Robert W. Armstrong, III Carol Fox Foelak, Administrative Law Judge
SECURITIES EXCHANGE ACT OF 1934
Release No. 48325 / August 12, 2003
ACCOUNTING AND AUDITING ENFORCEMENT
Release No. 1837 / August 12, 2003
ADMINISTRATIVE PROCEEDING
File No. 3-9793
In the Matter of Jean-Paul Bolduc, Brian J. Smith, C.P.A., Respondents. |
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ORDER MAKING FINDINGS AND IMPOSING CEASE-AND-DESIST ORDER AGAINST CONSTANTINE L. HAMPERS, M.D. |
I.
The Securities and Exchange Commission ("Commission") deems it appropriate to accept the Offer of Settlement ("Offer") submitted by Constantine L. Hampers, M.D. ("Dr. Hampers" or "Respondent") pursuant to Rule 240(a) of the Rules of Practice of the Commission, 17 C.F.R. § 201.240(a), for the purpose of settlement of public cease-and-desist proceedings instituted against him by the Commission on December 22, 1998 pursuant to an Order Instituting Public Administrative and Cease-and-Desist Proceedings Pursuant to Section 21C of the Securities Exchange Act of 1934 and Rule 102(e) of the Commission's Rules of Practice ("OIP").
II.
Solely for the purpose of this proceeding, Dr. Hampers admits the jurisdiction of the Commission over him and over the subject matter of these proceedings, and consents to the entry by the Commission of this Order, which orders Dr. Hampers to cease and desist from committing or causing any violation and any future violation of Section 13(b)(5) of the Securities Exchange Act of 1934 ("Exchange Act") and Rule 13b2-1 thereunder, and from causing any violation and any future violation of Sections 13(a) and 13(b)(2) of the Exchange Act and Rules 12b-20, 13a-1, and 13a-13 thereunder.
III.
On the basis of this Order and the Respondent's Offer, the Commission finds that:1
BACKGROUND
1. Respondent Dr. Hampers was the founder of National Medical Care ("NMC") and chairman and chief executive from 1971 through June 1996. From March 1991 until December 1996, Dr. Hampers was an executive vice president and member of the board of directors of W.R. Grace & Co. ("Grace").
2. Grace was a New York corporation with its principal executive offices in Boca Raton, Florida during at least 1991 through 1996. Grace's primary businesses were packaging, specialty chemicals and health care services. During the relevant time period, Grace had a December 31 fiscal year end.
3. Between at least fiscal years 1991 and 1995, NMC was Grace's main health care subsidiary, with its headquarters in Waltham, Massachusetts. NMC provided kidney dialysis and home health services and manufactured specialized medical products. During the relevant period, NMC comprised the bulk of Grace's Health Care Group, which group was, until the first quarter of 1995, one of Grace's core businesses and was reported as a segment in Grace's consolidated financial statements. The Health Care Group contributed a significant portion of the consolidated pretax earnings of Grace during the majority of the period 1991-1995.
EXCESS RESERVES AT NMC
4. As described in greater detail below, during the fiscal years 1991 through 1995 ("relevant period"), Grace engaged in fraudulent conduct by deferring income earned by NMC primarily to smooth the earnings of the Health Care Group. Grace deferred reporting income by increasing or establishing "excess reserves" that were not in conformity with generally accepted accounting principles ("GAAP"). Grace used the reserves to manipulate the reported quarterly and annual earnings of the Health Care Group and Grace.2
Creation of the Excess Reserves
5. Beginning in 1990 or 1991, NMC experienced a significant and unanticipated increase in revenues and earnings, in excess of Grace's internal forecasts, due to changes in Medicare reimbursement procedures. Dr. Hampers and other members of NMC senior management deferred some of the unanticipated income by increasing or establishing reserves (an expense).
6. At some point in mid-1991, as the reserves reached a level of between $10 and $20 million, certain members of NMC senior management realized that the reserves were going to be significant by year end and contacted Grace management to determine how Grace wanted NMC to account for the reserves, which became known as the "excess reserves." Grace management directed that NMC maintain the excess reserves and report Health Care Group earnings consistent with Grace's targeted levels (specifically a 24% growth rate for 1991 and a 27-28% growth rate for 1992) because Grace would not be credited by the investing public for growth rates beyond the targeted levels. Thus, rather than report its actual earnings, NMC, at the direction of certain former members of Grace senior management, underreported its earnings for 1991 and 1992.
7. The final reported 1991 growth rate for the Health Care Group was 24%, and the final reported 1992 growth rate was 27.5%.
Use of the Excess Reserves
8. During the relevant period, the excess reserves were primarily used for profit planning purposes, i.e., to bring the Health Care Group's quarterly reported results of operations in line with Grace's targets for the Health Care Group. In general, from 1991 through the first quarter of 1995, the reported Health Care Group growth rates remained relatively steady - from about 23% to 37% -- whereas the actual growth rates fluctuated from about an 8% decline in growth to a 61% increase.
