UNITED STATES OF AMERICA
|: ORDER INSTITUTING|
|In the Matter of||: ADMINISTRATIVE PROCEEDINGS|
|: PURSUANT TO SECTION 21C|
|: OF THE SECURITIES EXCHANGE|
|PETER MADSEN and||: ACT OF 1934, MAKING FINDINGS|
|MARK RAFFERTY,||: AND ORDERING RESPONDENTS TO|
|: CEASE AND DESIST|
The Commission deems it appropriate that public administrative proceedings be, and they hereby are, instituted against Peter Madsen and Mark Rafferty pursuant to Section 21C of the Securities Exchange Act of 1934 ("Exchange Act").
In anticipation of the institution of these proceedings, the Respondents have each sub-mitted Offers of Settlement which the Commission has determined to accept. Solely for the purposes of these proceedings and any other proceeding brought by or on behalf of the Commission or to which the Commission is a party, the Respon-dents, without admitting or denying the findings set forth herein, except that they admit to the jurisdiction of the Commission Instituting Administrative Proceedings Pursuant to Section 21C of the Securities Exchange Act of 1934, Making Findings and Ordering Respondents to Cease and Desist ("Order"), each consents to the entry of this Order.
On the basis of this Order and the Offers of Settlement of Peter Madsen and Mark Rafferty, the Commission finds1 that:
Peter Madsen ("Madsen"), 48, has been President, Chief Executive Officer and Director of FastComm since September 1992.
Mark Rafferty ("Rafferty"), 44, has been Vice President, Chief Financial Officer and Treasurer of FastComm since August 1993. He is a certified public accountant.
B. The Issuer
FastComm Communications Corporation2 ("FastComm") is a Virginia corporation, located in Sterling, Virginia, that develops, manufactures, markets, and services analog and digital products to access public and private computer networks based on analog and digital transmission. The common stock of FastComm is registered with the Commission pursuant to Section 12(g) of the Exchange Act and was traded on the NASDAQ National Market System from September 1993 until June 10, 1998, when the NASD delisted it for failure to meet the financial criteria for continued listing. FastComm stock currently trades on the OTC Bulletin Board operated by the NASD. On June 2, 1998, FastComm filed a voluntary petition for reorganization under Chapter 11 of the U.S. Bankruptcy Code.
1. The Quarter Ending July 31, 1993
In July 1993, FastComm recognized revenue of $247,000 on a sale of product to a company owned by a brother-in-law of Madsen, without timely disclosing the related-party nature of this transaction in FastComm's quarterly report on Form 10-Q for the quarter ending July 31, 1993. This sale represented approximately 18% of FastComm's total revenue for that quarter. FastComm added the appropriate related-party disclosure in its subsequent filings, including an amended Form 10-Q and Form 10-K, both of which were filed on December 21, 1995. On the basis of information available to him, Madsen knew or should have known that FastComm failed to make required timely disclosure of the related-party nature of this transaction.
2. The Quarter Ending February 5, 1994: Conditional Sales to Daitel Technologies, Inc.
During the quarter ending February 5, 1994, FastComm recognized $579,000 in revenue on two sales to a Chilean reseller, Daitel Technologies, Inc. ("Daitel"). These sales represented 33.5% of FastComm's reported revenue for that quarter. The sales to Daitel were conditional upon two subsequent events: the provision of a letter of credit by Daitel, which was never provided, and a further sale of the product by Daitel to its customers. Daitel never paid FastComm for this product, and at FastComm's direction, the product was eventually returned by the freight-forwarder to FastComm. Prior to issuing its Form 10-K report for fiscal year ending April 30, 1994, the Company reversed the Daitel sales. Further, the Company restated its third quarter revenues by amending, in September 1994, its February 5, 1994 Form 10-Q.
The recognition of revenue on these transactions, which was not in accordance with generally accepted accounting principles ("GAAP"), rendered FastComm's books and records, and its quarterly report on Form 10-Q for the period ending February 5, 1994, materially inaccurate. On the basis of information available to them, Madsen and Rafferty knew or should have known that recognition of revenue on these transactions was improper.
