UNITED STATES OF AMERICA
In the Matter of
Paul Melvin Henson, Jr.,
|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
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").
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.
On the basis of this Order and Respondent's Offer, the Commission finds1 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.
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.
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.
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.
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.
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