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U.S. Securities and Exchange Commission

UNITED STATES OF AMERICA
Before the
SECURITIES AND EXCHANGE COMMISSION

SECURITIES EXCHANGE ACT OF 1934
Release No. 42569 / March 23, 2000

ACCOUNTING AND AUDITING ENFORCEMENT
Release No. 1240 / March 23, 2000

ADMINISTRATIVE PROCEEDING
File No. 3-10166

In the Matter of

Jill Pitts and Janet Hanson

Respondents.


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ORDER INSTITUTING CEASE
AND-DESIST PROCEEDINGS TO
PURSUANT TO SECTION 21C
OF THE SECURITIES EXCHANGE
ACT OF 1934, MAKING FINDINGS
AND ORDERING RESPONDENTS
TO CEASE AND DESIST

I.

The Securities and Exchange Commission (Commission) deems it appropriate that cease-and-desist proceedings be instituted pursuant to Section 21C of the Securities Exchange Act of 1934 (Exchange Act) against Jill Pitts (Pitts) and Janet Hanson (Hanson).

In anticipation of the institution of these cease-and-desist proceedings, Pitts and Hanson have each submitted an Offer of Settlement which the Commission has determined to accept. Solely for the purpose of this proceeding and 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 Commission's findings, except as to jurisdiction and those findings contained in paragraph II.A. below, which are admitted by Hanson, and the findings contained in paragraph II.B. below, which are admitted by Pitts, Pitts and Hanson 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 Ordering Respondents to Cease and Desist (Order).

Accordingly, IT IS ORDERED that cease-and-desist proceedings pursuant to Section 21C of the Exchange Act be, and hereby are, instituted.

II.

On the basis of this Order and the Offers of Settlement submitted by Pitts and Hanson, the Commission finds that1:

A. Hanson, age 60, is a resident of Minerva, Ohio. From 1979 to in or about June 1996, Hanson was employed as an inventory clerk and production control manager at a subsidiary of ABS Industries, Inc. ("ABS").

B. Pitts, age 28, is a resident of Minerva, Ohio. From July 1993 to in or about June 1996, Pitts was employed as the accounts receivable clerk by a subsidiary of ABS Industries, Inc. ("ABS").

C. At all relevant times, ABS, a Delaware company with its corporate headquarters in Willoughby, Ohio, was the holding company for two wholly owned subsidiaries, which produced and machined cold and warm forgings for the automotive and light truck industries. At all relevant times, ABS' securities were registered with the Commission under Section 12(g) of the Exchange Act. Thus, pursuant to Section 13(a) of the Exchange Act and the rules and regulations promulgated thereunder, ABS was required to and did file with the Commission certain periodic and other informational reports on Forms 10-Q and 10-K. These periodic reports contained ABS' consolidated financial statements, which were derived from the books and records of ABS and its two subsidiaries.

D. Beginning in at least fiscal year 1994 through at least the first three quarters of fiscal year 1995: the President and Chief Executive Officer of ABS (Chief Executive Officer); the Chief Accounting Officer of ABS (Chief Accounting Officer); the Corporate Controller of both of ABS' subsidiaries (Controller); and the General Manager of one of ABS' subsidiaries (General Manager) engaged in a scheme to defraud the market by prematurely recording sales and accounts receivable at ABS through its subsidiaries. They engaged in a scheme to record sales from purported "bill and hold" transactions where, among other things: the customers had not requested that the transactions be on a bill and hold basis; the product being recorded as "sold" had not yet been billed or shipped to the customer, who had no fixed commitment to purchase the goods; and, in some cases, the goods were not even complete. Such "sales" were booked without regard to commercial reality but, among other things, for the purpose of meeting the sales projections and goals set by the Chief Executive Officer. These "bill and hold" transactions were included in ABS' accounts receivable, sales, net income, and earnings per share during the relevant period. Those figures were then included in ABS' consolidated financial statements. As a result, ABS made material misrepresentations and omitted to state material facts in its Form 10-K for fiscal year 1994 and materially overstated its accounts receivable, sales, net income and earnings per share in ABS' Forms 10-Q for the first three quarters of 1995.

E. In furtherance of the scheme, among other things, at the 1994 fiscal year end in October 1994 and at the end of the first three quarters of fiscal year 1995, the Chief Accounting Officer and the Controller directed Hanson to prepare a list of all inventory located on the premises at ABS' subsidiaries that had not been shipped to customers. During all relevant periods, these lists included work-in-process, i.e., goods that were not yet completely manufactured. The Chief Accounting Officer and the Controller then reviewed this list, designated the specific inventory to be recorded as "bill and hold" sales, and directed Hanson to create a final list of the "bill and hold" sales. At the direction of the Chief Accounting Officer and the Controller, Pitts recorded these purported "bill and hold" sales in her sales journals, created invoices for the "bill and hold" sales, and discarded the customer copy of the "bill and hold" invoice so that the customers would not be billed for these purported "sales." The customers did not receive an invoice for the "bill and hold" product unless that product was actually shipped to the customer. If the product was shipped, Pitts issued a credit memo for the dollar amount of the product shipped against the prior "bill and hold" invoice and created a new invoice for the "bill and hold" product that was actually sent to the customer for payment. Moreover, the Chief Accounting Officer directed Pitts to discontinue the prior practice of sending statements to customers, because the purported "bill and hold" products on the statements could raise questions or cause problems with the customers.