3. The Fiscal Year Ending April 30, 1994: Recognition of Revenue on the Shipment of Product to Black Box
On the last day of its 1994 fiscal year, FastComm recognized approximately $50,000 of revenue on an order from its customer Black Box.3 The items upon which FastComm recognized revenue did not have a full complement of memory chips as the customer had ordered. FastComm shipped the product to a freight-forwarder's warehouse to be held until recalled by FastComm. Although FastComm received payment on this order on May 20, 1994, revenue should not have been recognized until the following quarter ending July 31, 1994, at which time shipment of the completed product to Black Box occurred. On the basis of information available to him, Rafferty knew or should have known that recognition of revenue on this transaction was improper.
D. Legal Analysis
Section 13(a) of the Exchange Act and Rules 13a-1 and 13a-13 promulgated thereunder require issuers of registered securities to file factually accurate annual and quarterly reports with the Commission, pursuant to Section 12 of the Exchange Act. Rule 12b-20 also requires that periodic reports contain all information necessary to ensure that statements made in those reports are not, under the circumstances, misleading.
FastComm violated Section 13(a) of the Exchange Act, and Rules 13a-1, 13a-13 and 12b-20 thereunder, by filing annual and quarterly reports that included financial statements that were not prepared in accordance with GAAP, as required by Regulation S-X. Madsen and Rafferty were a cause of FastComm's violations of Section 13(a) of the Exchange Act and Rules 13a-13 and 12b-20 promulgated thereunder, and Rafferty was a cause of FastComm's violation of Exchange Act Rule 13a-1, because, as senior officers of FastComm, they caused FastComm to make filings with the Commission that they knew or should have known were materially inaccurate. See In the Matter of Bausch & Lomb Inc., Exchange Act Release No. 39329, Admin. Proc. File No. 3-9488 (November 17, 1997).
FastComm violated Section 13(b)(2)(A) of the Exchange Act by maintaining inaccurate books and records which materially overstated its revenue and net income. FastComm violated Section 13(b)(2)(B) of the Exchange Act, the internal controls provision, by failing to implement procedures designed to provide reasonable assurance that all sales transactions were recorded in accordance with GAAP. Madsen and Rafferty were each a cause of FastComm's violations of Section 13(b)(2)(A) of the Exchange Act because, as senior officers of FastComm, they permitted FastComm to record revenue from sales transactions that did not meet GAAP requirements for revenue recognition. Madsen and Rafferty were each a cause of FastComm's violations of Section 13(b)(2)(B) of the Exchange Act because they failed to ensure that FastComm implemented internal controls which would have provided reasonable assurance that revenue from sales transactions were recorded in accordance with GAAP.
Based on the foregoing, and for purposes of Section 21C of the Exchange Act, the Commission finds that Madsen and Rafferty were each a cause of FastComm'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-13 promulgated thereunder, and that, additionally, Rafferty was a cause of FastComm's violation of Exchange Act Rule 13a-1.
In view of the foregoing, the Commission finds that it is appropriate to impose the following relief as agreed to in the Offers of Settlement of Peter Madsen and Mark Rafferty.
Accordingly, IT IS HEREBY ORDERED, pursuant to Section 21C of the Exchange Act, that Respondents Madsen and Rafferty each cease and desist from committing or causing any violations or 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 promulgated thereunder, and that Respondent Rafferty cease and desist from committing or causing any violations or future violations of Rule 13a-1 promulgated under the Exchange Act.
By the Commission.
Jonathan G. Katz
-- 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 in any other proceeding. -- On September 28, 1999, the Commission filed (i) two district court injunctive actions against FastComm and Charles DesLaurier, and (ii) a district court action against Madsen and Rafferty for civil penalties. -- FastComm's total revenue for fiscal year 1994 was $5,136,355.
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