United States of America
In the matter of
David T. Dodge,
Order Instituting Proceedings, Making Findings, and Imposing Cease-and-Desist Order
The Securities and Exchange Commission (the "Commission") deems it appropriate that cease-and-desist proceedings be, and they hereby are, instituted against David T. Dodge ("Dodge") pursuant to Section 21C of the Securities Exchange Act of 1934 (the "Exchange Act").
In anticipation of the institution of these proceedings, Dodge has submitted an Offer of Settlement (the "Offer") that 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, except those findings pertaining to the jurisdiction of the Commission over Dodge and the subject matter of these proceedings, which Dodge admits, Dodge consents to the issuance of this Order Instituting Proceedings, Making Findings, and Imposing Cease-and-Desist Order (the "Order"), the entry of the findings and the cease-and-desist order set forth below.
On the basis of this Order and the Offer submitted by Dodge, the Commission makes the following findings:1
A. Respondent and Related Parties
Dodge, 45, of Northbrook, Illinois, was the general manager of El Camino Resources Ltd.'s ("El Camino") vendor leasing division during the time period at issue here. Dodge was primarily responsible for managing El Camino's relationship with PictureTel.
2. Related Parties
PictureTel Corp. ("PictureTel" or the "Company") is a Delaware corporation, headquartered in Andover, Massachusetts, that designs, manufactures and markets videoconferencing systems. At all relevant times, PictureTel's shares were traded on the NASDAQ national market system. Until October 19, 2001, PictureTel's shares were registered with the Commission pursuant to Section 12(g) of the Exchange Act. On October 18, 2001, PictureTel was acquired by another company. It is currently operating as a separate division of the acquiring company and retains the PictureTel name.
El Camino is a privately-held company headquartered in Woodland Hills, California, which served as PictureTel's leasing agent. At all times relevant to this matter, El Camino's leasing division, located in Chicago, accounted for approximately 5% of its revenues. Transactions with PictureTel represented approximately 80-90% of El Camino's leasing business during 1996-97. El Camino is currently being liquidated.
This matter concerns Dodge's participation in a scheme by Len Guida ("Guida"), PictureTel's former sales controller,2 to inflate PictureTel's revenue. From September 1996through March 1997, Dodge assisted Guida by issuing or approving purchase orders in several purported sales transactions totaling approximately $10 million. The transactions were not valid sales because Dodge and Guida negotiated side agreements providing that Dodge's employer, El Camino, had no obligation to pay PictureTel unless the goods involved in the transactions were sold through to end users. As evidenced by contemporaneous memoranda, Dodge was reckless in not knowing that Guida was entering into the transactions to inflate PictureTel's revenue. During PictureTel's 1996 audit, in March 1997, Dodge assisted Guida's efforts to conceal the scheme by telling the company's outside auditors that El Camino owed and intended to pay for the transactions, which represented part of a $6.4 million accounts receivable balance for 1996. In January 1998, PictureTel restated its financial results for the periods ended September 28, 1996 through June 29, 1997, reversing $17.8 million in previously-recognized revenue. Accordingly, Dodge caused Guida's violations of Sections 10(b) and 13(b)(5) of the Exchange Act and Rules 10b-5, 13b2-1 and 13b2-2 thereunder, and he caused PictureTel'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.
1. Dodge's Participation in PictureTel's Improper Revenue Recognition
During the second half of 1996 and the first quarter of 1997, Dodge negotiated transactions totaling more than $10 million with Guida, which resulted in significant overstatements of PictureTel's revenue and income. In some of these transactions, instead of using the standard master lease agreement that governed most of the El Camino-PictureTel transactions, Dodge and Guida entered into non-standard agreements which did not obligate El Camino to pay PictureTel until the products were sold through to end users. These non-standard transactions were complex and El Camino did not act in its customary role as PictureTel's leasing agent. Although Dodge submitted purchase orders in connection with these purported sales, he and Guida also negotiated side agreements which provided that El Camino did not have to pay PictureTel unless third party end users agreed to pay for the equipment. Most of the products were never sold to end users and instead remained in storage at either a third party warehouse in which PictureTel leased space or at warehouses owned by El Camino. Despite the absence of a firm commitment to pay, PictureTel improperly recorded these purported sales as revenues in violation of GAAP. Dodge was reckless in not knowing that when he participated in these transactions, they were done to enable PictureTel to recognize revenue.
