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THOMAS A. ZACCARO, Cal. Bar No. 183241
Attorneys for Plaintiff
UNITED STATES DISTRICT COURT
Plaintiff Securities and Exchange Commission ("Commission") alleges as follows: JURISDICTION AND VENUE 1. This Court has jurisdiction over this action pursuant to Sections 20(b), 20(d)(1) and 22(a) of the Securities Act of 1933 ("Securities Act"), 15 U.S.C. §§ 77t(b), 77t(d)(1) and 77v(a), and Sections 21(d)(3)(A), 21(e) and 27 of the Securities Exchange Act of 1934 ("Exchange Act"), 15 U.S.C. §§ 78u(d)(3)(A), 78u(e) and 78aa. 2. Venue is proper in this district pursuant to Section 22(a) of the Securities Act, 15 U.S.C. § 77v(a), and Section 27 of the Exchange Act, 15 U.S.C. § 78aa, because certain of the transactions, acts, practices and courses of conduct constituting violations of the laws alleged herein occurred within the Central District of California and because one of the defendants resides therein. SUMMARY 3. This case involves financial fraud by Motorcar Parts and Accessories, Inc. ("Motorcar"), a public company based in Torrance, California. Motorcar remanufactures and sells alternators and starters for the automotive aftermarket industry. In 1997 and 1998, Motorcar reported false financial results to its shareholders, the Commission, and the public in its annual reports on Form 10-K and in a registration statement for an offering of its stock. Motorcar overstated its pre-tax earnings for fiscal year 1997 by $3,391,000 (59.8%) and for fiscal year 1998 by $3,576,000 (49.6%). 4. Motorcar falsified its earnings through its accounting for returned products. Motorcar remanufactures alternators and starters, called "cores," returned to it by customers. Motorcar gives its customers credit for the returned cores after it checks them in to its inventory. Because of the delay in checking returned product in to inventory and processing the related credits, Motorcar was required to establish reserves for credits owed to its customers. This reserve constituted an expense that was required to be charged against Motorcar's earnings. 5. Motorcar and its Chief Financial Officer Peter Bromberg ("Bromberg") committed financial fraud through two schemes at the end of fiscal years 1997 and 1998 relating to returned cores and customer credits. First, Motorcar had a significant number of product returns from its customers that it should have either checked in to inventory or established a reserve. To circumvent these requirements, Motorcar and Bromberg hid these returns from its independentauditors (the "Auditor") by shipping them to offsite storage. After the audit, Motorcar and Bromberg allowed the returns to be checked in to inventory. Second, Motorcar understated the reserve for returns and delayed issuing credits to customers. Motorcar and Bromberg prepared false schedules for the Auditor that supported an understated reserve for unprocessed credits. Motorcar and Bromberg then delayed processing customer credits until after the audit. As a result, Motorcar and Bromberg concealed the true amount of the reserve from the Auditor. 6. The Commission seeks to enjoin Motorcar and Bromberg from future violations of the federal securities laws. In addition, the Commission seeks to bar Bromberg from serving as an officer or director of a public company, to obtain disgorgement of all benefits Bromberg received from his securities violations, and to obtain civil money penalties. DEFENDANTS 7. Defendant Motorcar Parts and Accessories, Inc. is a New York corporation based in Torrance, California. Motorcar's securities are registered with the Commission pursuant to Section 12(g) of the Exchange Act and were traded on Nasdaq until it suspended trading on August 2, 1999. On September 2, 1999, Nasdaq delisted Motorcar's securities and the securities began trading over-the-counter. Motorcar filed with the Commission annual reports on Form 10-K on June 30, 1997 and June 30, 1998, and a registration statement on Form S-2 on October 29, 1997. 8. Defendant Peter Bromberg was the Chief Financial Officer ("CFO") of Motorcar from 1994 until he resigned in May 1999. Bromberg, as Motorcar's CFO and chief accounting officer, was responsible for the preparation of accurate financial statements. Bromberg signed Motorcar's 1997 and 1998 annual reports and its 1997 registration statement filed with the Commission. Bromberg was a Certified Public Accountant in the State of New York. GENERAL ALLEGATIONS
