Raytheon Company, a large defense contractor, has submitted an offer to the SEC to settle an accounting investigation related to revenue recognition at its commuter aircraft subsidiary. The offer, which the SEC staff has agreed to recommend to the Commission to accept, requires the company to pay a $12 million civil penalty along with the entry of a cease-and-desist order. Raytheon’s press release (here) states that its CFO, Edward S. Pliner, will also be named in an SEC proceeding regarding the accounting, and he has been placed on leave along with another lower-level executive. (ph)
Category: Civil Enforcement
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The SEC’s investigation of Delphi has led to its former parent, General Motors, being subpoenaed for records relating to its accounting in two transactions between the company. A Wall Street Journal article (here) describes the subpoenas as relating to a previously disclosed $237 million payment by Delphi to GM related to product recalls, and an $85 million credit from GM to Delphi related to retiree health benefits. The issue of supplier rebates and warranty payments has come under the SEC’s scrutiny in the past few months because these payments can be used as a type of "cookie jar" for companies seeking to smooth out their earnings. The investigation of Delphi has already led to the firing of its CFO and other finance executives (see earlier post here), and there does not appear to be a quick resolution in sight yet for Delphi and other companies. If the SEC finds any systematic abuses in the area, then the investigation is likely to spread to other auto suppliers, unwelcome news as the auto industry struggles with falling demand for its products. (ph)
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The SEC filed a securities fraud lawsuit alleging accounting fraud and self-dealing against seven former top executives at IMPATH, Inc., a company that provided diagnostic and laboratory services for cancer treatments before it filed for bankruptcy in 2003 (complaint here). Among the seven former executives named as defendants are Anuradha Saad, former CEO and chairman of the board, Richard Adelson, former president, and David Cammarata, former CFO. The SEC Litigation Release states:
As a result of the accounting fraud, Impath falsely reported multimillion dollar profits when it had actually suffered huge losses. To meet financial projections and boost Impath’s stock price, the defendants made, or directed others to make, phony accounting entries that artificially increased revenue and improperly reduced operating expenses . . . While the accounting fraud was occurring, Saad, Adelson and Cammarata also engaged in undisclosed self-dealing. Not only did they exercise stock options and sell Impath stock during the fraud, they used over $850,000 in corporate funds to pay for option exercises without obtaining board approval or making the required proxy statement disclosures. Saad also used corporate funds to pay for other personal expenses without the requisite approval or disclosure, including vacations, country club dues and artwork.
One defendant settled the suit, disgorging a $100,000 bonus he received as a result of the company meeting certain financial goals, and a $150,000 civil penalty. (ph)
UPDATE (3/30): The New York Times reports (here) that Saad and Adelson were indicted on conspiracy and securities fraud charges, and four other executives have pleaded guilty to charges arising from the accounting fraud at the company.
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Frank Quattrone, who was convicted last year of obstruction of justice (the case is currently on appeal to the Second Circuit), is challenging the permanent bar on associating with any broker-dealer imposed by the NASD. The basis for the NASD’s disciplinary action is that Quattrone invoked his Fifth Amendment right and refuse to testify in the NASD’s investigation while the federal grand jury investigation was proceeding. Quattrone argues that the NASD, which was conducting a joint investigation with the SEC of his activities as an investment banker at CSFB, was effectively a governmental entity and cannot penalize him for asserting his Fifth Amendment right. The appeal is now with the SEC, and the full Commission will consider the case. Quattrone’s brief to the SEC is here (Download quattrone_opening_appeal_brief_to_sec_pdf1.pdf). Thanks to his counsel, Barbara Winters, for permission to post the brief. (ph)
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Time Warner agreed to settle a civil action with the SEC, which had been hanging over the company’s head for over two years, by agreeing to pay a $300 million civil money penalty. The investigation concerned the accounting for $400 million worth of round-trip transactions between Bertelsmann AG and AOL related to advertising. The SEC’s Litigation Release (here) states:
Beginning in mid-2000, stock prices of Internet-related businesses declined precipitously as, among other things, sales of online advertising declined and the rate of growth of new online subscriptions started to flatten. Beginning at this time, and extending through 2002, the company employed fraudulent round-trip transactions that boosted its online advertising revenue to mask the fact that it also experienced a business slow-down. The round-trip transactions ranged in complexity and sophistication, but in each instance the company effectively funded its own online advertising revenue by giving the counterparties the means to pay for advertising that they would not otherwise have purchased. To conceal the true nature of the transactions, the company typically structured and documented round-trips as if they were two or more separate, bona fide transactions, conducted at arm’s length and reflecting each party’s independent business purpose. The company delivered mostly untargeted, less desirable, remnant online advertising to the round-trip advertisers, and the round-trip advertisers often had little or no ability to control the quantity, quality, and sometimes even the content of the online advertising they received. Because the round-trip customers effectively were paying for the online advertising with the company’s funds, the customers seldom, if ever, complained.
The Commission also brought administrative proceedings against three Time Warner executives, including CFO Wayne Pace, and all entered into settlements and agreed to accept cease-and-desist orders, but will not pay any civil penalty or be barred from serving as an officer of a publicly-traded company (here).
