U.S. Securities & Exchange Commission
SEC Seal
Home | Previous Page
U.S. Securities and Exchange Commission

UNITED STATES OF AMERICA
Before the
SECURITIES AND EXCHANGE COMMISSION

SECURITIES EXCHANGE ACT OF 1934
Release No. 47340 / February 10, 2003

ACCOUNTING AND AUDITING ENFORCEMENT
Release No. 1713 / February 10, 2003

ADMINISTRATIVE PROCEEDING
File No. 11039


In the Matter of

Richard C. Tyrer,

Respondent.


:
:
:
:
:
:
:
:

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

I.

The Securities and Exchange Commission ("Commission") deems it appropriate that public cease-and-desist proceedings be, and hereby are, instituted pursuant to Section 21C of the Securities Exchange Act of 1934 ("Exchange Act") against Richard C. Tyrer ("Tyrer" or "Respondent").

II.

In anticipation of the institution of these proceedings, Respondent has submitted an Offer of Settlement ("Offer"), 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 in which the Commission is a party, and without admitting or denying the findings herein, except that the Respondent admits the Commission's jurisdiction over him and the subject matter of the proceedings, Respondent consents to the entry of this Order Instituting Public Cease-and-Desist Proceedings, Making Findings, and Imposing a Cease-and-Desist Order Pursuant to Section 21C of the Securities Exchange Act of 1934 ("Order").

III.

On the basis of this Order and Respondent's Offer, the Commission finds1 that:

Respondent

Respondent Tyrer was the Vice President, Western Region Sales for The North Face, Inc. ("The North Face"). Throughout his association with The North Face, Tyrer's responsibilities were limited to sales. Tyrer, 50 years old, is a U.S. citizen residing in Los Barriles, Mexico.

Other Relevant Entities

The North Face was a Delaware corporation with its headquarters in San Leandro, California and Carbondale, Colorado. The North Face is now a wholly-owned subsidiary of VF Corporation, but during the relevant time period it was a publicly-traded company. The North Face products include outerwear, skiwear, and outdoor equipment designed for activities such as mountaineering, backpacking, skiing, hiking, training, and adventure travel.

Conduct

The North Face had a network of what it called variously "wholesale distributors" or "premium dealers" or "Territory 68"; these were primarily small operations that diverted North Face product into "gray market" export channels.

In the third quarter of 1998, The North Face arranged a $9.3 million consignment sale to a Territory 68 customer based in Texas. The Texas customer was a one-person operation owned by an individual who ran his business from a home office. He had no other facilities and the only employee was a part-time bookkeeper. Prior to the third quarter of 1998, the Texas customer had not placed an order with The North Face for more than $1 million; his total orders for 1996 were $1 million and for 1997 were just $90,000. The true terms of the third quarter sale were not disclosed and the sale was improperly recorded by the company as a normal sale-with immediate, improper recognition of revenue and full profit margin.2

The third quarter sale to the Texas customer began as a proposed consignment sale in late August 1998. Tyrer met with the Texas customer to discuss a potential sale of approximately $1 million. Tyrer, with the express authority of his superior, an officer of the company, offered that the company would pay all storage costs for the product, that the Texas customer could return any product he was unable to sell, and that the Texas customer did not have to pay for the product unless he was able to sell it. Based on these terms, the Texas customer agreed to the consignment sale. The Texas customer did not place an order for specific items-the company was to select the product to be included in the sale. The North Face selected a third-party warehouse near the Texas customer to store the goods, and made all of the arrangements for the storage and shipping of the goods, without the Texas customer's involvement.

Without consulting the Texas customer, the company "increased" the sale from $1 million as discussed in August to $9.3 million. The sale was booked and the product shipped at the very end of the quarter. This third quarter transaction was the largest single sale in the history of the company. It instantly made the Texas customer one of the top customers for the entire year. The Texas customer never sent or signed a purchase order for the sale-indeed he was not aware that the amount had increased to $9.3 million until December 1998.

During the audit of The North Face's 1998 financial statement in early 1999, its independent auditor raised certain questions and requested that The North Face conduct an internal investigation into various issues. One of the items included in the internal investigation was the sale to the Texas customer. The auditors were to be informed of the results of the investigation. The North Face's audit committee conducted an investigation and was assisted by an accounting firm different from the independent auditor as well as company employees and outside counsel.

