UNITED STATES OF AMERICA
IN THE MATTER OF
PAUL S. JUREWICZ
| ORDER INSTITUTING |
TO SECTION 21C OF THE
SECURITIES EXCHANGE ACT
OF 1934, MAKING FINDINGS
AND IMPOSING A CEASE-
The Securities and Exchange Commission (Commission) deems it appropriate to institute cease-and-desist proceedings against Respondent Paul S. Jurewicz (Respondent) pursuant to Section 21C of the Securities Exchange Act of 1934 (Exchange Act).
Accordingly, IT IS HEREBY ORDERED that a proceeding pursuant to Section 21C of the Exchange Act be, and hereby is, instituted.
In anticipation of the institution of these proceedings, Respondent has submitted an Offer of Settlement (Offer), which the Commission has determined to accept. In determining to accept Respondent's Offer of Settlement, the Commission considered remedial acts promptly undertaken by Respondent and cooperation afforded the Commission staff. 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 Commission's findings contained herein, except to the Commission's jurisdiction over him and the subject matter of this proceeding, which are admitted, Respondent consents to the entry of this Order Instituting Proceedings Pursuant to Section 21C of the Exchange Act, Making Findings and Imposing a Cease-and-Desist Order (Order).
On the basis of the Order and Respondent's Offer, the Commission makes the following findings:1
Paul S. Jurewicz, a resident of Libertyville, Illinois, was the Chief Financial Officer of Sabratek Corporation ("Sabratek" or "Company"), from July 1998 to April 1999.
Sabratek was a medical products manufacturer of infusion pumps and flush syringes, located in Skokie, Illinois. At all relevant times, the Company's securities were registered pursuant to Section 12(g) of the Exchange Act and traded on Nasdaq. At all relevant times, Sabratek filed reports with the Commission pursuant to Section 13(a) of the Exchange Act.
From the first quarter of 1998 through the first quarter of 1999, certain employees of Sabratek engaged in a scheme to overstate the Company's reported revenue, resulting in the material misrepresentation of its results of operations and inflation of its stock price. This scheme included improper recognition of revenue from purported sales of infusion pumps and from consulting services that were largely not performed. Sabratek overstated net sales by $30.7 million (62% greater than actual net sales) and operating income by $18.3 million over the five quarters. Over these five quarters, the Company reported operating income of $10.3 million instead of a loss from operations of approximately $8.0 million.
Respondent, the Company's Chief Financial Officer from July 1998 to April 1999, contributed to Sabratek's misrepresentations by causing to be prepared and reviewing the Company's financial statements, and by signing the Company's Form 10-Q for the third quarter of 1998, Form 10-K for 1998, and the Company's management representation letters to its auditor for these periods. At the time that he signed these Forms 10-Q and 10-K and the representation letters, Respondent was reckless in not knowing that the Sabratek's financial results were materially overstated. Respondent also did not devise and maintain a system of internal accounting controls to ensure that the Company's revenue from sales and billings was accurately recorded.
From August 1999, when Sabratek reported that its operating results for the second quarter of 1999 would be significantly below Wall Street estimates and that its release of earnings information would be delayed, to November 1999, when its stock was delisted, the Company lost $202 million (98%) in market capitalization.
The Improper Recognition of Pump Sales Revenue
In 1998, Sabratek experienced a decline in the demand for its infusion pumps and suspended distribution of its flush syringes because of issues with the Food and Drug Administration. These were the two primary sources of Sabratek's revenue. Despite these setbacks, Sabratek desired to present itself as a growing business. To do so, certain employees of Sabratek engaged in a scheme to inflate its revenue and income. As Sabratek's Chief Financial Officer from July 1998 to April 1999, Respondent prepared and reviewed the financial statements included in its public filings with the Commission.
During 1998, Sabratek improperly recognized sales revenue from fictitious sales of pumps that were not ordered by customers, but were fraudulently parked at third-party warehouses. Sabratek also induced its customers to purchase pumps by offering consignment or right-of-return terms and promising to assist in the resale of these pumps to other customers. Generally Accepted Accounting Principles did not permit the recognition of these sales as revenue. All of these transactions occurred at the end of quarters.
During his employment at Sabratek, Respondent was familiar with accounting rules concerning the recognition of revenue for sales transactions. Before he signed the Company's Form 10-Q for the third quarter of 1998, Respondent knew that Sabratek was recognizing a material amount of revenue from an $8.2 million pump sale at the end of the quarter, in which the customer had the right to return any pumps that it could not subsequently resell to others. Respondent also was aware that Sabratek was filling this transaction in large part with pumps that purportedly had been sold in a $4.3 million transaction that had been recognized at the end of the second quarter of 1998. Despite this knowledge, Respondent allowed Sabratek to recognize the revenue on the transaction in the third quarter, and did not question the recognition of revenue for the other transaction in the second quarter.
Before he signed the Company's Form 10-K for 1998, Respondent also knew or was reckless in not knowing that Sabratek had recognized revenue on a $2.5 million pump transaction at the end of the first quarter of 1998 and another $2.5 million pump transaction at the end of the third quarter of 1998 in which these customers had not agreed to pay these amounts, but only pay for pumps as they ordered them. By the end of 1998, Respondent had information indicating that these customers had actually only ordered and paid for approximately $800,000 of the pumps. Respondent was also aware that Sabratek had been treating a $383,000 first quarter 1998 pump transaction as a consignment sale. Respondent thus knew or was reckless in not knowing that Sabratek materially overstated its financial results for the third quarter of 1998 and the year of 1998 by improperly recognizing revenue from pump sales.
