United States of America
In the Matter of
JOHN J. CANEPA, CPA
|ORDER MAKING FINDINGS AND IMPOSING CEASE-AND-DESIST ORDER PURSUANT TO SECTION 21C OF THE SECURITIES EXCHANGE ACT OF 1934 AND DISMISSING RULE 102(e) PROCEEDING|
The Securities and Exchange Commission ("Commission") deems it appropriate to accept the Offer of Settlement ("Offer") submitted by John J. Canepa ("Canepa" or "Respondent") pursuant to Rule 240(a) of the Commission's Rules of Practice, 17 C.F.R. § 201.240(a), for the purpose of settlement of these public administrative and cease-and-desist proceedings instituted by the Commission against him on January 13, 2003, pursuant to Section 21C of the Securities Exchange Act of 1934 ("Exchange Act") and Rule 102(e) of the Commission's Rules of Practice. The Rule 102(e) Proceeding is dismissed.
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 over the subject matter of these proceedings, which is admitted, Respondent consents to the entry of this Order Making Findings and Imposing Cease-and-Desist Order Pursuant to Section 21C of the Securities Exchange Act of 1934 and Dismissing Rule 102(e) Proceeding ("Order"), as set forth below.
On the basis of this Order and the Respondent's Offer, the Commission finds1 that:
Canepa, age 47, resides in Belmont, Massachusetts. During the relevant period, he was a certified public accountant ("CPA") licensed in the state of Massachusetts. His CPA license lapsed in June 2002. Canepa was a partner with Arthur Andersen LLP ("Andersen") in its Boston office from September 1989 until May 2001. He was the Andersen engagement partner for Anika Therapeutics, Inc. ("Anika") from the beginning of the engagement in or about June 1998 until May 2001.
a. Anika is a Massachusetts corporation established in 1983, with its headquarters in Woburn, Massachusetts. It manufactures and sells pharmaceutical products that are used to treat bone, cartilage and soft tissue injuries. During all relevant times, Anika's common stock was traded on the NASDAQ National Market System and was registered with the Commission pursuant to Section 12(g) of the Exchange Act.2
b. The Distributor: In November 1997, Anika entered into a ten-year exclusive agreement with the Distributor pursuant to which the Distributor received exclusive rights to distribute one of Anika's products, Orthovisc,3 to customers in Canada, most of Europe and the United States (the "Agreement").
c. Andersen provided accounting and auditing services to Anika beginning with a quarterly review for Anika's quarter ended June 30, 1998. Anika terminated Andersen's engagement in July 2002.
Respondent Canepa was a cause of Anika's improper recognition of approximately $1.3 million in revenue from 1998 and 1999 "bill-and-hold" transactions involving the sale of its product, Orthovisc, to the Distributor, in violation of generally accepted accounting principles ("GAAP").4 Anika prematurely recorded on its books and records and reported in periodic filings with the Commission revenue from three bill-and-hold transactions with the Distributor at the time of invoicing and prior to actual shipment and delivery of the product to the Distributor. Canepa reviewed and concurred with Anika's premature recognition of revenue from the bill-and-hold transactions in 1999. Moreover, in March 2000, Canepa caused Anika to improperly recognize $342,980 in revenue from a 1998 bill-and-hold transaction in its restatement of revenue. The company filed a second restatement in September 2001. As a result, Canepa was a cause of Anika'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.
Pursuant to the Agreement, the Distributor placed orders with Anika for a total of approximately 15,000 units of Orthovisc in April and July 1998. In early September 1998, in light of the different labeling and packaging requirements for Orthovisc in various regulatory jurisdictions, Anika recommended to the Distributor that Anika invoice for the approximately 15,000 unit order under Anika's normal payment terms, but that it hold the Distributor's order at Anika's refrigerated facility. Under this arrangement, the Distributor would pay for the product within 45 days of invoicing, and Anika would hold the units as unlabeled, unpackaged, filled syringes, until the Distributor desired shipment.
On September 24, 1998, Anika invoiced the Distributor $545,650 for 15,590 units from the April/July 1998 order. The Distributor paid for the units in November 1998, within the 45 day payment period established by the parties under the Agreement. The 15,590 unit order was not shipped to the Distributor until March 1999 as per the Distributor's request. Anika recorded revenue for the transaction on its books and records as a bill-and-hold transaction in the quarter ended September 30, 1998. However, the transaction did not meet all the GAAP criteria necessary for revenue recognition in that quarter. Even so, in its quarterly report for the quarter ended September 30, 1998, filed with the Commission on Form 10-Q, Anika recognized $545,650 from this bill-and-hold transaction as revenue for that quarter. Anika also recognizedthis revenue in its annual report for the year ended December 31, 1998, filed with the Commission on Form 10-K.
