Gary Moe and ID Integration
Securities Exchange Act of 1934
Release No. 50705 / November 19, 2004
Accounting And Auditing Enforcement
Release No. 2138 / November 19, 2004
Admin. Proc. File No. 3-11742
In the Matter of GARY MOE and ID INTEGRATION,, Respondents. |
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ORDER INSTITUTING CEASE-AND-DESIST PROCEEDINGS, MAKING FINDINGS, AND IMPOSING CEASE-AND-DESIST ORDERS PURSUANT TO SECTION 21C OF THE SECURITIES EXCHANGE ACT OF 1934 |
I.
The Securities and Exchange Commission ("Commission") deems it appropriate that cease-and-desist proceedings be, and hereby are, instituted pursuant to Section 21C of the Securities Exchange Act of 1934 ("Exchange Act") against Gary Moe ("Moe") and ID Integration ("IDI").
II.
In anticipation of the institution of these proceedings, Respondents Moe and IDI have submitted Offers of Settlement (the "Offers") that 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 them and over the subject matter of these proceedings, which are admitted, Respondents Moe and IDI consent to the entry of this Order Instituting Cease-and-Desist Proceedings, Making Findings, and Imposing Cease-and-Desist Orders Pursuant to Section 21C of the Securities Exchange Act of 1934 ("Order"), as set forth below.
III.
On the basis of this Order and the Respondents Moe's and IDI's Offers, the Commission finds1 that:
A. RESPONDENTS AND RELATED PARTY
Respondents
1. Moe, age 42, lives in Everett, Washington. He is the vice president of IDI, a company he co-founded in 1999. Moe has a B.S. in chemical engineering from the University of Washington.
2. IDI is a privately-held company headquartered in Renton, Washington. IDI is a distributor and systems integrator of marketing and bar code systems, products which enable IDI's customers to permanently identify and mark machine parts for tracking and safety purposes.
Related Party
3. Robotic Vision Systems, Inc. ("Robotic") is a Delaware corporation currently based in Nashua, New Hampshire. During the relevant time period, Robotic's corporate offices, as well as the offices of its Acuity CiMatrix ("ACIM") division, were located in Canton, Massachusetts. Robotic's ACIM division manufactures bar code reading systems and other computer systems that inspect products. At all relevant times, Robotic's common stock was registered with the Commission pursuant to Section 12(g) of the Exchange Act and was traded on the NASDAQ National Market System, and the company was required to file annual and quarterly reports with the Commission pursuant to Section 13(a) of the Exchange Act.
B. FACTS
Summary
4. This matter concerns Moe's and IDI's causing of Robotic's financial fraud and reporting violations. Between June and September 2000, Moe and IDI entered into two purported sales transactions with Robotic's ACIM division, in which ACIM granted IDI an unconditional right of return. Moe agreed to the second transaction even though only a few of the products from the first transaction had been sold. In September 2000, when negotiating the second transaction, an ACIM executive requested that IDI omit the right of return term from its purchase order so that Robotic could book revenue from the transaction. Moe agreed, and omitted any reference to the right of return. Few of the products from either transaction were ever sold, and IDI returned most of the products to Robotic. In its financial statements for its third quarter ended June 30, 2000 and its fiscal year ended September 30, 2000, Robotic recognized revenue from the transactions with IDI. Recognizing revenue was improper because IDI was not obligated to pay for the products. Together with other similar improper transactions, the IDI transactions caused Robotic's financial statements to be materially overstated.
Robotic's Conduct
5. Between August and December 2000, Robotic materially misstated its revenue and income in its financial statements filed with the Commission and in press releases announcing its results. In its annual report on Form 10-K for its fiscal year ended September 30, 2000, Robotic overstated its revenue by $4.74 million, or 2.1%, and its net income by $1.45 million, or 13.5%. In its quarterly report on Form 10-Q for its third quarter ended June 30,2000, Robotic overstated its revenue by $2.1 million, or 3.4%, and its net income by $517,000, or 9.7%. In May 2001, Robotic announced that it would restate its financial results.
6. Robotic's misstatements arose because the company improperly booked revenue from transactions its ACIM division entered into with distributors and customers. Between December 1999 and September 2000, senior personnel at ACIM entered into approximately 36 purported sales to distributors and customers which deferred, conditioned or even negated their obligation to pay for the products. This premature recognition of revenue constituted a failure to comply with generally accepted accounting principles ("GAAP").
Moe and IDI Caused Robotic's Improper Revenue Recognition
7. At the end of Robotic's fiscal third quarter, in June 2000, as ACIM was striving to generate revenue to make up for a shortfall at another Robotic division, an ACIM executive requested that IDI agree to act as a distributor for a new line of its products. IDI agreed to receive $525,000 worth of the products, and to pay for the products within 90 days. However, ACIM and IDI also agreed that after 90 days, IDI could either return the products without penalty or, with ACIM's consent, extend the payment period. IDI was concerned about its financial exposure in the transaction, and specifically wanted to avoid responsibility for payment of unsold product. The companies also agreed that the transaction would be a "ship in place" transaction, meaning that Robotic would continue to store the products. IDI sold only a few of the products. In its press release announcing its results for its third quarter ended June 30, 2000, Robotic referenced its supposed sales of the new product, stating that such "sales" had reached 1,000 units and $1.9 million. In reality, the vast majority of these purported sales were consignment transactions with IDI and two other distributors, in which there was no firm obligation to pay.