9. However, at various times, Grace also directed NMC to release some of the excess reserves to increase Grace's earnings per share. For example, Grace requested NMC to report an additional $1.5 million in income for the fourth quarter of 1994 because Grace needed the additional income for its consolidated results of operations.
10. Throughout the relevant period, Dr. Hampers and other officers of NMC and Grace discussed the creation and use of the excess reserves with Price Waterhouse LLP ("PW"), Grace's independent auditors. (PW merged with Coopers & Lybrand, L.L.P. on July 1, 1998 to form PricewaterhouseCoopers LLP.) Also throughout the relevant time period, PW performed audits of Grace's consolidated financial statements and issued audit reports containing unqualified opinions thereon.3 Additionally, during the relevant time period, Grace's audit committee was advised of the excess reserves and that PW had concluded the excess reserves did not significantly affect Grace's consolidated financial statements or the financial reporting process. Dr. Hampers was aware of PW's conclusions as communicated to the audit committee.
RESPONDENT'S CONDUCT
11. Dr. Hampers, in his position as CEO of NMC, knew NMC was entering the excess reserve information in NMC's books and records at the direction of Grace management as a step in the process of consolidating NMC's financial information into Grace's financial statements, and allowed the activity to continue. Thus, Dr. Hampers, through his actions or omissions, was a cause of (i) Grace filing periodic reports that contained material misstatements and omissions, and (ii) Grace's failure to make and keep books and records which accurately reflected its transactions and maintain a system of internal accounting controls sufficient to provide reasonable assurances that transactions were recorded as necessary to permit the preparation of financial statements in conformity with GAAP.
12. On December 22, 1998 the Commission issued the OIP against Respondent and other members of senior management of Grace and NMC. In re Bolduc, et al., Administrative Proceeding File No. 3-9793.
VIOLATIONS
13. Based upon the aforesaid conduct, Respondent Dr. Hampers was a cause of Grace's violations of Sections 13(a), 13(b)(2) and 13(b)(5) of the Exchange Act and Rules 12b-20, 13a-1, 13a-13 and 13b2-1 thereunder.
IV.
Respondent Dr. Hampers has submitted an Offer of Settlement in which, without admitting or denying the findings herein, he consents to the Commission's entry of this Order, which: (1) makes findings, as set forth above; and (2) orders Dr. Hampers to cease and desist from committing or causing any violations, or future violations, of certain provisions of the federal securities laws, as set forth below. As set forth in Dr. Hampers' Offer of Settlement, Dr. Hampers undertakes to cooperate with the Commission staff in preparing for and presenting any civil litigation or administrative proceedings concerning any transaction that is the subject of the Order.
V.
On the basis of the foregoing, the Commission deems it appropriate to accept Respondent's Offer.
ACCORDINGLY, IT IS ORDERED that:
Respondent Dr. Hampers cease and desist from committing or causing any violation and any future violation of Section 13(b)(5) of the Exchange Act and Rule 13b2-1 thereunder, and from causing any violation and any future violation of Sections 13(a) and 13(b)(2) of the Exchange Act and Rules 12b-20, 13a-1, and 13a-13 thereunder.
By the Commission.
| Jonathan G. Katz Secretary |
| The findings herein are made pursuant to Respondent Dr. Hampers' Offer of Settlement and are not binding on any other person or entity in this or any other proceeding. | |
| On June 30, 1999, Grace consented to the entry of an Order by the Commission (the "Grace Order") requiring Grace to cease and desist from committing or causing any violation and any future violation of Sections 10(b), 13(a) and 13(b) of the Exchange Act and Rules 10b-5, 12b-20, 13a-1 and 13a-13 thereunder. See In the Matter of W. R. Grace & Co., Securities Exchange Act Release No. 41578; Accounting and Auditing Enforcement Release No. 1140 (June 30, 1999). Pursuant to the Grace Order, Grace also undertook to establish a fund of $1 million for program(s) to further awareness and education relating to financial statements and generally accepted accounting principles. | |
| On June 30, 1999, the Commission, on consent, ordered two PW partners who were involved in the audits of Grace's consolidated financial statements during the relevant period to cease and desist from causing any violation and any future violation of Sections 13(a) and 13(b) of the Exchange Act and Rules 12b-20, 13a-1 and 13a-13 thereunder. See In the Matter of Eugene Gaughan, C.P.A., Securities Exchange Act Release No. 41580, Accounting and Auditing Enforcement Release No. 1141 (June 30, 1999); In the Matter of Thomas Scanlon, C.P.A., Securities Exchange Act Release No. 41581, Accounting and Auditing Enforcement Release No. 1142 (June 30, 1999). |