Tyrer assisted his superior in concealing the real terms of the sale to the Texas customer from the company's audit committee, independent auditors and senior management. As part of the internal investigation it was conducting, the audit committee investigators arranged a conference call with the Texas customer in March 1999. The purpose of the call was to learn more about the third quarter 1998 transaction to determine if it was a bona fide normal sale. Tyrer participated in a material portion of the conference call, which also included his superior, other company employees, and accountants from the accounting firm assisting the audit committee.

Prior to the conference call, Tyrer and his superior told the Texas customer what he should say to the accountants-principally that he should misrepresent the transaction as a normal sale, not a consignment sale. The misrepresentations Tyrer and his superior asked the Texas customer to make also included saying, among other things, that (i) the Texas customer's clients were located in Latin America, (ii) the Texas customer had the ability and the intent to pay the balance of the receivable on time (without payment depending on sales to third-parties), (iii) he did not intend to return the product, and (iv) he had no right to return the product. During the conference call, the Texas customer made these misrepresentations, thereby providing false and misleading information about the transaction.

Despite the misinformation provided in the conference call, questions remained about the transaction. The North Face CEO asked for a face-to-face meeting to address the remaining concerns about the sale. The Texas customer was flown to Aspen, Colorado at the company's expense to meet with the CEO. The Texas customer repeated essentially the same story to the CEO, portraying the sale as a normal sale.

The audit committee investigators, unaware that there was no purchase order for the sale to the Texas customer, or any other contemporaneous documentation of the terms of the sale, had requested to see documentation for the transaction during the internal investigation. During the Aspen trip, the Texas customer met with Tyrer and his superior at a hotel. All three were aware that no purchase order or other documents supporting the sale existed. At the hotel, they created a purchase order for the third quarter sale, back-dated it to September 1998, and asked the Texas customer to sign it. The Texas customer signed the document. That newly created and back-dated document was given to the CEO, Company employees, accountants from the accounting firm assisting the audit committee, and the auditors. There was no indication on the document that it had just been created and backdated, nor did Tyrer, or his superior, disclose that there was no purchase order at the time of the transaction.

The Texas customer returned the inventory in May 1999. Before doing so, however, the Texas customer signed a confirmation letter from The North Face's independent auditors falsely stating that he owned the product as of December 1998. Tyrer, acting on the instructions of his superior, asked the Texas customer to sign the false confirmation letter.

In the fourth quarter of 1998, The North Face arranged a $2.6 million consignment sale to a Territory 68 customer based in California. The true terms of the sale were not disclosed and the sale was improperly recorded by the company as a normal sale-with immediate, improper recognition of revenue and full profit margin.

Tyrer and his superior arranged the sale of $2.6 million consignment sale to the California customer. The California customer successfully had sold The North Face product for years, but ordinarily he would not place a large order unless it was "matched". In a "matched" order, the California customer acted as a broker. He would receive a purchase order from a client, re-format the order as being from his company and send it to The North Face. The fourth quarter sale, however, was not a matched sale. When the California customer saw the product list of what had been shipped to his warehouse, he told the Tyrer that he would not be able to sell it to his normal customers. Tyrer asked him to hold the product and said that the company would work with him to identify potential sales channels.

The North Face's independent auditors, in connection with their audit of the 1998 year-end financial statements, sent a confirmation letter to the California customer regarding the fourth quarter transaction. The letter was more detailed than a typical confirmation: it set for all of the elements of a bona fide normal sale and asked the California customer to confirm that the description of the transaction was accurate. The California customer knew that the terms the auditors sought to confirm in the letter were false. Tyrer, following the directions of his superior, asked the California customer to sign the confirmation. After being assured by Tyrer that the company was not trying to change the consignment terms of the transaction, the California customer agreed to sign the confirmation letter. The California customer signed the confirmation letter and returned it to the auditors. The auditors were thereby provided with materially false and misleading information about the fourth quarter sale.

Violations

As a result of the conduct described above, Tyrer violated Sections 10(b) and 13(b)(5) of the Exchange Act and Rules 10b-5 and 13b2-1 thereunder and caused violations of Sections 13(a) and 13(b)(2)(A) and (B) of the Exchange Act and Rules 13a-1, 13a-13 and 13b2-2 thereunder.