The Improper Recognition of Consulting Revenue
During 1998, Sabratek created $2.7 million in inflated billings for consulting services that were largely not provided by the Company. Of this amount, $600,000 was recognized in revenue for the fourth quarter of 1998. Sabratek had inadequate documentation to support the amounts billed for this purported consulting work. Although Respondent was aware that it was unlikely that Sabratek provided these services in the fourth quarter of 1998, he did not determine whether Sabratek executives ever performed any of these consulting services. Therefore, Respondent was reckless in not knowing that Sabratek's financial results for the year of 1998 were materially overstated as a result of the improper recognition of revenue from the consulting billings.
The Form 10-Q for the Third Quarter of 1998
As a result of the scheme to overstate its revenue, Sabratek reported net sales of $18.8 million and operating income of $3.9 million in its Form 10-Q for the period ended September 30, 1998, when it actually had net sales of approximately $12.5 million and operating income of approximately $1.1 million. Respondent signed this filing with the Commission. Respondent knowingly or recklessly allowed Sabratek to improperly recognize certain revenue from pump sales in this public filing, as described above.
The Form 10-K for 1998
As a result of the scheme to overstate its revenue, Sabratek reported net sales of $66.9 million and operating income of $8.6 million in its Form 10-K for the year ended December 31,1998, when it actually had net sales of approximately $46 million and sustained an operating loss of approximately $3 million. Respondent signed this filing with the Commission. Respondent knowingly or recklessly allowed Sabratek to improperly recognize revenue from pump sales and consulting billings in this public filing, as described above.
The Management Representation Letters
Sabratek provided its auditor with a management representation letter in connection with the 1998 audit of Sabratek. In this letter, signed by Respondent, Sabratek falsely represented that there were no side agreements with customers that allowed for the return of merchandise, except for defect or other conditions covered by customary warranties. Respondent knew or was reckless in not knowing this statement was false because he was aware that Sabratek had given a customer in a material transaction the right to return unsold pumps. Sabratek also provided a management representation letter to its auditor in connection with the quarterly review of the financial information included in the Form 10-Q for the third quarter of 1998. This letter, signed by Respondent, represented that material transactions were properly recorded in the accounting records underlying the financial information. Respondent knew or was reckless in not knowing that this statement was false because he was aware of a material pump sale that was improperly recognized at the end of the third quarter, as described above.
Section 10(b) of the Exchange Act and Rule 10b-5 thereunder prohibit the use of devices, schemes or artifices to defraud in connection with the purchase or sale of securities. Section 13(a) of the Exchange Act and Rules 12b-20, 13a-1 and 13a-13 thereunder require issuers of registered securities to file accurate reports with the Commission. Section 13(b)(2)(A) of the Exchange Act requires companies that are registered under Section 12 of the Exchange Act to maintain accurate books, records and accounts. Rule 13b2-1 prohibits any person from, directly or indirectly, falsifying or causing to be falsified any book, record, or account required to be kept pursuant to Section 13(b)(2) of the Exchange Act. Section 13(b)(2)(B) of the Exchange Act requires companies to devise and maintain an adequate system of internal accounting controls. Rule 13b2-2, promulgated under Section 13(b)(2) of the Exchange Act, prohibits any officer or director from, directly or indirectly, lying to an accountant in connection with an audit or the preparation of reports required to be filed with the Commission.
Sabratek violated Section 13(a) of the Exchange Act and Rules 12b-20, 13a-1 and 13a-13 thereunder by, among other things, making false statements in the Company's Form 10-Q for the third quarter of 1998 and its Form 10-K for 1998, relating to Sabratek's revenue from pump sales and consulting billings. Sabratek also violated Section 13(b)(2)(A) of the Exchange Act by failing to maintain accurate books, records and accounts for the third quarter of 1998 and the year of 1998. Sabratek further violated Section 13(b)(2)(B) of the Exchange Act by failing to devise and maintain an adequate system of internal accounting controls to ensure, among other things, that its revenue from sales and billings was accurate.
When Respondent prepared and reviewed Sabratek's financial statements and signed the Company's filings with the Commission that misleadingly overstated the Company's revenue and income, as described above, he violated Section 10(b) 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, 13a-1 and 13a-13 thereunder. When Respondent signed the management representation letters to Sabratek's auditors that included false statements that there were no side agreements and that material transactions were properly recorded, as described above, he violated Rule 13b2-2 under the Exchange Act. Respondent also caused Sabratek's violations of Section 13(b)(2)(B) of the Exchange Act by failing to devise and maintain an adequate system of internal accounting controls to ensure, among other things, that its revenue from sales and billings was accurate.
Based on the foregoing, the Commission deems it appropriate to accept the offer submitted by Respondent.
Accordingly, IT IS HEREBY ORDERED that pursuant to Section 21C of the Exchange Act that Respondent cease and desist from committing or causing any violation and any future violation of 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, 13b2-1, 13b2-2 thereunder.
IT IS FURTHER ORDERED that Respondent shall, within sixty (60) days of the entry of this Order, pay disgorgement and prejudgment interest in the total amount of $17,907.00 to the United States Treasury. Such payment shall be: (A) made by United States postal money order, certified check, bank cashier's check or bank money order; (B) made payable to the United States Securities and Exchange Commission; (C) hand-delivered or mailed to the Comptroller, Securities and Exchange Commission, Operations Center, 6432 General Green Way, Alexandria, VA 22312-0003; and (D) submitted under cover letter that identifies Paul S. Jurewicz as a Respondent in these proceedings and the file number of these proceedings, a copy of which shall be sent simultaneously to Pravin B. Rao, Branch Chief, Division of Enforcement, Securities and Exchange Commission, Midwest Regional Office, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661.
By the Commission.
Jonathan G. Katz
|1||The findings herein are made pursuant to Jurewicz's Offer and are not binding on any other person or entity in this or any other proceeding.|
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