9. Motorcar was required to comply with federal statutes, rules and regulations to maintain public trading of its stock and to sell to the public its securities. These statutes, rules and regulations, designed to ensure that financial information is accurately recorded and publicly disclosed, required Motorcar to: (a) make and keep books, records and accounts, which, in reasonable detail, accurately and fairly reflected its transactions and dispositions of assets; (b) devise and maintain a system of internal accounting controls sufficient to provide reasonable assurances that the transactions are recorded as necessary to permit preparation of financial statements in conformity with generally accepted accounting principles ("GAAP") or any other criteria applicable to such statements and to maintain accountability for assets; (c) file with the Commission annual reports on the appropriate form (known as a "Form 10-K") for each fiscal year, including a financial statement disclosing the company's balance sheet and statements of income and cash flows prepared in conformity with GAAP and certified by an independent public accountant (or "auditor"); and (d) file with the Commission annual reports and registration statements that do not make any untrue statement of material fact or omit to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading. 10. GAAP requires a loss accrual (called a "reserve") when it is probable that an asset has been impaired and the amount can be reasonably estimated. In this case, the required reserves for customer credits were both probable and could have been reasonably estimated. The establishment of a reserve constitutes an expense item that reduces earnings. / / / Motorcar's Remanufacturing Process And Related Accounting 11. Motorcar's remanufacturing process begins when Motorcar's customers return used alternators and starters to Motorcar's warehouse in Torrance. Motorcar sorts the used alternators and starters, breaks them down into their component parts, remanufactures them to original manufacturer specifications, and then packages them for sale to its customers. Motorcar receives two types of core returns from its customers: core trade-ins and product returns (also called warranty or defect returns). 12. Motorcar gives its customers credit for the returned cores but does not issue these credits until after it checks the cores in to its inventory. 13. Motorcar has three stages of processing cores before it issues a credit to its customer. Initially, a customer contacts Motorcar and requests to return cores. When Motorcar approves the core return transaction, it issues a "return goods authorization" to the customer. The next stage is when the cores have been received at Motorcar's warehouse, but not yet checked in to inventory. They are unloaded into a designated area for temporary storage before sorting. Finally, Motorcar personnel check the cores in to inventory. Returned cores are unboxed, scanned into Motorcar's computer system, and then placed into bins in the warehouse. At this point the cores are considered "checked in" to inventory. 14. Because of the delay in checking the cores in to inventory and processing the related credits, Motorcar's policy was to establish reserves for credits due to customers that have yet to be processed. The effect of the reserve on Motorcar's financial statements was to reduce its earnings. Motorcar And Bromberg Understated Fiscal Year 1997 And 1998
15. During the last months of both fiscal 1997 and 1998, Motorcar received a substantial number of returns that it did not check in to inventory. Motorcar stored them offsite in trailers. The majority of these returns were product returns. 16. Bromberg participated in discussions concerning the plan to store the product returns offsite. He supervised the employees who arranged for the offsite storage. By storing the returns offsite, Bromberg deceived the Auditor into believing that all inventory and returns were accounted for properly. 17. At fiscal year end 1997 and 1998, Motorcar did not reserve for product returns received but not checked in to inventory. 18. By hiding the returns offsite and not reserving for them, Motorcar and Bromberg positively and materially impacted Motorcar's reported profitability for fiscal 1997 and 1998. 19. Motorcar overstated pre-tax earnings by $1,067,000, or 18.8%, by failing to properly reserve for product returns received but not checked in to inventory at March 31, 1997. 20. Similarly, Motorcar overstated pre-tax earnings by $1,176,000, or 16.3%, by failing to properly reserve for product returns received but not checked in to inventory for fiscal year ended March 31, 1998. Motorcar And Bromberg Understated Fiscal Year 1997 And 1998
