule 12b-20, which requires that the annual and periodic reports filed pursuant to Rules 13a-1 and 13a-13 contain any additional information necessary to ensure that the required statements in the reports are not, under the circumstances, materially misleading. + 27. Based on the foregoing, Roberts caused Quadramed's violations of Section 13(b)(2)(A) of the Exchange Act, which requires issuers to make and keep books, records and accounts which, in reasonable detail, accurately and fairly reflect the transactions of the issuer. + 28. Based on the foregoing, Roberts violated Section 13(b)(5) of the Exchange Act and Rule 13b2-1, which prohibits a person from knowingly circumventing or knowingly failing to implement a system of internal accounting controls or knowingly falsifying an issuer's books, records and accounts. + + III. + Based on the foregoing, the Commission deems it appropriate to accept the Offer submitted by Roberts. Accordingly, it is hereby ORDERED, pursuant to Section 21C of the Exchange Act, that Respondent Roberts cease and desist from causing any violations and any future violations of Sections 13(a) and 13(b)(2)(A) of the Exchange Act and Rules 12b-20, 13a-1, and 13a-13 thereunder, and from committing or causing violations of Section 13(b)(5) of the Exchange Act and Rule 13b2-1 thereunder. + + By the Commission. + + + + + Jonathan G. Katz + Secretary + + + Endnotes + 1 Quadramed's deficiencies were the subject of a prior Commission order, In the Matter of Quadramed Corp. , Exchange Act Rel. 34-49642; AAE Rel. 1998; File No. 3-11472 (April 30, 2004). The Commission ordered Quadramed to cease and desist from committing or causing any violations or any future violations of Sections 10(b), 13(a), 13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act and Rules 10b-5, 12b-20, 13a-1 and 13a-13 thereunder. + + +See also the Order in this matter --> + + + + + + + + + + + + + + + + + + + + + + + + + + Return to top + + + + + SEC homepage + + + + + + + + + + + + + + About the SEC + + + + + + Budget & Performance + + + Careers + + + Commission Votes + + + Contact + + + Contracts + + + + + + + + Transparency + + + + + + Accessibility & Disability + + + Super Intelligence + + + FOIA + + + Inspector General + + + No FEAR Act Data + + + Ombuds + + + SEC Excess Personal Property Guidance + + + + + + + + Websites + + + + + + Investor.gov + + + Related Sites + + + USA.gov + + + + + + + + Site Information + + + + + + Plain Writing + + + Privacy & Security + + + Site Map + + + + + + + + + + + + + + + + + + Stay connected. 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Edwards, CA + + + + + + + + + + + + Frank D. Edwards, CA + + + + + + + + + + + + + + + + + + + + + Securities Exchange Act of 1934 +Release No. 50931 / December 27, 2004 + + Accounting And Auditing Enforcement +Release No. 2156 / December 27, 2004 + + Admin. Proc. File No. 3-11782 + + In the Matter of + FRANK D. EDWARDS, CA, + Respondent. + + : : : : : : : : : + ORDER INSTITUTING ADMINISTRATIVE PROCEEDINGS PURSUANT TO RULE 102(e) OF THE COMMISSION'S RULES OF PRACTICE, MAKING FINDINGS, AND IMPOSING REMEDIAL SANCTIONS + I. + The Securities and Exchange Commission ("Commission") deems it appropriate and in the public interest that public administrative proceedings be, and hereby are, instituted against Frank D. Edwards ("Respondent" or "Edwards") pursuant to Rule 102(e)(3)(i) of the Commission's Rules of Practice. 1 + + II. + In anticipation of the institution of these proceedings, Respondent has submitted an Offer of Settlement (the "Offer") which the Commission has determined to accept. Solely for the purpose of these proceedings and any other proceedings brought by or on behalf of the Commission, or to which the Commission is a party, and without admitting or denying the findings herein, except as to the Commission's jurisdiction over him and the subject matter of these proceedings, and the findings contained in Section III.3 below, which are admitted, Respondent consents to the entry of this Order Instituting Administrative Proceedings Pursuant to Rule 102(e) of the Commission's Rules of Practice, Making Findings, and Imposing Remedial Sanctions ("Order"), as set forth below. + + III. + On the basis of this Order and Respondent's Offer, the Commission finds that: + 1. Edwards, age 50, served as CFO at Robotic Vision Systems, Inc. ("Robotic") from March 1999 to September 2001. He is licensed as a "chartered accountant" ("CA"), the Canadian equivalent of a certified public accountant ("CPA"), in the province of Quebec. + 2. Robotic is a Delaware corporation currently based in Nashua, New Hampshire. During the relevant time period, Robotic's corporate offices, as well as the offices of its Acuity CiMatrix ("ACIM") division, were located in Canton, Massachusetts. Robotic's ACIM division manufactures bar code reading systems and computer systems that inspect products. At all relevant times, Robotic's common stock was registered with the Commission pursuant to Section 12(g) of the Exchange Act and was traded on the NASDAQ National Market System, and the company was required to file annual and quarterly reports with the Commission pursuant to Section 13(a) of the Securities Exchange Act of 1934 ("Exchange Act"). + 3. On November 18, 2004, the Commission filed a complaint against Edwards in SEC v. Baker, et al. (Civil Action No. 04-12444-DPW). On November 29, 2004, the court entered an order permanently enjoining Edwards, by