Section 10(b) provides that it shall be unlawful for any person, directly or indirectly, by the use of any means or instrumentality of interstate commerce, or of the mails, or of any facility or any national securities exchange, to use or employ, in connection with the purchase or sale of any security registered on a national securities exchange . . . any manipulative or deceptive device or contrivance in contravention of such rules as the Commission may prescribe as necessary or appropriate in the public interest or for the protection of investors. Rule 10b-5 provides that it shall be unlawful for any person, directly or indirectly, by the use of any means or instrumentality of interstate commerce, or of the mails, or of any facility or any national securities exchange, (1) to employ any device, scheme, or artifice to defraud, (2) to make any untrue statement of a material fact or to omit to state a material fact necessary in order to make the statements made, in light of the circumstances under which they were made not misleading, or (3) to engage in any act, practice, or course of business which operates or would operate as a fraud or deceit upon any person, in connection with the purchase or sale of any security.

Section 13(b)(5) provides that no person shall knowingly circumvent or knowingly fail to implement a system of internal controls or knowingly falsify any book, record, or account [required to be made and kept pursuant to Section 13(b)(2)].

Rule 13b2-1 provides that no person shall, directly or indirectly, falsify or cause to be falsified, any book, record or account subject to section 13(b)(2(A) of the Securities Exchange Act.

Section 13(a) provides, inter alia, that every issuer of a security registered pursuant to Section 12 of [the Exchange Act] shall file with the Commission, in accordance with such rules and regulations as the Commission may prescribe as necessary or appropriate for the proper protection of investors and to insure fair dealing in the security such annual reports . . . and such quarterly reports . . . as the Commission may prescribe. Rule 13a-1 provides that every issuer having securities registered pursuant to Section 12 of the [Exchange] Act. . . shall file an annual report on the appropriate form authorized or prescribed therefore; and Rule 13a-13 provides that every such issuer must also file a quarterly report.

Sections 13(b)(2)(A) and (B) provide that every issuer which has a class of securities registered pursuant to section 12 of [the Exchange Act] . . . shall (A) make and keep books, records, and accounts, which, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the issuer; and (B) devise and maintain a system of internal accounting controls sufficient to provide reasonable assurances that -(i) transactions are executed in accordance with management's general or specific authorization; (ii) transactions are recorded as necessary (I) to permit preparation of financial statements in conformity with generally accepted accounting principles or any other criteria applicable to such statements, and (II) to maintain accountability for assets; (iii) access to assets is permitted only in accordance with management's general or specific authorization; and (iv) the recorded accountability for assets is compared with existing assets at reasonable intervals and appropriate action is taken with respect to any differences.

Rule 13b2-2 prohibits officers and directors of an issuer from (i) making or causing to be made materially false or misleading statements, or (ii) omitting to state, or causing another person to omit to state, any material fact necessary in order to make statements made, in light of the circumstances under which such statements were made, not misleading to an accountant in connection with any audit or examination of the financial statements of the issuer or the preparation or filing of any document or report required to be filed with the Commission.

IV.

In view of the foregoing, it is appropriate to impose the sanctions agreed to in the Offer submitted by Respondent. Accordingly,

IT IS ORDERED, pursuant to Section 21C of the Exchange Act, that Respondent cease and desist from committing or causing any violations and any future violations of Sections 10(b) and 13(b)(5) of the Exchange Act and Rules 10b-5, 13b2-1, and 13b2-2 thereunder, and from causing any violations or any future violations of Sections 13(a), 13(b)(2)(A) and (B) of the Exchange Act and Rules 13a-1 and 13a-13 thereunder.

By the Commission.

Jonathan G. Katz
Secretary

Footnotes

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

2 Statement of Financial Accounting Standards No. 48, "Revenue Recognition When Right of Return Exists," does not allow the seller to recognize revenue [or, therefore, profit] when the customer can return the product and payment to the seller is contingent upon resale by the customer. Thus, recognition of revenue and profit for a contingent sale is improper since payment to the seller being contingent upon resale by the customer is the essence of a consignment sale.

 

http://www.sec.gov/litigation/admin/34-47340.htm


Modified: 02/11/2003