Due to delays in launching Orthovisc in Europe in 1998, the Distributor was, in early 1999, still storing approximately 58,000 of the 60,000 units of Orthovisc it had already purchased from Anika. Despite this level of inventory, in late April 1999, the Distributor proposed to Anika that it purchase 41,100 additional units of Orthovisc from Anika in the second and third quarters of 1999, or approximately $1 million of product. The additional units were above and beyond the contractually required annual minimum purchase of 30,000 units. Anika agreed to this proposal. The additional units ordered were divided into two invoices, one on June 30, 1999, which the Distributor paid in August 1999, and the other on September 30, 1999, which the Distributor paid in November 1999. In a May 20, 1999 letter, the Distributor requested that its order of 41,100 additional units be treated as bill-and-hold transactions. Only a partial delivery was made of the June 30, 1999 order, which occurred in October 1999. The balance of units from the June order and the units for the September 30, 1999 order were never delivered and ultimately were destroyed by agreement of the parties upon termination of the contract in late 2000.
The June and September 1999 transactions also did not meet all the GAAP criteria necessary for revenue recognition as bill-and-hold transactions. However, Anika prematurely recorded revenue from the June and September transactions on its books and records for the quarters ended June 30, 1999 and September 30, 1999. In its quarterly report for the period ended June 30, 1999, filed with the Commission on Form 10-Q, Anika prematurely recognized $365,250 from the June 30, 1999 transaction for 15,000 units as revenue for that quarter. In its quarterly report for the period ended September 30, 1999, filed with the Commission on Form 10-Q, Anika prematurely recognized $633,100 from the September 30, 1999 transaction for 26,000 units as revenue for that quarter.
As the Commission stated in Sunbeam Corporation, Exchange Act Rel. No. 44305, Accounting and Auditing Enforcement Rel. No. 1393 (May 15, 2001), 2001 SEC LEXIS 931, "[b]ill and hold sales are unusual transactions subject to stringent accounting criteria." The Commission has previously articulated these criteria in Stewart Parness, Exchange Act Rel. No. 23507, Accounting and Auditing Enforcement Rel. No. 108 (August 5, 1986), 1986 SEC LEXIS 1051, and reaffirmed those criteria in Staff Accounting Bulletin No. 101 (December 3, 1999). Anika's 1998 and 1999 transactions with the Distributor failed to meet the following criteria necessary for recognizing revenue from bill-and-hold transactions:
In addition, when it recognized revenue from the above transactions in the third quarter of 1998 and the second quarter of 1999, Anika contradicted the revenue recognition policy set forth in both its 1997 and 1998 Forms 10-K. In the 1997 Form 10-K, the policy stated in relevant part that: "[t]he Company recognizes revenue on product sales when the products are shipped and the customer takes ownership." In the 1998 Form 10-K, the policy stated in relevant part: "Product revenue is recognized upon shipment of commercial product and represents sales of products,Hyvisc and Orthovisc." Anika did not ship the product from the 1998 third quarter transaction to the Distributor's facility until March 1999, almost six months after it had recognized revenue from the sale. In addition, Anika's recognition of revenue from the June 30, 1999 transaction failed to conform with its 1998 policy statement as only a small portion of the product subject to the transaction was ever delivered and that partial shipment and delivery took place approximately four months following Anika's recognition of revenue for the transaction. Nonetheless, the company neither clarified the revenue recognition policy in its quarterly filings nor included information in its Commission filings about its deviation from its stated revenue recognition policy.
During the relevant time period, Andersen served as Anika's independent auditor, and Canepa served as the engagement partner on the Anika engagement. Canepa reviewed and concurred with Anika's recognition of revenue for the September 1998 and June and September 1999 bill-and-hold transactions.
Canepa learned of the September 1998 bill-and-hold transaction in July 1999 during Andersen's quarterly review for the second quarter of 1999. Canepa documented his analysis of the September 1998 transaction in an internal memorandum dated July 23, 1999, in which he acknowledged that "[t]he SEC staff has indicated that in order to recognize revenue on a bill-and-hold transaction, all of the [Parness criteria] must be met." (emphasis added) Canepa concurred with Anika's accounting treatment for the 1998 bill-and-hold transaction even though he knew or should have known that the transaction did not meet at least the following Parness criteria for revenue recognition: (i) a delivery schedule had not been fixed; (ii) Anika retained specific performance obligations, including final packaging, labeling and sterilization of the product; and (iii) the product was not complete and ready for shipment.