consent, from future violations of Sections 10(b), 13(a), 13(b)(2)(A), 13(b)(2)(B) and13(b)(5) of the Exchange Act and Rules 10b-5, 12b-20, 13a-1, 13a-13, 13b2-1 and 13b2-2 thereunder, in the civil action entitled SEC v. Baker, et al. , Civil Action No. 04-12444-DPW, in the United States District Court for the District of Massachusetts. Edwards was ordered to pay a $75,000 civil money penalty, and barred for a period of five years from serving as an officer or a director of any issuer which has a class of securities registered pursuant to Section 12 of the Exchange Act or which is required to file reports pursuant to Section 15(d) of the Exchange Act. + 4. The Commission's complaint alleged, among other things, that Robotic made material overstatements of revenue and net income resulting from improper recognition of revenue at the ACIM division. Between December 1999 and September 2000, ACIM entered into approximately 36 purported sales to its customers and distributors that contained non- standard terms that deferred, conditioned or even negated their obligation to pay ACIM for the products. ACIM recognized approximately $4.74 million of revenue on the purported sales. This improper recognition of revenue constituted a failure to comply with generally accepted accounting principles ("GAAP"). The complaint alleged that, among other things, Edwards participated in the preparation of Robotic's financial statements and knew, or was reckless in not knowing, that the financial statements contained materially false or misleading revenue figures arising out of the ACIM transactions with non-standard terms. The complaint also alleged that Edwards failed to disclose to Robotic's outside auditors relevant information about the transactions with non-standard terms, and that Edwards violated and aided and abetted violations of the books and records and internal controls provisions of the Exchange Act. + + IV. + In view of the foregoing, the Commission deems it appropriate and in the public interest to impose the sanction agreed to in Respondent Edwards' Offer. + Accordingly, it is hereby ORDERED, effective immediately, that: + A. Respondent is suspended from appearing or practicing before the Commission as an accountant. + B. After five years from the date of this Order, Respondent may request that the Commission consider his reinstatement by submitting an application (attention: Office of the Chief Accountant) to resume appearing or practicing before the Commission as: + a preparer or reviewer, or a person responsible for the preparation or review, of any public company's financial statements that are filed with the Commission. Such an application must satisfy the Commission that Respondent's work in his practice before the Commission will be reviewed either by the independent audit committee of the public company for which he works or in some other acceptable manner, as long as he practices before the Commission in this capacity; and/or   + an independent accountant. Such an application must satisfy the Commission that:   + Respondent, or the public accounting firm with which he is associated, is registered with the Public Company Accounting Oversight Board ("Board") in accordance with the Sarbanes-Oxley Act of 2002, and such registration continues to be effective;   + Respondent, or the registered public accounting firm with which he is associated, has been inspected by the Board and that inspection did not identify any criticisms of or potential defects in the Respondent's or firm's quality control system that would indicate that the Respondent will not receive appropriate supervision or, if the Board has not conducted an inspection, has received an unqualified report relating to his, or the firm's, most recent peer review conducted in accordance with the guidelines adopted by the former SEC Practice Section of the American Institute of Certified Public Accountants Division for CPA Firms or an organization providing equivalent oversight and quality control functions;   + Respondent has resolved all disciplinary issues with the Board, and has complied with all terms and conditions of any sanctions imposed by the Board (other than reinstatement by the Commission); and   + The Respondent acknowledges his responsibility, as long as Respondent appears or practices before the Commission as an independent accountant, to comply with all requirements of the Commission and the Board, including, but not limited to, all requirements relating to registration, inspections, concurring partner reviews and quality control standards.   + C. The Commission will consider an application by Respondent to resume appearing or practicing before the Commission provided that his Chartered Accountant license is current and he has resolved all other disciplinary issues with the applicable accountant licensing authorities. However, if licensure is dependant on reinstatement by the Commission, the Commission will consider an application on its other merits. The Commission's review may include consideration of, in addition to the matters referenced above, any other matters relating to Respondent's character, integrity, professional conduct, or qualifications to appear or practice before the Commission. + + + By the Commission. + + + + + Jonathan G. Katz + Secretary + + + Endnotes + 1 Rule 102(e)(3)(i) provides, in relevant part, that: + The Commission, with due regard to the public interest and without preliminary