UNITED STATES OF AMERICA
In the Matter of
Robert C. Guccione,
ORDER INSTITUTING CEASE-AND-DESIST PROCEEDING, 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 a cease-and-desist proceeding be, and hereby is, instituted pursuant to Section 21C of the Securities Exchange Act of 1934 ("Exchange Act") against Robert C. Guccione ("Respondent" or "Guccione").
In anticipation of the institution of this proceeding, Respondent has submitted an Offer of Settlement (the "Offer") which the Commission has determined to accept. Solely for the purpose of this proceeding and any other proceeding 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 this proceeding, Respondent consents to the entry of this Order Instituting Cease-and-Desist Proceeding, 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
1. This proceeding arises out of Guccione's failure to establish and maintain adequate disclosure controls and procedures at Penthouse International, Inc. ("Penthouse" or the "Company") required by the certification rule adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. It also arises out of his review and approval of public filings that nonetheless falsely represented that Penthouse had adequate disclosure controls and procedures. On May 23, 2003, Penthouse filed a quarterly report on Form 10-Q that Guccione had not seen or approved, but which nonetheless purported to bear his signature. That quarterly report also attached a Sarbanes-Oxley certification that also, falsely, purported to bear Guccione's signature. The quarterly report had also not been reviewed by Penthouse's auditor or counsel, and it materially overstated Penthouse's financial results for the quarter, by improperly recognizing $1 million in revenue, and thereby creating the false appearance of a profitable quarter. Thereafter, although he was aware of the circumstances surrounding the filing of the quarterly report, Guccione approved the filing of Forms 8-K that omitted to disclose that the quarterly report had been filed without his review or approval, while, in one case, falsely assuring investors that Penthouse's disclosure controls and procedures were adequate.
2. Robert C. Guccione, age 73, resides in New York, N.Y., and during the relevant period served as Penthouse's "principal executive officer" and "principal financial officer" within the meaning of the Sarbanes-Oxley certification rule, Exchange Act Rule 15d-14. During the relevant period Guccione, directly and indirectly, owned and controlled approximately 85% of Penthouse's common stock, but currently owns and controls none. Guccione resigned from his positions at Penthouse in November 2003.
3. Penthouse International, Inc. was, at all relevant times, a public company organized under the laws of Florida, headquartered in New York, New York. Penthouse never registered any class of securities under Section 12 of the Exchange Act and had been reporting pursuant to Section 15(d). Its primary business was the publication of Penthouse, a men's entertainment magazine with adult content owned by a Penthouse subsidiary, General Media, Inc. As of December 31, 2002, Penthouse had fewer than 300 record shareholders of its common stock, but continued to be quoted on the Over-the-Counter Bulletin Board under the symbol PHSL. Its trading symbol has since changed to PHSL.PK.
4. On April 30, 2003, Penthouse filed its first annual report on Form 10-K. Guccione reviewed the Form 10-K and signed it before it was filed. Attached to the Form 10-K was a Sarbanes-Oxley certification, which Guccione also signed. In the Sarbanes-Oxley certification Guccione certified, among other things, that he was responsible for establishing and maintaining disclosure controls and procedures as defined in Exchange Act Rule 15d-14, and that he had designed such disclosure controls and procedures to ensure that material information relating to Penthouse, including its consolidated subsidiaries, was made known to Penthouse's management.
5. On May 16, 2003, Penthouse filed a Form 12b-25, which indicated that the Company would be filing late its Form 10-Q for the quarter ended March 31, 2003. According to that filing, the Form 10-Q was to be filed on Wednesday May 21, 2003. Guccione signed the Form 12B-25.
6. On May 23, 2003, Penthouse filed its Form 10-Q for the period ended March 31, 2003. In the financial statements contained in the Form 10-Q, Penthouse improperly included as revenue $1 million received as an up-front payment in connection with a five-year website management agreement. The $1 million revenue should not have been recognized in the quarter ended March 31, 2003 for two reasons. First, the agreement was not actually signed until the following quarter. Second, under generally accepted accounting principles ("GAAP"), the $1 million payment should have been recognized as deferred revenue and amortized into income over the five-year life of the agreement. The inclusion of the $1 million payment under the agreement increased Penthouse's reported revenue by approximately 9%, from $11,072,000 to $12,072,000 and changed a quarterly net loss of $167,000 to a purported net profit of $828,000.
7. Attached to the Form 10-Q was a Sarbanes-Oxley certification bearing the electronic signature of Guccione, as Penthouse's Principal Executive Officer and Principal Financial Officer. The inclusion of Guccione's electronic signature created the impression that he had reviewed and approved the filing of the Form 10-Q (which also bore his electronic signature) and had signed the Sarbanes-Oxley certification. In fact, Guccione had not reviewed or approved the filing of the Form 10-Q and had not authorized the use of his electronic signature on the Sarbanes-Oxley certification (or the Form 10-Q). The Form 10-Q had been filed at the direction of another officer and director of Penthouse. The Form 10-Q had also not been reviewed by Penthouse's counsel or its independent auditor prior to its filing, a fact that was not disclosed in the filing.