As part of his 1999 second quarter review, Canepa also became aware of the parties' April/May 1999 agreement in which the Distributor purchased an additional $1 million of product resulting in the June and September 1999 purchase of 41,100 units. Canepa concurred with Anika's accounting treatment for the June 30,1999 bill-and-hold transaction even though he knew or should have known that the transaction failed to meet at least the following Parness criteria for revenue recognition: (i) a delivery schedule was not fixed, but was based on "demand for the product in Europe;" (ii) Anika retained specific performance obligations, including final packaging, labeling and sterilization of the product; and (iii) the product was not complete and ready for shipment.
Canepa reached the same conclusion regarding Anika's third quarter 1999 transaction. He concurred with Anika's recognition of revenue from the September 30, 1999 bill-and-hold transaction in the third quarter even though he knew or should have known that the transaction failed to meet at least the following Parness criteria for revenue recogntion: (i) a delivery schedule was not fixed; (ii) Anika retained specific performance obligations, including final packaging, labeling and sterilization of the product; and (iii) the product was not complete and ready for shipment.
On March 31, 2000, Anika restated its earnings figures for 1998 and the first three quarters of 1999 in its 1999 Form 10-K ("March 2000 Restatement"). A material component of the restatement was the bill-and-hold transactions Anika entered into with the Distributor during the third quarter of 1998, second quarter of 1999, and third quarter of 1999. According to the March 2000 Restatement, Anika had materially overstated revenue and net income in its earlier periodic reports for those quarters. The March 2000 Restatement changed Anika's accounting treatment for those three transactions and stated in relevant part: "Anika had also recognized revenue in 1998 and the first three quarters of 1999 for Orthovisc which was held in its refrigerators at [the Distributor's] request. Under the Company's revised revenue recognition policy, this revenue will be recorded when the Orthovisc is shipped to [the Distributor]."
Accordingly, in its March 2000 Restatement, Anika reversed the June 30 and September 30, 1999 bill-and-hold transactions and restated revenues for the second and third quarters of 1999 by reducing revenue by the amounts previously recognized for those transactions.6 Anika's improper recognition of revenue from those transactions in the second and third quarters of 1999 resulted in an overstatement of revenues of $365,250, or 10.3% (second quarter of 1999), and $633,100, or 21.0% (third quarter of 1999); and overstatements of net income of $152,445, or 38.3% (second quarter of 1999), and $237,646, which resulted in a change from net income of $4,186 to a net loss of $233,460 (third quarter of 1999).
However, in its March 2000 Restatement, Anika, relying on advice from Canepa, improperly restated revenue for the September 30, 1998 bill-and-hold transaction by moving it to the fourth quarter of 1998 instead of to the first quarter of 1999, when the product was actually shipped and delivered to the Distributor. In or about February 2000, in preparing for the March 2000 restatement, Anika personnel provided Canepa a spreadsheet that correctly placed revenue from the September 30, 1998 transaction in the first quarter of 1999. Canepa recommended that, in the March 2000 restatement, Anika instead place the revenue in the fourth quarter of 1998 when payment was received. Anika followed Canepa's advice. However, Canepa's recommendation was incorrect and contrary to GAAP and the revised revenue recognition policy contained in the March 2000 Restatement.
At the time of the March 2000 Restatement, Canepa knew or should have known that the September 30, 1998 transaction failed to meet the following Parness bill-and-hold criteria for revenue recognition: (i) there was no fixed delivery date prior to December 31, 1998, the end of the fourth quarter of 1998; (ii) Anika retained specific performance obligations, including final packaging, labeling and sterilization of the product; and (iii) the product was not complete and ready for shipment.
On September 5, 2001, Anika restated its earnings from the September 30, 1998 transaction for a second time. Anika moved the revenue from the fourth quarter of 1998 into the first quarter of 1999. Thus, 1998 fourth quarter revenue was reduced by $342,980, or 10.08%, and net income for the period was reduced by $118,983, or 19.5%. Revenue and net income for the 1999 first quarter was increased by the same dollar amount. For the year ended 1998, Anika overstated revenue by $342,980, or 2.7%, and overstated net income by $118,983, or 3.3%.