Representative examples of El Camino transactions negotiated by Dodge that resulted in improper revenue recognition by PictureTel include the following:
The Try-Buy Transaction
On September 26, 1996, Guida and Dodge negotiated an agreement whereby El Camino purported to purchase approximately $1.1 million of videoconferencing equipment from PictureTel. Under the contract, El Camino agreed to attempt to sell the goods in Europe by arranging for prospective end users to try the equipment for up to six months. The end users could then either purchase, lease or return the goods ("Try-Buy"). El Camino had no obligation to pay PictureTel for the goods at the end of the trial period unless and until a sale to an end-user occurred. Despite this contingency, during the third quarter of 1996, PictureTel improperly recognized $1.1 million of revenue from Try-Buy transactions. In a February 1997 internal El Camino memorandum, Dodge acknowledged that PictureTel requested the unusual terms of the Try-Buy agreement because, among other reasons, it "needed revenue for the third quarter" of 1996, and that PictureTel's outside auditors had questioned the open-ended payment terms contained in El Camino's purchase order. In August 1997, Dodge also told Guida's successor that PictureTel had needed revenue at the time of the Try-Buy order and that Guida had asked Dodge to "step up" and help the company by placing the order.
The Hotel Chain Transactions
Dodge caused El Camino to become involved in a transaction that Guida had originally negotiated with a third-party, thinly-capitalized reseller ("Reseller"). Under the original terms of the agreement, which was executed September 27, 1996, the Reseller was to buy 113 used videoconferencing systems from PictureTel to install at major hotels. During the fall of 1996, the terms of the original agreement were modified so that instead of a direct sale between PictureTel and the Reseller, El Camino purchased the 113 units from PictureTel and leased them to the Reseller. Guida and Dodge agreed that El Camino would not have to pay for the systems until it received lease payments from the Reseller. The Reseller, in turn, was not obligated to pay El Camino unless it received fees from users at the hotels. Dodge was reckless in not knowing that El Camino's role in the transaction was for the purpose of assisting Guida and PictureTel to recognize revenue. During the fourth quarter of 1996, Dodge prepared an internal memorandum stating that El Camino had "issued P.O. [purchase order] to PictureTel in order to book revenue." During the third quarter and fourth quarter of 1996, PictureTel recognized, respectively, $1.52 million of revenue and $1.97 million of revenue from the Reseller transactions, despite the fact that El Camino did not have a firm obligation to pay for the equipment.
The Department of Justice Transaction
During the fourth quarter of 1996, PictureTel was negotiating a sale of $1.2 million of videoconferencing equipment to the Department of Justice ("DOJ"). On December 31, 1996, the last day of the quarter and the fiscal year, PictureTel, through Guida, obtained a purchase order from El Camino for the purchase of $1.2 million of videoconferencing equipment, purportedly for lease to the DOJ. Dodge authorized a member of his staff to issue the purchase order. The purchase order did not represent a bona fide order for goods. Prior to December 31, 1996, ElCamino had never been involved in the negotiations for the DOJ's purchase of equipment from PictureTel. In fact, the DOJ's general procurement contract did not permit lease financing of the goods. PictureTel improperly recognized $1.2 million in revenue from this transaction for the year ended December 31, 1996.3
2. Dodge's Statements to PictureTel's Auditors
In late March 1997, PictureTel's outside auditors, along with Guida, telephoned Dodge to confirm El Camino's $6.4 million accounts receivable balance from 1996. Dodge verbally assured the auditors that the balance would be paid by El Camino and was merely delayed by paperwork. Dodge's statements were misleading because El Camino did not have a firm commitment to pay PictureTel for, among others, the Try-Buy and Reseller transactions, which comprised a substantial portion of the $6.4 million accounts receivable balance.