21. For both fiscal 1997 and 1998, Bromberg was responsible for preparing the schedules showing the amount of unprocessed credits for customer returns. These schedules were given to Motorcar's Auditor to support the reserve that Motorcar established for unprocessed customer credits. Bromberg directed employees to delete customer returns from the schedules, resulting in schedules supporting a lower than required reserve for unprocessed credits. 22. For the fiscal year ended March 31, 1997, Motorcar should have reserved $2,824,000 for unprocessed customer credits. Because Motorcar gave aschedule to the Auditor with customer returns deleted from it, Motorcar reserved only $500,000. 23. For the fiscal year ended March 31, 1998, Motorcar should have reserved $2,701,000 for unprocessed customer credits. Because Motorcar gave a schedule to the Auditor with customer returns deleted from it, Motorcar reserved only $300,000. 24. In an attempt to conceal from Motorcar's Auditor the true amount of the reserve required, Bromberg directed that clerical staff delay any processing of credit memos relating to returns that had been deleted from the reserve schedules until after the Auditor completed its audit fieldwork. 25. Motorcar overstated its pre-tax earnings for fiscal year ended March 31, 1997 by $2,324,000, or 41%, by recording reserves for unprocessed customer credits of only $500,000 when required reserves were $2,824,000. 26. Similarly, Motorcar overstated its pre-tax earnings for fiscal year ended March 31, 1998 by $2,401,000, or 33.3%, by recording reserves for unprocessed customer credits of only $300,000 when required reserves were $2,701,000. Motorcar And Bromberg Filed False Financial Statements
27. Through the two schemes alleged in paragraphs 15 through 26 above, Motorcar and Bromberg overstated pre-tax earnings by $3,391,000 (59.8%) in Motorcar's annual report filed on Form 10-K for the fiscal year ended March 31, 1997 with the Commission. 28. Through the two schemes alleged in paragraphs 15 through 26 above, Motorcar and Bromberg overstated pre-tax earnings by $3,576,000 (49.6%) in Motorcar's annual report filed on Form 10-K for the fiscal year ended March 31, 1998 with the Commission. 29. Bromberg knew, or was reckless in not knowing, that Motorcar materially overstated its earnings in fiscal years 1997 and 1998 by failing to properly reserve for returns received but not checked in to inventory and by failing to properly reserve for returns checked in to inventory for which a credit had not been issued. Motorcar And Bromberg Included Motorcar's False 1997 Financial Statements In A Form S-2 Registration Statement 30. On October 29, 1997, Motorcar filed a registration statement with the Commission on Form S-2 registering 1.3 million shares of its common stock. It realized $19.8 million in net proceeds from this offering in November 1997. 31. Motorcar included its false 1997 financial statements in the Form S-2 registration statement. 32. Bromberg signed Motorcar's registration statement as both the company's chief financial officer and chief accounting officer when he knew, or was reckless in not knowing, that the 1997 financial statements included false earnings. Bromberg Lied To Motorcar's Auditor 33. In fiscal years 1997 and 1998, Bromberg lied to Motorcar's Auditor regarding the reserve for customer credits. He was responsible for the preparation of the schedules that Motorcar provided to its Auditor as support for the reserve for unprocessed credits. He knew that these schedules were false when Motorcar gave them to the Auditor. 34. In fiscal years 1997 and 1998, Bromberg also signed false management representation letters to the Auditor. In these letters, Bromberg made the following false representations: (a) "The inventory quantities include all of the company's goods, including goods not on the company's premises such as goods in public warehouses;" and (b) "There have been no irregularities involvingmanagement or employees who have significant roles in the system of internal accounting controls." 35. Bromberg knew, or was reckless in not knowing, that these representations were false because he knew that Motorcar stored returns offsite for both fiscal years ended March 31, 1997 and 1998 in order to avoid including the returns in Motorcar's inventory and that Motorcar did not reserve for them. He also knew that Motorcar gave the Auditor false schedules supporting Motorcar's reserve for unprocessed credits and then manipulated the timing for processing credits to avoid detection by the Auditor. Bromberg Improperly Obtained Bonuses In 1997 And 1998