8. On May 29, 2003 Penthouse filed a current report on Form 8-K disclosing that Eisner LLP had resigned as Penthouse's auditor in a dispute over Penthouse's Form 10-Q for the quarter ended March 31, 2003. The Form 8-K reported that Penthouse had received a letter from Eisner on May 29, 2003, in which Eisner stated that Penthouse's Form 10-Q failed to state that the financial statements contained therein were not reviewed by Eisner or by other independent certified public accountants. In the letter, Eisner also stated that Penthouse had requested Eisner to consider the accounting treatment regarding the website management agreement, for which Eisner presented a preliminary view. According to the letter, Penthouse accounted for this transaction in the Form 10-Q in a manner contrary to the preliminary view Eisner had expressed to Penthouse.
9. The May 29 Form 8-K did not disclose that, contrary to the representations in the Form 10-Q, Guccione had not reviewed or signed the Form 10-Q or the attached Sarbanes-Oxley certification. Guccione reviewed and signed the May 29 Form 8-K.
10. After the close of business on June 13, Penthouse filed another current report on Form 8-K disclosing that certain statements in the Form 10-Q were inaccurate. First, Penthouse noted that the Form 10-Q had stated that the website management agreement was entered into as of January 13, 2003, although the agreement in fact was not entered into until May 21, 2003, and the the website management agreement recited that it was effective as of March 31, 2003. Second, Penthouse corrected the description of the parties to the website management agreement, and the timing and method of the $1 million payment. Lastly, Penthouse announced its intention to file an amended Form 10-Q, and urged investors not to rely on the Form 10-Q that was already filed.
11. The June 13 Form 8-K did not disclose that Guccione had not reviewed or signed the Form 10-Q or the Sarbanes-Oxley certification, or authorized the filing of the Form 10-Q. This Form 8-K also affirmatively represented that Penthouse's existing disclosure controls and procedures were adequate and that the filing of the inaccurate Form 10-Q was caused by a failure to follow those procedures. Guccione reviewed and signed this Form 8-K, even though he knew that the Company's disclosure controls and procedures were not adequate and had permitted the filing of the Form 10-Q and accompanying Sarbanes-Oxley certification without his review or approval.
12. On September 25, 2003, Penthouse filed an amended Form 10-Q for the quarter ended March 31, 2003. The amended Form 10-Q disclosed that the original May 23, 2003 Form 10-Q was not reviewed, signed or approved by Guccione; that the original Form 10-Q had failed to disclose that the Company's independent auditors had not reviewed it before it was filed; and that the financial statements contained therein were inaccurate. The amended Form 10-Q, and the Form 10-Q filed for the subsequent quarter, also stated that the Company had determined that there were significant weaknesses in its disclosure controls – a statement that contradicted the earlier assurances provided in the Company's June 13 Form 8-K.
13. Exchange Act Rule 15d-14 requires, among other things, that all reports of a company filed on Form 10-Q include a certification signed by that company's principal executive officer and principal financial officer stating that he or she has reviewed the report being filed, that based on his or her knowledge, the report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by the report, and that based on his or her knowledge, the financial statements and other financial information included in the report, fairly present in all material respects the financial condition, results of operations and cash flows of the issuer as of, and for, the periods presented in the report. Rule 15d-14 also requires that a company's principal executive officer and principal financial officer certify that they are responsible for establishing and maintaining disclosure controls and procedures, have designed such disclosure controls and procedures to ensure that material information is made known to them, particularly during the period in which the periodic report is being prepared; have evaluated the effectiveness of the issuer's disclosure controls and procedures as of a date within 90 days prior to the filing date of the report; and have presented in the report their conclusions about the effectiveness of the disclosure controls and procedures based on the required evaluation as of that date. As a result of the conduct described above, Guccione violated Exchange Act Rule 15d-14.
14. Exchange Act Rule 15d-11 requires that companies file accurate current reports on Form 8-K. Exchange Act Rule 12b-20 requires that in addition to the information expressly required to be included in a public company's statement or report, there shall be added such further material information, if any, as may be necessary to make the required statements, in the light of the circumstances under which they are made, not misleading. As a result of the conduct described above, Guccione caused Penthouse to violate Section 15(d) of the Exchange Act and Rules 12b-20 and 15d-11 thereunder. Guccione inaccurately represented that Penthouse had adequate disclosure controls and procedures to ensure that material information was made known to him. Guccione made this representation in the June 13 Form 8-K. This representation was inaccurate. The June 13 8-K, and a Form 8-K filed on May 29, 2003, also omitted to disclose that the Form 10-Q had been filed without review by Guccione, or Penthouse's outside auditor or counsel.
In view of the foregoing, the Commission deems it appropriate to impose the sanctions agreed to in Respondent Guccione's Offer.
Accordingly, it is hereby ORDERED that Respondent Guccione cease and desist from causing any violations and future violations of Section 15(d) of the Exchange Act and Rules 12b-20 and 15d-11 thereunder and committing or causing any violations and any future violations of Rule 15d-14 thereunder.
By the Commission.
Jonathan G. Katz
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