UNITED STATES OF AMERICA
In the Matter of
|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|
The Securities and Exchange Commission ("Commission") deems it appropriate that cease-and-desist proceedings pursuant to Section 8A of the Securities Act of 1933 ("Securities Act") and Section 21C of the Securities Exchange Act of 1934 ("Exchange Act") be, and hereby are, instituted against Maryann Brown ("Brown" or "Respondent").
In anticipation of the institution of these proceedings, Brown 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 in which the Commission is a party, and without admitting or denying the findings, except as to the Commission's jurisdiction over the Respondent and the subject matter of this proceeding, which Respondent admits, Respondent 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 ("Order"), as set forth below.
On the basis of this Order and Brown's Offer, the Commission finds1 that:
Respondent and Relevant Entity
1. Candie's is a Delaware corporation with headquarters in Valhalla, NY. Candie's primary business is designing, marketing, and distributing moderately priced women's shoes, handbags and other accessories. During the period from 1997 to 1999, Candie's filed periodic reports with the Commission pursuant to Section 12(g) of the Exchange Act and its stock was traded on the Nasdaq National Market.
2. Brown, age 45, resides in Little Falls, NJ. Candie's hired Brown in 1997 as a sales analyst and later promoted her to manager of the customer service department. Candie's terminated her employment in October 1999.
3. This matter involves accounting fraud at Candie's. From August 1997 until the Spring of 1999, Candie's senior management employed fraudulent accounting practices designed to improve Candie's publicly reported financial condition. Among other practices, Candie's prematurely recognized revenue through the use of improper bill and holds.
Candie's Engaged in an Improper Bill and Hold Scheme
4. Candie's COO directed employees to engage in a practice known as bill and hold. At the end of certain quarters, Candie's prematurely recorded revenue from various purchase orders calling for future delivery of shoes, by recording these orders as final sales prior to shipping the shoes to customers. Generally Accepted Accounting Principles ("GAAP") do not permit revenue recognition for sales unless risk and title has passed to the customer, which was typically when Candie's shipped shoes to the customer. Candie's revenue recognition policy, as disclosed in its Commission filings, calls for recognition of revenue upon shipment of goods with risk and title passing.
5. Despite the prohibitions of GAAP and its own policy, from at least January 1998 through July 1998, Candie's prematurely recognized over $4.4 million in revenue through the improper use of bill and hold. Specifically, Candie's Form 10-K for fiscal year 1998 dated May 1, 1998, contained financial statements that reflected $1.8 million in improper revenue, and $775,000 in improper income, from the bill and hold practice and other irregular shipping procedures that violated GAAP. The improper income from bill and hold allowed Candie's to convert a fourth quarter loss to a gain. Candie's Form 10-Q for the first quarter of fiscal year 1999 dated June 11, 1998, contained financial statements reflecting $991,000 in improper revenue solely from the bill and hold practice. Candie's Form 10-Q for the second quarter of fiscal year 1999 dated September 14, 1998, contained financial statements reflecting $1.7 million in improper revenue solely from the bill and hold practice. These overstatements of revenue and income were material.
6. Candie's COO directed Brown to assist Candie's in carrying out the bill and hold practice during the fourth quarter of fiscal year 1998 and the first and second quarter of fiscal year 1999 by insuring that enough orders were improperly invoiced so that Candie's could meet its sales targets in those periods. Specifically, Brown directed a subordinate to identify orders calling for shipment in future periods that could be invoiced in the current period. Brown then helped track the invoices, directed that the invoices be reversed after they were booked, and insured that customer accounts were credited for the false sales. Brown understood that the bill and hold practice was inappropriate and that her actions resulted in Candie's reporting false financial results in these periods.
Brown Caused Candie's Violations of
Section 17(a) of the Securities Act,
Section 10(b) of the Exchange Act, and Rule 10b-5 thereunder
7. Section 17(a) of the Securities Act prohibits fraud in the offer or sale of securities. Section 10(b) of the Exchange Act and Rule 10b-5 thereunder prohibit fraud in connection with the purchase or sale of securities. To establish a violation of Section 17(a) of the Securities Act and Section 10(b) of the Exchange Act and Rule 10b-5 thereunder, the evidence must show:
(1) misrepresentations or omissions of material fact or other fraudulent conduct; (2) "in" the offer or sale, or "in connection with" the purchase or sale, of securities; and (3) that the defendants acted with scienter. See SEC v. Chester Holdings, Ltd., 41 F. Supp.2d 505, 519 (D.N.J. 1999).
8. Candie's committed violations of Section 17(a) of the Securities Act and Section 10(b) of Exchange Act and Rule 10b-5 thereunder because the company knew, or was reckless in not knowing, that the Form 10-K and Forms 10-Q described above were materially misleading.
9. Brown caused Candie's violations of Section 17(a) of the Securities Act and Section 10(b) of Exchange Act and Rule 10b-5 thereunder by knowingly and substantially assisting Candie's in recording revenue improperly from the bill and hold practice, which permitted Candie's to issue a materially misleading Form 10-K and materially misleading Forms 10-Q, as described above.
Brown Caused Candie's Violations of
Section 13(a) of the Exchange Act and Rules 12b-20, 13a-1, and 13a-13 thereunder
10. Issuers of securities registered under Section 12 of the Exchange Act must file accurate annual and quarterly reports with the Commission pursuant to Section 13(a) of the Exchange Act and Rules 13a-1 and 13a-13 thereunder. Rule 12b-20 requires that statements and reports contain all information necessary to ensure that statements made in them are not materially misleading. Implicit in these provisions is the requirement that the information reported be true, correct, and complete. No showing of scienter is necessary to establish an issuer's violation of the corporate reporting provisions. See SEC v. Wills, 472 F. Supp. 1250, 1268 (D.D.C. 1978).
11. Candie's committed violations of Section 13(a) of the Exchange Act and Rules 12b-20, 13a-1, and 13a-13 thereunder by filing the materially misleading Form 10-K and materially misleading Forms 10-Q described above.
12. Brown caused Candie's violations of Section 13(a) of the Exchange Act and Rules 12b-20, 13a-1, and 13a-13 thereunder by knowingly and substantially assisting Candie's in improperly recognizing revenue from the bill and hold practice, which was reflected in the Form 10-K and Forms 10-Q described above.
In view of the foregoing, the Commission deems it appropriate to impose the sanctions specified in Brown's Offer.
Accordingly, IT IS HEREBY ORDERED, that Brown, pursuant to Section 8A of the Securities Act and Section 21C of the Exchange Act, cease and desist from committing or causing any violations and any future violations 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 violations or any future violations of Section 13(a) of the Exchange Act, and Rules 12b-20, 13a-1, and 13a-13 thereunder.
By the Commission.
Jonathan G. Katz
|1||The findings herein are made pursuant to Brown's Offer and are not binding on any other person or entity in this or any other proceeding.|
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