36. Bromberg was eligible to receive cash bonuses if Motorcar's earnings before interest and taxes ("EBIT") exceeded EBIT of the prior fiscal year by 20%. For 1997, Bromberg received a $48,000 bonus, and, for 1998, he received a $28,275 bonus. If Motorcar and Bromberg, however, had properly reported reserves for customer credits in 1997 and 1998, Motorcar's EBIT would not have exceeded the EBIT for the prior year by 20%, and Bromberg would not have received these bonuses. Bromberg Improperly Reduced Accounts Payable At
37. In April 1999, Bromberg improperly reversed $544,000 of accounts payable that Motorcar had properly recorded in the fourth quarter of fiscal 1999. Bromberg reversed the accounts payable in order to enhance Motorcar's earnings. Motorcar never issued any financial statements that included the improperly reversed accounts payable amounts. Motorcar's Auditor Discovered The Fraud 38. In May 1999, Motorcar's Auditor was conducting its audit of Motorcar's financial statements for the fiscal year ended March 31, 1999. TheAuditor discovered several accounting discrepancies, including an understated reserve for unprocessed customer credits and an inappropriate reversal of accounts payable. Motorcar engaged the Auditor to investigate those accounting discrepancies. 39. Motorcar sought Bromberg's resignation and issued a press release on May 24, 1999, stating that it anticipated reporting a loss for the fourth quarter and entire fiscal year ended March 31, 1999. 40. At the end of July 1999, the Auditor completed its investigation and prepared an investigative report for Motorcar indicating that an illegal act had or may have occurred. Further, the Auditor withdrew its audit reports on Motorcar's fiscal 1997 and 1998 financial statements. 41. On August 1, 1999, Motorcar announced that it planned to restate its previously reported financial results because of accounting irregularities. It explained that it planned to restate its previously reported net income for 1997 from $5,534,000 to $2,851,000 and for 1998 from $6,602,000 to $6,017,000. Motorcar's stock price reacted dramatically to this announcement, dropping from $5.15 per share on August 1 to $1.50 per share on September 2, 1999. FIRST CLAIM FOR RELIEF
42. Paragraphs 1 through 41 are realleged and incorporated herein by reference. 43. Defendants Motorcar and Bromberg, and each of them, by engaging in the conduct described above, directly or indirectly, in the offer or sale of securities, by the use of means or instruments of transportation or communication in interstate commerce, or by use of the mails, directly or indirectly, (a) with scienter, employed devices, schemes or artifices to defraud; (b) obtained money or property by means of any untrue statement of a material fact or any omission to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading; or (c) engaged in transactions, practices, or courses of business which operate or would operate as a fraud or deceit upon the purchaser; in violation of Section 17(a) of the Securities Act of 1933, 15 U.S.C. § 77q(a). 44. By reason of the foregoing, each of the defendants violated, and unless restrained and enjoined will continue to violate, Section 17(a) of the Securities Act. SECOND CLAIM FOR RELIEF
45. Paragraphs 1 through 41 are realleged and incorporated herein by reference. 46. Defendants Motorcar and Bromberg, and each of them, with scienter, by engaging in the conduct described above, directly or indirectly, in connection with the purchase or sale of securities, by the use of means or instrumentalities of interstate commerce, or of the mails, (a) employed devices, schemes or artifices to defraud; (b) made untrue statements of material fact or omitted to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading; or (c) engaged in acts, practices or courses of business which operated or would operate as a fraud or deceit upon other persons; in violation of Section 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78j(b), and Rule 10b-5 thereunder, 17 C.F.R. § 240.10b-5. 47. By reason of the foregoing, each of the defendants violated, and unless restrained and enjoined will continue to violate, Section 10(b) of the Exchange Act and Rule 10b-5 thereunder. THIRD CLAIM FOR RELIEF
48. Paragraphs 1 through 41 are realleged and incorporated herein by reference. 49. Defendant Motorcar filed annual reports with the Commission on Form 10-K that failed to contain material information necessary to make the required statements in the Form 10-K, in light of the circumstances under which they were made, not misleading. 50. By reason of the foregoing, defendant Motorcar violated and, unless restrained and enjoined, will continue to violate, Section 13(a) of the Exchange Act, 15 U.S.C. § 78m(a), and Rules 12b-20 and 13a-1 thereunder, 17 C.F.R. §§ 240.12b-20 and 240.13a-1. 51. By reason of the foregoing, and pursuant to Section 20(e) of the Exchange Act, defendant Bromberg aided and abetted Motorcar's violation of Section 13(a) of the Exchange Act, and Rules 12b-20 and 13a-1 thereunder. Unless restrained and enjoined, Bromberg will continue to aid and abet violations of Section 13(a) of the Exchange Act, and Rules 12b-20 and 13a-1 thereunder. FOURTH CLAIM FOR RELIEF