D. Dodge's Violations
1. Dodge Caused Guida's Violations of the Exchange Act
Dodge caused Guida's violations of Sections 10(b) and 13(b)(5) of the Exchange Act and Rules 10b-5, 13b2-1 and 13b2-2 thereunder by engaging in a series of transactions that enabled Guida to fraudulently inflate PictureTel's revenues. Section 10(b) of the Exchange Act and Rule 10b-5 thereunder proscribe the making of materially false and misleading statements "in connection with the purchase or sale of any security." Violations of Section 10(b) and Rule 10b-5 occur when an issuer makes material misstatements in press releases, registration statements, prospectuses, or periodic reports filed with the Commission and trading thereafter occurs in the issuer's securities. Basic, Inc. v. Levinson, 485 U.S. 224, 231-232 (1988); SEC v. Texas Gulf Sulphur Co., 401 F.2d 833 (2d Cir. 1968), cert. denied, 394 U.S. 976 (1969). In addition, to establish liability for violations of Section 10(b) and Rule 10b-5, the Commission must prove that a person acted with scienter. See Aaron v. SEC, 446 U.S. 680, 686 n.5 (1980). Recklessness satisfies the scienter requirement. See, e.g., Rolf v. Blyth Eastman Dillon & Co., 570 F.2d 38, 46 (2d Cir.), cert. denied, 439 U.S. 1039 (1978). Section 13(b)(5) of the Exchange Act prohibits any person from knowingly circumventing internal accounting controls or knowingly falsifying any book, record or account described in Section 13(b)(2). Section 13(b)(5) allows the Commission to address conduct that undermines the integrity of the books and records and internal controls of an issuer. Rule 13b2-1 prohibits any person from falsifying or causing the falsification of any books, records, or accounts subject to Section 13(b)(2)(A). InformixCorp., Exchange Act Rel. No. 42326 (January 11, 2000), 2000 SEC LEXIS 34. Rule 13b2-2 prohibits officers and directors from making or causing to be made materially false or misleading statements to an accountant in connection with an audit or examination or the preparation of any document or report to be filed with the Commission. See, e.g., Beth A. Morris and Steven H. Grant, Exchange Act Rel. No. 42587 (March 29, 2000), 2000 SEC LEXIS 577.
Pursuant to Section 21C of the Exchange Act, a person "causes" a violation where he or she commits an act or omission that the person knew or should have known would contribute to such violation. The evidence indicates that Dodge acted recklessly in causing El Camino to enter into transactions for the purpose of assisting Guida to improperly book revenues.
Dodge caused Guida's violations because he issued or approved purchase orders for several purported sales, including the Try-Buy, DOJ and Reseller transactions, which enabled PictureTel to improperly recognize revenue. In addition, Dodge caused Guida's violations because he failed to disclose to PictureTel's outside auditors that El Camino did not have a firm commitment to pay for a significant portion of orders that comprised El Camino's accounts receivable balance with PictureTel at the end of 1996.
Dodge also was reckless in not knowing that these transactions were done to assist Guida's scheme. In his February 1997 memorandum concerning the Try-Buy transaction, Dodge acknowledged that PictureTel had requested unusual payment terms because the company needed revenue for the third quarter of 1996; also, he knew that PictureTel's outside auditors had questioned the open-ended payment terms contained in El Camino's Try-Buy purchase order. In addition, Dodge acknowledged in a memorandum that El Camino had placed the purchase order to enable PictureTel to "book revenue" for the third quarter of 1996. Further, Dodge issued the DOJ purchase order to PictureTel on the last day of PictureTel's 1996 fiscal year, despite the fact that El Camino had not been involved in any of the negotiations between PictureTel and DOJ and despite the fact that DOJ lacked the authority and intent to use lease financing from El Camino for its acquisition of videoconferencing equipment.