F. During the third quarter of 1995, ABS did not have enough finished or unfinished inventory to meet the Chief Executive Officer's sales goals and projections. At the direction of the Chief Accounting Officer and the Controller, Hanson and Pitts caused ABS to record approximately $3.5 million dollars in "bill and hold" sales for goods that had not yet begun the manufacturing process. The Chief Accounting Officer and the Controller directed Hanson and Pitts to record these "bill and hold" sales, and instructed Hanson and Pitts not to tell anyone else about these transactions. Pitts first attempted to record these sales by creating four large invoices for each customer order. When the Chief Accounting Officer saw the size of the invoices, he instructed her to create several smaller invoices in smaller dollar amounts so that the sales would not raise a red flag to anyone reviewing the books.

G. Further, periodically in fiscal year 1995, the Chief Accounting Officer directed Pitts to "freshen" certain accounts receivable that were "non-current", or over 90 days old, to make the receivables "current". Many of the "freshened" receivables related to "bill and hold" products that had not yet been shipped. At least $5.8 million in receivables were "freshened" during fiscal year 1995.

H. As a result of this scheme, ABS reported in its 1994 Form 10-K, among other things, "record" sales of $92,122,000, which sales figures were also reported in a press release issued to the public. These figures overstated ABS' 1994 financial condition as follows: (1) sales were overstated by at least 3.21%; (2) accounts receivable were overstated by at least 16.35%; (3) pre-tax income was overstated by at least 2.48%; (4) net income was overstated by at least 2.31%; and (5) earnings per share was overstated by at least 2.08%. Moreover, ABS failed to disclose in its 1994 Form 10-K that management had adopted a policy of booking "bill and hold" sales without regard to commercial reality but solely for the purpose of meeting the Chief Executive Officer's sales goals and projections. ABS also failed to disclose that its "record" sales were due, in part, to purported "bill and hold" sales recorded pursuant to that policy. These misrepresentations and omissions were material to a reasonable investor.

I. Further, as a result of this scheme, in the first three quarters of fiscal year 1995, ABS recorded material amounts of improper "bill and hold" sales, including those discussed in paragraph F, and thereby, materially overstated its sales, accounts receivable, pre-tax income, net income, and earnings per share. These figures were included in ABS' Forms 10-Q for the first three quarters of 1995. These figures were also reported in press releases issued to the public. These figures materially overstated ABS' 1995 financial condition as follows: (1) sales were overstated by at least 17.99%, 21.16% and 6.46% for the first three quarters of 1995, (2) accounts receivable were overstated by at least 20.12%, 23.64%, and 5.93% in the first three quarters of 1995, and (3) pre-tax, net income, and earnings per share were overstated by at least 129.61%, 43.90%, and 123.08% for the first, second and third quarters of 1995.

J. On January 10, 1996, ABS issued a press release which stated, among other things, that it would restate downward its results for the first three quarters of 1995 and that it would also restate the results of its 1993 and 1994 financial statements. According to the press release, such restatement was necessary because certain previously reported sales were recognized prematurely, as the criteria for revenue recognition had not been met. On the day following the January 10, 1996 press release, the closing price of ABS common stock fell to $3.75/share from the January 10 closing price of $6.75/share, a decline of 44% in the value of the stock. On February 13, 1996, ABS' three main lenders filed an involuntary petition against ABS' two subsidiaries under Chapter 11 of the Bankruptcy Code and petitioned for the appointment of a trustee in bankruptcy for the two subsidiaries. On June 28, 1996, substantially all of the operating assets of the two subsidiaries were sold to a third party.

K. As a result of the above conduct, ABS 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, 13a-13, and 13b2-1 promulgated thereunder. The Chief Executive Officer and Chief Accounting Officer violated Sections 10(b) and 13(b)(5) of the Exchange Act and Rules 10b-5, 13b2-1, and 13b2-2 promulgated thereunder, and as control persons of ABS, 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 promulgated thereunder. The Controller violated Sections 10(b) and 13(b)(5) of the Exchange Act and Rules 10b-5, 13b2-1 and 13b2-2 promulgated thereunder. The General Manager violated Sections 10(b) and 13(b)(5) of the Exchange Act and Rules 10b-5 and 13b2-1 promulgated thereunder.

L. Under these circumstances, Pitts and Hanson knew or should have known that their actions would contribute to, and were a cause of, the above 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 promulgated thereunder.

III.

In view of the foregoing, it is appropriate to impose the sanctions specified in the Offers of Settlement.2

Accordingly, IT IS ORDERED, pursuant to Section 21C of the Exchange Act, that:

Pitts and Hanson cease and desist from committing or causing any violation and any future violation of Section 13(b)(5) of the Exchange Act and Rule 13b2-1 promulgated thereunder, and from causing any violation and any future 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 promulgated thereunder.

By the Commission.

Jonathan G. Katz
Secretary


Footnotes

1 The findings herein are made pursuant to Respondents' Offers of Settlement and are not binding on any other person or entity in this or any other proceeding.

2 In determining to accept the Offers of Settlement, the Commission considered the cooperation the Respondents afforded the Commission staff.

http://www.sec.gov/litigation/admin/34-42569.htm

Modified:03/24/2000