hearing, may, by order, . . . suspend from appearing or practicing before it any . . . accountant . . . who has been by name . . . permanently enjoined by any court of competent jurisdiction, by reason of his or her misconduct in an action brought by the Commission, from violating or aiding and abetting the violation of any provision of the federal securities laws or of the rules and regulations thereunder. + + +See also the Order in this matter --> + + + + + + + + + + + + + + + + + + + + + + + + + + Return to top + + + + + SEC homepage + + + + + + + + + + + + + + About the SEC + + + + + + Budget & Performance + + + Careers + + + Commission Votes + + + Contact + + + Contracts + + + + + + + + Transparency + + + + + + Accessibility & Disability + + + Super Intelligence + + + FOIA + + + Inspector General + + + No FEAR Act Data + + + Ombuds + + + SEC Excess Personal Property Guidance + + + + + + + + Websites + + + + + + Investor.gov + + + Related Sites + + + USA.gov + + + + + + + + Site Information + + + + + + Plain Writing + + + Privacy & Security + + + Site Map + + + + + + + + + + + + + + + + + + Stay connected. 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Individuals (SALI) + + + + + Enforcement Data Delivery Standards + + + + + Small Businesses + + + + + Appellate Briefs + + + + + Amicus / Friend of the Court Briefs + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + Home + + + Enforcement and Litigation + + + Administrative Proceedings + + + Laurence D. Cohen (CPA) + + + + + + + + + + + + Laurence D. Cohen (CPA) + + + + + + + + + + + + + + + + + + + + + Securities Exchange Act of 1934 +Release No. 50932 / December 27, 2004 + + Accounting And Auditing Enforcement +Release No. 2157 / December 27,, 2004 + + Admin. Proc. File No. 3-11783 + + In the Matter of + LAURENCE D. COHEN (CPA), + Respondent. + + : : : : : : : : : + ORDER INSTITUTING ADMINISTRATIVE PROCEEDINGS PURSUANT TO RULE 102(e) OF THE COMMISSION'S RULES OF PRACTICE, MAKING FINDINGS, AND IMPOSING REMEDIAL SANCTIONS + I. + The Securities and Exchange Commission ("Commission") deems it appropriate and in the public interest that public administrative proceedings be, and hereby are, instituted against Laurence D. Cohen ("Respondent" or "Cohen") pursuant to Rule 102(e)(3)(i) of the Commission's Rules of Practice. + + II. + In anticipation of the institution of these proceedings, Respondent has submitted an Offer of Settlement (the "Offer") which the Commission has determined to accept. Solely for the purpose of these proceedings and any other proceedings brought by or on behalf of the Commission, or to which the Commission is a party, and without admitting or denying the findings herein, except as to the Commission's jurisdiction over him and the subject matter of these proceedings, and the findings contained in Section III.3 below, which are admitted, Respondent consents to the entry of this Order Instituting Administrative Proceedings Pursuant to Rule 102(e) of the Commission's Rules of Practice, Making Findings, and Imposing Remedial Sanctions ("Order"), as set forth below. 1 + + III. + On the basis of this Order and Respondent's Offer, the Commission finds that: + 1. Cohen, age 40, is and has been a certified public accountant licensed to practice in the Commonwealth of Massachusetts. He served as corporate controller at Robotic Vision Systems, Inc. ("Robotic") from June 1999 to April 2003. + 2. Robotic is a Delaware corporation currently based in Nashua, New Hampshire. During the relevant time period, Robotic's corporate offices, as well as the offices of its Acuity CiMatrix ("ACIM") division, were located in Canton, Massachusetts. Robotic's ACIM division manufactures bar code reading systems and computer systems that inspect products. At all relevant times, Robotic's common stock was registered with the Commission pursuant to Section 12(g) of the Exchange Act and was traded on the NASDAQ National Market System, and the company was required to file annual and quarterly reports with the Commission pursuant to Section 13(a) of the Securities Exchange Act of 1934 ("Exchange Act"). + 3. On November 18, 2004, the Commission filed a complaint against Cohen in SEC v. Baker, et al. (Civil Action No. 04-12444-DPW). On November 29, 2004, the court entered an order permanently enjoining Cohen, by consent, from future violations of Sections 10(b), 13(a), 13(b)(2)(A), 13(b)(2)(B) and13(b)(5) of the Exchange Act and Rules 10b-5, 12b-20, 13a-1, 13a-13, 13b2-1 and 13b2-2 thereunder, in the civil action entitled SEC v. Baker, et al., Civil Action No. 04-12444-DPW, in the United States District Court for the District of Massachusetts. Cohen was ordered to pay a $40,000 civil money penalty, and barred for a period of five years from serving as an officer or a director of any issuer which has a class of securities registered pursuant to Section 12 of the Exchange Act or which is required to file reports pursuant to Section 15(d) of the Exchange Act. + 4. The Commission's complaint alleged, among other things, that Robotic made material overstatements of revenue and net income resulting from improper recognition of revenue at the ACIM division. Between December 1999 and September 2000, ACIM entered into approximately 36 purported sales to its customers and distributors that contained non- standard terms that deferred, conditioned or even negated their obligation to pay ACIM for the products. ACIM recognized approximately $4.74 million of