8. Beginning in July 2000, Robotic's controller, its CFO and a board member learned about the consignment nature of the IDI transaction and that, under its "ship in place" terms, Robotic continued to hold the products.
9. In August or September 2000, the ACIM executive again contacted Moe, this time requesting that IDI agree to a transaction involving $125,000 worth of a second product, supposedly designed to enhance the capabilities of the first product. Despite the fact that IDI had sold only a few of the first product, Moe agreed to this second transaction as well. The terms were the same as in the June transaction: IDI received indefinite payment terms and an unlimited right to return the products.
10. On September 2, 2000, the ACIM executive requested in an email that Moe agree to omit the right of return term from IDI's purchase order. The email stated, in pertinent part, that " . . . you cannot state that you have the right to return the product at no cost and at any time. When you do that we can't book the order as revenue." Moe agreed to conceal the contingent nature of the transaction, and he omitted the right of return term from IDI's purchase order. IDI ultimately returned nearly all of the first and second product to Robotic.
C. VIOLATIONS
Moe and IDI Caused Robotic's Violations of Sections 10(b) and 13(a) of the Exchange Act and Rules 10b-5, 12b-20 and 13a-1 thereunder
11. Moe and IDI caused Robotic's fraud violations by engaging in two transactions that enabled the company to inflate its revenues. Section 10(b) of the Exchange Act and Rule 10b-5 thereunder proscribe the making of materially false and misleading statements "in connection with the purchase or sale of any security." Violations of Section 10(b) and Rule 10b-5 occur when an issuer makes material misstatements in press releases, registration statements, prospectuses, or periodic reports filed with the Commission and trading thereafter occurs in the issuer's securities. Basic, Inc. v. Levinson, 485 U.S. 224, 231-232 (1988); SEC v. Texas Gulf Sulphur Co., 401 F.2d 833 (2d Cir. 1968), cert. denied, 394 U.S. 976 (1969). In addition, to establish liability for violations of Section 10(b) and Rule 10b-5, the Commission must prove that a person acted with scienter. See Aaron v. SEC, 446 U.S. 680, 686 n.5 (1980). Recklessness satisfies the scienter requirement. See, e.g., Rolf v. Blyth Eastman Dillon & Co., 570 F.2d 38, 46 (2d Cir.), cert. denied, 439 U.S. 1039 (1978).
12. Pursuant to Section 21C of the Exchange Act, a person "causes" a violation where he or she commits an act or omission that the person knew or should have known would contribute to such a violation. Section 3 of the Exchange Act defines "person" as a natural person, company, government, or political subdivision, agency, or instrumentality of a government. The evidence indicates that Moe knew or should have known that by entering into the transactions discussed in this Order, IDI would be assisting Robotic to improperly book revenue. Accordingly, Moe and IDI caused Robotic's violations of Section 10(b) of the Exchange Act and Rule 10b-5 thereunder.
13. Moe and IDI also caused Robotic's books and records and periodic reporting violations. Section 13(a) of the Exchange Act and Rules 12b-20 and 13a-1 require issuers of registered securities to file an annual report with the Commission. The information provided in the annual report must be accurate and must contain all information necessary to ensure that the statements made in it are not materially misleading. See SEC v. Kalvex, Inc., 425 F. Supp. 310, 316 (S.D.N.Y. 1975); SEC v. IMC International, Inc., 384 F. Supp. 889, 893 (N.D. Tex. 1974). 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. No showing of scienter is necessary to establish a violation of Section 13(a) or Rules 12b-20 and 13a-1. See SEC v. Savoy Industries, Inc., 587 F.2d 1149, 1167 (D.C. Cir. 1978); SEC v. Wills, 472 F. Supp.1250, 1268 (D.D.C. 1978).
14. By agreeing to the transactions discussed in this order, and by submitting a purchase order which omitted a material term, Moe and IDI enabled Robotic to record revenue improperly, thereby causing the company's financial statements and books and records to be materially inaccurate. Accordingly, Moe and IDI caused Robotic's violations of Section 13(a) of the Exchange Act and Rules 12b-20 and 13a-1 thereunder.
IV.
In view of the foregoing, the Commission deems it appropriate to impose the sanctions agreed to in Respondents Moe's and IDI's Offers.
Accordingly, pursuant to Section 21C of the Exchange Act, it is hereby ORDERED that:
A. Respondent Moe 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 and from causing any violations and any future violations of Section 13(a) of the Exchange Act and Rules 12b-20 and 13a-1 thereunder;
B. Respondent IDI cease and desist from committing or causing any violations and any future violations of Sections 10(b) and 13(a) of the Exchange Act and Rules 10b-5, 12b-20 and 13a-1 thereunder.
By the Commission.
Jonathan G. Katz
Secretary