United States of America
In the Matter of
ROBERT C. CLOYD,
|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|
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 Robert C. Cloyd ("Respondent" or "Cloyd").
In anticipation of the institution of these proceedings, Respondent has submitted an Offer of Settlement (the "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 to which the Commission is a party, and without admitting or denying the findings herein, except as to the Commission's jurisdiction over him and the subject matter of these 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"), as set forth below.
On the basis of this Order and Respondent's Offer, the Commission finds that:
1. This matter concerns a false audit confirmation sent by a customer of Digital Lava, Inc. ("Digital Lava"), a Southern California streaming-media company. In September 2000, Cloyd, then the Vice-President of Sales for Three Point Digital, Inc. ("Three Point Digital"), participated in Three Point Digital's purchase of product from Digital Lava for $319,000. As a part of the transaction, Cloyd obtained a letter (the "side letter") from Digital Lava's Vice-President of Sales providing that Three Point Digital did not have to pay for this product until Three Point Digital sold it to customers. Digital Lava and its auditors, as part of the preparation of Digital Lava's interim financial statements, sought confirmation that Three Point Digital did not have any undisclosed agreements related to this transaction. In response, Cloyd provided a false accounts receivable confirmation to Digital Lava's auditors that did not disclose the existence of an additional term even though the confirmation specifically requested this information.
2. Robert C. Cloyd, 47, is a resident of Castaic, California. He was the Vice-President of Sales and 50% owner of Three Point Digital, a private company, during the relevant period. Cloyd is currently the majority owner and president of a private company that rents editorial equipment.
3. Digital Lava, Inc. was incorporated in Delaware in 1996 and headquartered in Marina Del Rey, California, until its dissolution in January 2002. The Company provided digital publishing services and software products that created on-demand, interactive presentations, training and communication services. For the fiscal quarter ended September 30, 2000, Digital Lava recognized $1.7 million in revenue, which the Company subsequently restated to $1.1 million. Over 90% of this restatement was related to improperly recognized revenue on a product called "Firestream."
4. Three Point Digital, Inc. is a California corporation that was located in Burbank, California and ceased operations in 2002. During 2000, Three Point Digital performed two functions for Digital Lava. First, as an integrator, Three Point Digital assembled the hardware component and installed Digital Lava's software into the Firestream system. Second, Three Point Digital was also Digital Lava's largest distributor of the Firestream system, whereby it agreed to sell the Firestream system to its own customers.
5. On September 27, 2000, Cloyd, on behalf of Three Point Digital, issued a purchase order for $319,000 for Firestream systems to Digital Lava. This purchase order was subject to a side letter, which did not require Three Point Digital to pay for the Firestream systems until Three Point Digital had re-sold the systems to customers. This contingency was not included on the purchase order, because Digital Lava's Vice President of Sales requested that it be separately documented in a side letter, which he authorized.
6. On or about October 17, 2000, Digital Lava sent Three Point Digital an audit confirmation request asking Three Point Digital to confirm to Digital Lava's auditors that Three Point Digital owed Digital Lava $319,000 and that there were no undisclosed agreements or contingencies related to this transaction.
7. On October 17, 2000, Cloyd, on behalf of Three Point Digital, signed and returned the account receivable confirmation to Digital Lava's auditors. In this audit confirmation, Cloyd confirmed the $319,000 owed to Digital Lava, but did not disclose the fact that the transaction was contingent on Three Point Digital's resale of the product, as the contingency was documented in the side letter.
8. On November 14, 2000, Digital Lava filed with the Commission its Form 10-Q for the quarter ended September 30, 2000, which reported $1,743,000 in total revenues. Of this amount, $718,000, or 41%, represented revenue from the Firestream product. Included in Firestream revenue was the $319,000 transaction to Three Point Digital. The Three Point Digital transaction represented 18% of Digital Lava's reported revenues.
9. After Digital Lava filed the Form 10-Q, it discovered contingency terms that were attached to certain Firestream sales, including the sale to Three Point Digital.
10. On March 21, 2001, Digital Lava restated the revenue reported in the Form 10-Q for the quarter ended September 30, 2000 from $1,743,000 to $1,100,000. The Three Point Digital transaction for $319,000 represented the largest transaction reversed.
11. Section 10(b) of the Exchange Act and Rule 10b-5 thereunder prohibit an issuer or individual from making misstatements or omissions of material fact in connection with the purchase or sale of a security. An issuer and its management may violate Section 10(b) and Rule 10b-5 by making material misstatements or by omitting material information from press releases, registration statements, or periodic reports filed with the Commission. Basic Inc. v. Levinson, 485 U.S. 224, 231-32 (1988); SEC v. Texas Gulf Sulphur Co., 401 F. 2d 833 (2d Cir. 1968).
12. Section 21C of the Exchange Act provides that the Commission may order any person who is or was a cause of a violation of any provision of the Exchange Act, due to an act or omission the person knew or should have known would contribute to the violation, to cease and desist from committing or causing such violations.
13. When Cloyd negotiated the Firestream transaction the contingency was documented in a side letter, as opposed to the purchase order. Subsequently, when he was asked to confirm the accounts receivable amount for this transaction to Digital Lava's auditors, he should have disclosed the contingency. Cloyd either knew or should have known that the purpose of documenting the contingency in a side letter was to allow Digital Lava's Vice President of Sales to conceal this contingency. Additionally, Cloyd then confirmed the related accounts receivable amount to Digital Lava's auditors without disclosing the contingency, thereby facilitating a violation of the antifraud provisions by Digital Lava's Vice President of Sales.
14. As a result of the conduct described above, Cloyd caused violations by Digital Lava's Vice President of Sales of Section 10(b) of the Exchange Act and Rule 10b-5 thereunder.
In view of the foregoing, the Commission deems it appropriate to impose the sanctions specified in Respondent Cloyd's Offer.
ACCORDINGLY, IT IS HEREBY ORDERED:
Pursuant to Section 21C of the Exchange Act, that Respondent Cloyd cease and desist from committing or causing any violations and any future violations of Section 10(b) of the Exchange Act and Rule 10b-5 thereunder.
By the Commission.
Jonathan G. Katz
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