When Dodge was questioned by PictureTel's outside auditors about El Camino's accounts receivable balance in March 1997, he failed to acknowledge that El Camino did not have a firm commitment to pay for goods associated with, among others, the Try-Buy or Reseller transactions. At the time he spoke with the auditors, Dodge also knew from Guida that the auditors had questioned the open-ended payment terms relating to the Try-Buy transaction. Through these acts, Dodge caused Guida's violations of Sections 10(b) and 13(b)(5) of the Exchange Act and Rules 10b-5, 13b2-1 and 13b2-2 thereunder. See Ronald G. Davies, Exchange Act Rel. No. 42987 (June 28, 2000), 2000 WL 854288 (customer who, among other things, executed side agreements and made misleading responses to audit inquiries caused company's violations of antifraud and reporting provisions) (settled proceedings).
2. Dodge Caused PictureTel's Issuer Reporting Violations of the Exchange Act
Dodge caused PictureTel'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. Section 13(a) of the Exchange Act and Rules 13a-1 and 13a-13 require issuers of registered securities to file annual and quarterly reports with the Commission. The information provided in those reports must be accurate. See SEC v. Kalvex, Inc., 425 F. Supp. 310, 316 (S.D.N.Y. 1975); SEC v. IMC International, Inc., 384 F. Supp. 889, 893 (N.D. Tex. 1974). Similarly, Regulation S-X requires that financial statements filed with the Commission pursuant to Section 13(a) of the Exchange Act be prepared in accordance with generally accepted accounting principles. Otherwise, such statements will be presumed to be misleading or inaccurate. In addition, Exchange Act Rule 12b-20 requires that these periodic reports contain all information necessary to ensure that statements made in them are not materially misleading. No showing of scienter is necessary to establish a violation of Section 13(a) or Rule 12b-20. See SEC v. Savoy Industries, Inc., 587 F.2d 1149, 1167 (D.C. Cir. 1978); SEC v. Wills, 472 F. Supp.1250, 1268 (D.D.C. 1978). Section 13(b)(2)(A) of the Exchange Act requires every reporting company to make and keep books, records and accounts that accurately and fairly reflect the issuer's transactions. SEC v. World-Wide Coin Investments, Ltd., 567 F. Supp. 724, 750 (N.D. Ga. 1983). A violation of Section 13(b)(2)(A) does not require a showing of scienter. Id. at 751.
Dodge's conduct relating to the sales transactions and communications with PictureTel's outside auditors enabled Guida to record revenue improperly, thereby causing the company's financial statements and books and records to be materially inaccurate. Accordingly, Dodge caused PictureTel's violations of the periodic reporting and books and records provisions of the Exchange Act. See Ronald G. Davies, above.
In view of the foregoing, the Commission deems it appropriate to accept the Offer submitted by Dodge and to impose the cease-and-desist order agreed to in the Offer.
Accordingly, IT IS ORDERED, pursuant to Section 21C of the Exchange Act, that Dodge cease and desist from committing or causing any violation and any future violation of Sections 10(b) and 13(b)(5) of the Exchange Act, and Rules 10b-5, 13b2-1, and 13b2-2 thereunder, and causing any violation and any future violation of Sections 13(a) and 13(b)(2)(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 Dodge's Offer of Settlement and are not binding on any other person or entity in this or any other proceeding.|
|2||Simultaneous with the institution of these proceedings, the Commission is filing a civil injunctive action against Guida for his violations of the securities laws. In addition, the Commission is instituting and simultaneously settling cease-and-desist proceedings against PictureTel and Les B. Strauss based on their violations of the issuer periodic reporting, record-keeping and internal controls provisions of the securities laws in connection with the financial misstatements discussed herein.|
|3||On January 3, 1997, a procurement agent acting on behalf of the DOJ gave PictureTel its own purchase order for $1.2 million of videoconferencing equipment. This was a genuine order and reflected cash payment terms. In January 1997, PictureTel issued a credit memo to El Camino but, inappropriately, did not reverse the $1.2 million of revenue recorded in December 1996.|
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