UNITED STATES OF AMERICA
In the Matter of
KATRINA KRUG, CPA,
|ORDER INSTITUTING PROCEEDINGS PURSUANT TO SECTION 21C OF THE SECURITIES EXCHANGE ACT OF 1934 AND RULE 102(e) OF THE COMMISSION'S RULES OF PRACTICE, MAKING FINDINGS, AND IMPOSING A CEASE-AND-DESIST ORDER AND REMEDIAL SANCTIONS|
The Commission deems it appropriate to institute public administrative proceedings against Katrina Krug pursuant to Section 21C of the Securities Exchange Act of 1934 ("Exchange Act") and Rule 102(e) of the Commission's Rules of Practice,1 and such proceedings are hereby instituted.
In anticipation of the institution of these proceedings, Krug has submitted an Offer of Settlement ("Offer") to the Commission, 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, Krug, without admitting or denying the findings contained herein, except that she admits to the Commission's jurisdiction over her and over the subject matter of these proceedings, consents to the issuance of this Order Instituting Proceedings Pursuant to Section 21C of the Securities Exchange Act of 1934 and Rule 102(e) of the Commission's Rules of Practice, Making Findings and Imposing a Cease-and-Desist Order and Remedial Sanctions ("Order").
The Commission finds that:2
Respondent Katrina Krug, age 34, is a certified public accountant licensed in the State of Maryland. In May 1999, Krug began working for Alcore, Inc., then a division of Advanced Technical Products, Inc., and soon thereafter became Alcore's Controller, a position she held until May 2000.
B. Related Issuer and Subsidiary
Advanced Technical Products, Inc. ("ATP") is a Delaware corporation headquartered in Roswell, Georgia. Through its operating subsidiaries, ATP designs, develops, and manufactures materials and products used in aerospace and defense equipment. ATP's stock is registered with the Commission pursuant to Section 12(g) of the Exchange Act and trades on the Nasdaq National Market.
At all relevant times, Alcore, Inc. ("Alcore") was one of ATP's five operating subsidiaries, and was wholly owned by ATP. During the relevant period, Alcore primarily designed and manufactured airplane components at several facilities located in Maryland, and accounted for a substantial portion of ATP's consolidated revenues and net income. After the events described herein, ATP sold most of the assets of its Alcore subsidiary to another company and liquidated the remaining assets.
C. The Fraud at Alcore
Throughout ATP's 1998 and 1999 fiscal years, personnel at the company's Alcore subsidiary engaged in a massive financial fraud through which ATP's consolidated assets and earnings were materially overstated. The fraud at Alcore involved, among other things, the systematic understatement of expenses and overstatement of assets and revenues, and was achieved primarily by improperly capitalizing expenses, improperly and prematurely recognizing revenue, overvaluing inventory, and understating costs of goods sold. Throughout the relevant period, Alcore senior management routinely directed that artificial alterations be made to Alcore's income statement and balance sheet, and that auditors be misled, in furtherance of the fraudulent scheme. The scheme stopped only when, on January 7, 2000, the FBI served Alcore with a search warrant for financial records.3
As a result of the financial fraud at Alcore, the books, records, and accounts of Alcore and it publicly-traded parent company, ATP, were materially inaccurate throughout the relevant period. In addition, the consolidated financial statements included in ATP's quarterly reports on Form 10-Q for the first, second and third quarters of both its 1998 and 1999 fiscal years, and in its annual report on Form 10-K for its 1998 fiscal year, were materially false and misleading and did not comply with generally accepted accounting principles.
In May 2000, as a direct result of the financial fraud at Alcore, ATP restated its financial results for its fiscal year ended December 31, 1998 (including all interim quarters) and for the first three quarters of its fiscal year ended December 31, 1999. The cumulative impact of the restatement-as the table below reflects-was to reduce ATP's net income for its 1998 fiscal year from $5,687,000 (as originally reported) to $3,999,000 (as restated), and its net income for the first three quarters of its 1999 fiscal year from $4,906,000 (as originally reported) to a net loss of $229,000 (as restated):
1998 Fiscal Year
|($$ in 000's)||1st Quarter||2nd Quarter||3rd Quarter||4th Quarter||Total Year|
|Originally Reported Net Income||111||1,302||1,949||2,325||5,687|
|Restated Net Income||102||1,230||1,214||1,453||3,999|
1999 Fiscal Year - First Three Quarters
|($$ in 000's)||1st Quarter||2nd Quarter||3rd Quarter||Total Three Quarters|
|Originally Reported Net Income||1,108||1,961||1,837||4,906|
|Restated Net Income||186||513||(928)||(229)|
Thus, approximately 30% of ATP's reported earnings for fiscal year 1998 were overstated, and approximately 105% of its reported earnings for fiscal year 1999 were overstated. After ATP disclosed the accounting problems at Alcore in early 2000, and ultimately quantified the necessary restatements in a public filing with the Commission in May 2000, ATP's stock price plummeted from $14 per share in early January to less than $2 per share in August 2000.
D. Krug's Conduct
After she joined Alcore, Krug participated in the ongoing financial fraud described above. Before Krug's arrival, Alcore's senior management had a practice in place whereby they would review Alcore's monthly financial statements and, before submitting them to ATP, artificially adjust certain accounts to arrive at desired results. On at least one occasion, Krug suggested to Alcore senior management which accounts could be artificially adjusted to arrive at desired month-end results. In addition, at the direction of Alcore's Chief Executive Officer and Chief Financial Officer, and notwithstanding her expressed reservations, Krug assisted in the preparation of Alcore financial statements that she knew were materially misstated, and that she knew would be consolidated into ATP's quarterly reports on Form 10-Q for the periods in question. In particular, Krug knew that Alcore's financial statements included improperly capitalized expenses, improperly recognized revenue, overvalued inventory, and understated costs of goods sold. ATP's books, records, and accounts were thus materially falsified, and ATP filed with the Commission false and misleading reports on Form 10-Q for the second and third quarters of ATP's 1999 fiscal year.