The issue of round trip transactions has been a particular focus of the SEC since the collapse of Enron, and has recently come up in the investigation of accounting problems at Delphi (see earlier post here). (ph)
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Wal-Mart and the Department of Justice reached a civil settlement over the company’s use of illegal immigrants in its stores who were hired by floor-cleaning contractors. The investigation, which had been going on for over four years and involved raids in 2003 at various Wal-Mart stores in 21 states, resulted in the company paying an $11 million civil penalty, the largest immigration civil settlement ever, and setting up an internal compliance program to monitor hiring. Various contractors who actually hired the illegal immigrants to work in the stores agreed to plead guilty to criminal charges. See an AP story (here) and Wal-Mart press release (here) discussing the settlement. (ph)
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Former Qwest CEO Joseph Nacchio, two former CFOs, and five other former senior executives at the Baby Bell were sued by the SEC for fraudulent accounting at the company; two executives settled their cases. The SEC Litigation Release (here) states that under the direction of the defendants "Qwest fraudulently recognized over $3 billion of revenue and excluded $71.3 million in expenses." The Commission and Qwest settled the case in Oct. 2004, with the company paying a civil penalty of $250 million. The Commission is seeking disgorgement and director & officer bars against the remaining defendants. (ph)
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Titan Corporation, whose merger with Lockheed Martin Corp. was scuttled in 2004 in part due to questionable foreign payments, agreed to enter a settlement with the SEC and plead guilty to one count of violating the Foreign Corrupt Practices Act related to more than $3.5 million of payments made to the President of Benin’s business advisor. The company agreed to disgorge profits approximately $12 million from the transactions obtained through the corrupt payments and to pay a criminal fine of $13 million. The SEC’s Litigation Release describes the conduct that violated the FCPA:
The Commission’s complaint alleges that, from 1999 to 2001, Titan paid more than $3.5 million to its agent in Benin, Africa, who was known at the time by Titan to be the President of Benin’s business advisor. Titan failed to conduct any meaningful due diligence into the background of its agent either before his retention or thereafter and also failed to ensure that the services alleged to be performed by the agent, and described in his invoices, were in fact provided to Titan. The complaint alleges, in 2001, at the direction of at least one former senior Titan officer based in the United States, Titan funneled approximately $2 million, via its agent in Benin, towards the election campaign of Benin’s then-incumbent President. The complaint also alleges that some of these funds were used to reimburse Titan’s agent for the purchase to T-shirts adorned with the President’s picture and instructions to vote for him in the upcoming election. According to the complaint, Titan made these payments to assist the company in its development of a telecommunications project in Benin and to obtain the Benin government’s consent to an increase in the percentage of Titan’s project management fees for that project. The complaint alleges that a former senior Titan officer directed that these payments be falsely invoiced by the agent as consulting services and that actual payment of the money be broken into smaller increments and spread out over time. The complaint does not allege that the then-incumbent President knew of the payments.
The SEC also issued a Section 21(a) Report of Investigation criticizing Titan for not properly disclosing the FCPA violations as part of the disclosure related to the proposed merger with Lockheed Martin.(ph)
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The temptation to exercise your stock options and sell the shares when you know that your company is about to announce negative news proved too strong for John D. Hutchinson, an executive with Ryland Group, Inc. The SEC filed a complaint in federal court in Los Angeles charging Hutchinson with insider trading related to the following conduct outlined in the Commission’s Litigation Release:
The Commission’s complaint alleges that during December 2003, Hutchinson, in the course of his duties as a division president of Ryland, became aware that Ryland’s new housing orders for the fourth quarter of 2003 would decrease significantly compared to the fourth quarter of 2002. The complaint alleges that while Hutchinson was aware of this non-public information, he exercised all of his exercisable options in Ryland stock, and sold the underlying shares before this information was publicly announced, thereby avoiding a substantial loss of over $100,000.
Hutchinson disgorged the loss avoided from the trade and paid a one-time civil money penalty in settling the case. The siren song of inside information can be so hard to resist. (ph)
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The former director of corporate communications for Gerber Scientific, Inc., Robert Goehring, was indicted in the Southern District of New York and charged in a civil complaint filed by the SEC in Connecticut with trading on material nonpublic information prior to its release by the company, resulting in gains and losses avoided of approximately $94,000. Goehring is also accused of tipping a close friend who traded in Gerber Scientific shares with a gain and loss avoided of approximately $11,000. The SEC Litigation Release states:
Between July 1998 and April 2000, Goehring traded in the Gerber stock nine times on the basis of material, nonpublic information he obtained in the course of his employment as Gerber’s director of corporate communications. Goehring enjoyed profits and avoided losses from these illicit trades of $94,016. In addition, Goehring tipped his close friend, Armund Ek, who was not employed at Gerber, with material, non-public information about Gerber on three occasions. Ek bought and sold Gerber stock based on these tips and had profits and avoided losses totaling $11,453 as a result of his trading.
Ek settled with the SEC (Litigation Release here), disgorging the $11,453 and paying a civil money penalty of a little less than $11,000; he was not charged in the criminal case. (ph)
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