Section 13(a) of the Exchange Act and Rules 13a-1 and 13a-13 thereunder require issuers of registered securities to file annual and quarterly reports with the Commission. It is implicit in this requirement that the information provided be accurate. See SEC v. Kalvex, Inc., 425 F. Supp. 310, 316 (S.D.N.Y. 1975) (filing misleading periodic 13(a) reports violates the federal securities laws); SEC v. IMC International, Inc., 384 F. Supp. 889, 893 (N.D. Tex. 1974) (Exchange Act reporting provisions are satisfied only by filing complete, accurate reports). 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 GAAP. See Peritus Software Services, Inc., Exchange Act Rel. No. 42673 (April 13, 2000), 2000 SEC LEXIS 724. 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 Indus., Inc., 587 F.2d 1149, 1167 (D.C. Cir. 1978), cert. denied, 440 U.S. 913 (1979); SEC v. Wills, 472 F. Supp.1250, 1268 (D.D.C. 1978).
Anika's recognition of revenue from the three bill-and-hold transactions, prior to shipment and delivery of the product, violated GAAP and contradicted the plain language of its revenue recognition policy as disclosed in filings with the Commission. As a result of Anika's premature recognition of revenue, its Forms 10-K for the years ended December 31, 1998 and December 31, 1999 and its Forms 10-Q for the quarters ended September 30, 1998, June 30, 1999, and September 30, 1999 materially overstated the company's revenues. Accordingly, the annual and quarterly reports discussed above were inaccurate, and Anika violated Section 13(a) of the Exchange Act and Rules12b-20, 13a-1, and 13a-13 thereunder.
Section 13(b)(2)(A) of the Exchange Act states in pertinent part that every reporting company must make and keep books, records and accounts that accurately and fairly reflect the issuer's transactions. Section 13(b)(2)(A) does not require a showing of scienter. SEC v. World-Wide Coin Investments, Ltd., 567 F. Supp. 724, 751 (N.D. Ga. 1983). Anika violated Section 13(b)(2)(A) by failing to maintain accurate records of its revenues and net income. The company's books and records reflected Anika's premature recording of revenues from bill-and-hold transactions that occurred in September 1998 and June and September 1999.
Canepa was a cause of Anika'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. Canepa reviewed and concurred with Anika's proposed recognition of revenue from bill-and-hold transactions in the second and third quarters of 1999 even though he knew or should have known that the transactions did not meet all of the Parness criteria for revenue recognition. Canepa also caused Anika to make material misstatements in its March 2000 restatement. In preparing for the restatement, Anika initially decided to place revenue from the September 1998 bill-and-hold transaction in the first quarter of 1999 (the quarter in which the product was shipped and delivered). Despite the plain language of Anika's restated revenue recognition policy, which explicitly stated that revenue from sales of Orthovisc to the Distributor would not be recognized until shipment, Canepa recommended instead that Anika recognize revenue for the sale in the fourth quarter of 1998 when payment was received. Anika followed Canepa's advice. Canepa knew or should have known that the accounting treatment he recommended was inconsistent with Anika's revised revenue recognition policy and did not meet several of the Parness criteria for revenue recognition in that quarter. In September 2001, Anika restated revenue from the September 1998 transaction for a second time by moving the revenue from the fourth quarter of 1998 into the first quarter of 1999.
In view of the foregoing, the Commission deems it appropriate to accept the Offer submitted by the Respondent and to impose the sanctions agreed to in the Respondent's Offer.
Accordingly, it is hereby ORDERED, pursuant to Section 21C of the Exchange Act, that:
Respondent Canepa shall cease and desist from causing any violations and any future violations 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 not binding on anyone other than Respondent.
2 On January 13, 2003, the Commission instituted and simultaneously settled related cease-and-desist proceedings against Anika, its former CEO, J. Melville Engle, and its former CFO, Sean F. Moran, In the Matter of Anika Therapeutics, Inc., et al., Exchange Act Rel. No. 46167 (January 13, 2003), 2003 WL 103216.
3 Orthovisc is a treatment for osteoarthritis that is manufactured in a liquid form and placed into syringes for injection into the knee. The product must be refrigerated during and after the manufacturing process and has a two year shelf life.
4 Generally, a bill-and-hold transaction is a practice whereby a customer agrees to purchase goods and the seller invoices the customer, but the seller retains physical possession until a later delivery date. There are very limited circumstances under GAAP that permit a seller to recognize revenue from a bill-and-hold transaction prior to shipping the goods, and Anika did not satisfy all of the necessary criteria for revenue recognition for its bill-and-hold transactions.
6 Revenue ultimately was recorded for these transactions in late 2000 when the contract was terminated and the units were destroyed pursuant to the parties' agreement.
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