revenue on the purported sales. This improper recognition of revenue constituted a failure to comply with generally accepted accounting principles ("GAAP"). The complaint alleged that, among other things, Cohen participated in the preparation of Robotic's financial statements and knew, or was reckless in not knowing, that the financial statements contained materially false or misleading revenue figures arising out of the ACIM transactions with non-standard terms. The complaint also alleged that Cohen failed to disclose to Robotic's outside auditors relevant information about the transactions with non-standard terms, and that Cohen violated and aided and abetted violations of the books and records and internal controls provisions of the Exchange Act. + + IV. + In view of the foregoing, the Commission deems it appropriate and in the public interest to impose the sanction agreed to in Respondent Cohen's Offer. + Accordingly, it is hereby ORDERED, effective immediately, that: + A. Respondent is suspended from appearing or practicing before the Commission as an accountant. + B. After five years from the date of this order, Respondent may request that the Commission consider his reinstatement by submitting an application (attention: Office of the Chief Accountant) to resume appearing or practicing before the Commission as: + a preparer or reviewer, or a person responsible for the preparation or review, of any public company's financial statements that are filed with the Commission. Such an application must satisfy the Commission that Respondent's work in his practice before the Commission will be reviewed either by the independent audit committee of the public company for which he works or in some other acceptable manner, as long as he practices before the Commission in this capacity; and/or   + an independent accountant. Such an application must satisfy the Commission that:   + Respondent, or the public accounting firm with which he is associated, is registered with the Public Company Accounting Oversight Board ("Board") in accordance with the Sarbanes-Oxley Act of 2002, and such registration continues to be effective;   + Respondent, or the registered public accounting firm with which he is associated, has been inspected by the Board and that inspection did not identify any criticisms of or potential defects in the Respondent's or firm's quality control system that would indicate that the Respondent will not receive appropriate supervision or, if the Board has not conducted an inspection, has received an unqualified report relating to his, or the firm's, most recent peer review conducted in accordance with the guidelines adopted by the former SEC Practice Section of the American Institute of Certified Public Accountants Division for CPA Firms or an organization providing equivalent oversight and quality control functions;   + Respondent has resolved all disciplinary issues with the Board, and has complied with all terms and conditions of any sanctions imposed by the Board (other than reinstatement by the Commission); and   + The Respondent acknowledges his responsibility, as long as Respondent appears or practices before the Commission as an independent accountant, to comply with all requirements of the Commission and the Board, including, but not limited to, all requirements relating to registration, inspections, concurring partner reviews and quality control standards.   + C. The Commission will consider an application by Respondent to resume appearing or practicing before the Commission provided that his state CPA license is current and he has resolved all other disciplinary issues with the applicable state boards of accountancy. However, if state licensure is dependant on reinstatement by the Commission, the Commission will consider an application on its other merits. The Commission's review may include consideration of, in addition to the matters referenced above, any other matters relating to Respondent's character, integrity, professional conduct, or qualifications to appear or practice before the Commission. + + + By the Commission. + + + + + Jonathan G. Katz + Secretary + + + Endnotes + 1 Rule 102(e)(3)(i) provides, in relevant part, that: + The Commission, with due regard to the public interest and without preliminary hearing, may, by order, . . . suspend from appearing or practicing before it any . . . accountant . . . who has been by name . . . permanently enjoined by any court of competent jurisdiction, by reason of his or her misconduct in an action brought by the Commission, from violating or aiding and abetting the violation of any provision of the federal securities laws or of the rules and regulations thereunder. + + +See also the Order in this matter --> + + + + + + + + + + + + + + + + + + + + + + + + + + Return to top + + + + + SEC homepage + + + + + + + + + + + + + + About the SEC + + + + + + Budget & Performance + + + Careers + + + Commission Votes + + + Contact + + + Contracts + + + + + + + + Transparency + + + + + + Accessibility & Disability + + + Super Intelligence + + + FOIA + + + Inspector General + + + No FEAR Act Data + + + Ombuds + + + SEC Excess Personal Property Guidance + + + + + + + + Websites + + + + + + Investor.gov + + + Related Sites + + + USA.gov + + + + + + + + Site Information + + + + + + Plain Writing + + + Privacy & Security + + + Site Map + + + + + + + + + + + + + + + + + + Stay connected. 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