E. Legal Analysis
1. Securities Fraud
Exchange Act Section 10(b) and Rule 10b-5 thereunder prohibit fraud in connection with the purchase or sale of any security. After joining Alcore, Krug willfully violated these provisions by assisting in the preparation of Alcore financial statements that she knew were materially misstated and that she knew would be consolidated into the financial statements that ATP would include in its public filings with the Commission.
2. Falsification of Books and Records, Circumvention of Internal Accounting Controls, and Causation of ATP's Violations
Exchange Act Section 13(b)(5) and Exchange Act Rule 13b2-1 prohibit the falsification of corporate books, records, and accounts of any issuer of registered securities, and Section 13(b)(5) further prohibits the knowing circumvention of internal accounting controls of any such issuer. After joining Alcore, Krug willfully violated these provisions by knowingly participating in the falsification of the books and records of Alcore and ATP and by knowingly circumventing the internal accounting controls that existed at Alcore and ATP.
In addition, Exchange Act Section 13(a) and Exchange Act Rules 12b-20 and 13a-13 required ATP to file with the Commission quarterly reports on Form 10-Q that were not materially misleading, and Exchange Act Section 13(b)(2)(A) required ATP to make and keep books, records, and accounts that accurately and fairly reflected its transactions and dispositions of assets. Krug's above-described conduct, after she joined Alcore, contributed to ATP's violations of these provisions.4
Based on the foregoing, the Commission finds that Krug willfully violated Exchange Act Sections 10(b) and 13(b)(5) and Exchange Act Rules 10b-5 and 13b2-1, and was a cause of ATP's violations of Exchange Act Sections 13(a) and 13(b)(2)(A) and Exchange Act Rules 12b-20 and 13a-13.
Accordingly, the Commission hereby accepts Krug's Offer and hereby ORDERS, effective immediately, that:
A. pursuant to Exchange Act Section 21C, Krug cease and desist from committing or causing any violation and any future violation of Exchange Act Sections 10(b) and 13(b)(5) and Exchange Act Rules 10b-5 and 13b2-1, and cease and desist from causing any violation or future violation of Exchange Act Sections 13(a) and 13(b)(2)(A) and Exchange Act Rules 12b-20 and 13a-13; and
B. pursuant to Rule 102(e) of the Commission's Rules of Practice:
(a) a preparer or reviewer, or a person responsible for the preparation or review, of any public company's financial statements that are filed with the Commission. Such an application must satisfy the Commission that Krug's work in her practice before the Commission will be reviewed either by the independent audit committee of the public company for which she works or in some other acceptable manner, as long as she practices before the Commission in this capacity; and/or
(b) an independent accountant. Such an application must satisfy the Commission that: (i) Krug, or the firm with which she is associated, is a member of the SEC Practice Section of the American Institute of Certified Public Accountants Division for CPA Firms ("SEC Practice Section") or an equivalent body; (ii) Krug, or the firm, has received an unqualified report relating to her, or the firm's, most recent peer review conducted in accordance with the guidelines adopted by the SEC Practice Section or an equivalent body; and (iii) as long as Krug appears or practices before the Commission as an independent accountant she will remain either a member of the SEC Practice Section or an equivalent body or associated with a member firm of the SEC Practice Section or an equivalent body, and will comply with all applicable SEC Practice Section requirements or the requirements of an equivalent body, including all requirements for periodic peer reviews, concurring partner reviews, and continuing professional education.
By the Commission.
Jonathan G. Katz
|1|| Rule 102(e)(1) of the Commission's Rules of Practice provides, in pertinent part:
The Commission may censure a person or deny, temporarily or permanently, the privilege of appearing or practicing before it in any way to any person who is found by the Commission after notice and opportunity for hearing in the matter . . . (iii) to have willfully violated any provision of the Federal securities laws or the rules and regulations thereunder.
|2||The findings herein are not binding on anyone other than Krug.|
|3||On July 23, 2001, the Commission sued Alcore's former Chief Executive Officer and former Chief Financial Officer for their participation in the financial fraud at Alcore. SEC v. Edward J. Kiley and Richard N. Orzechowski, No. L-01-2146 (D. Md.) (Lit. Rel. No. 17074). The Commission charged both former officers with securities fraud in violation of Exchange Act Section 10(b) and Rule 10b-5 thereunder; with knowingly falsifying the books, records, and accounts of Alcore and ATP in violation of Exchange Act Section 13(b)(5) and Exchange Act Rule 13b2-1; and with misleading ATP's auditors in violation of Exchange Act Rule 13b2-2. The Commission also charged the former Chief Executive Officer with fraud in violation of Section 17(a) of the Securities Act based on his sales of ATP stock before the fraud at Alcore was publicly disclosed. The Commission's complaint sought injunctions, civil penalties, and officer-and-director bars against both defendants, along with disgorgement of the former Chief Executive Officer's profits from his unlawful sales of ATP stock. The same day, United States Attorney's Office for the District of Maryland announced related criminal charges against both defendants.|
|4||Contemporaneously with this order, the Commission has issued a separate order that, among other things, finds that ATP violated these provisions and orders ATP to cease and desist from committing such violations in the future. See Securities Exchange Act Rel. No. 46030, AAER No. 1564 (June 5, 2002).|
|Home | Previous Page||