52. Paragraphs 1 through 41 are realleged and incorporated herein by reference. 53. Defendant Motorcar, directly or indirectly, by the use of any means or instrumentality of interstate commerce or of the mails, or of any facility of any national securities exchange, failed to make and keep accurate books, records, and accounts which, in reasonable detail, accurately and fairly reflect the transactions and disposition of the assets of the issuer; in violation of Section 13(b)(2)(A) of the Exchange Act, 15 U.S.C. § 78m(b)(2)(A). 54. By reason of the foregoing, defendant Motorcar violated, and unless restrained and enjoined, will continue to violate, Section 13(b)(2)(A) of the Exchange Act. FIFTH CLAIM FOR RELIEF
55. Paragraphs 1 through 41 are realleged and incorporated herein by reference. 56. By reason of the foregoing, and pursuant to Section 20(e) of the Exchange Act, defendant Bromberg aided and abetted Motorcar's violation of Section 13(b)(2)(A) of the Exchange Act, and, unless restrained and enjoined, will continue to aid and abet violations of Section 13(b)(2)(A) of the Exchange Act. 57. Defendant Bromberg further violated Rule 13b2-1 under the Exchange Act, 17 C.F.R. § 240.13b2-1, which prohibits falsifying any book, record or account subject to Section 13(b)(2)(A) of the Exchange Act. Unless restrained and enjoined, Bromberg will continue to violate Rule 13b2-1 under the Exchange Act. SIXTH CLAIM FOR RELIEF
58. Paragraphs 1 through 41 are realleged and incorporated herein by reference. 59. Defendant Motorcar, directly or indirectly, by the use of any means or instrumentality of interstate commerce or of the mails, or of any facility of any national securities exchange, failed to devise and maintain a system of internal accounting controls sufficient to provide reasonable assurances that financial statements are prepared in conformity with Generally Accepted Accounting Principles; in violation of Section 13(b)(2)(B) of the Exchange Act, 15 U.S.C. § 78m(b)(2)(B). 60. By reason of the foregoing, defendant Motorcar violated, and unless restrained and enjoined, will continue to violate, Section 13(b)(2)(B) of the Exchange Act. / / /
SEVENTH CLAIM FOR RELIEF
61. Paragraphs 1 through 41 are realleged and incorporated herein by reference. 62. By reason of the foregoing, and pursuant to Section 20(e) of the Exchange Act, defendant Bromberg aided and abetted Motorcar's violation of Section 13(b)(2)(B) of the Exchange Act, and, unless restrained and enjoined, will continue to aid and abet violations of Section 13(b)(2)(B) of the Exchange Act. 63. Defendant Bromberg further violated Section 13(b)(5) of the Exchange Act, 15 U.S.C. § 78m(b)(5), which prohibits circumventing or failing to implement a system of internal accounting controls. Unless restrained and enjoined, Bromberg will continue to violate Section 13(b)(5) of the Exchange Act. EIGHTH CLAIM FOR RELIEF
64. Paragraphs 1 through 41 are realleged and incorporated herein by reference. 65. By engaging in the conduct described above, and in connection with the preparation and filing of statements and reports with the Commission, Bromberg, directly or indirectly, made or caused to be made materially false or misleading statements to accountants and omitted to state, or caused another person to omit to state, to accountants, material facts necessary in order to make statements made to the accountants, in light of the circumstances under which such statements were made, not misleading. 66. Bromberg violated and, unless restrained and enjoined, will continue to violate Rule 13b2-2 under the Exchange Act, 17 C.F.R. §240.13b2-2. PRAYER FOR RELIEF WHEREFORE, the Commission respectfully requests that the Court: I. Issue findings of fact and conclusions of law that defendants Motorcar and Bromberg committed the violations alleged and charged herein. II. Issue final judgments of permanent injunction, in a form consistent with Fed. R. Civ. P. 65(d): (a) enjoining Motorcar from violating Section 17(a) of the Securities Act, 15 U.S.C. § 77q(a), Section 10(b) of the Exchange Act, 15 U.S.C. § 78j(b), and Rule 10b-5 thereunder, 17 C.F.R. § 240.10b-5, Section 13(a) of the Exchange Act, 15 U.S.C. § 78m(a), and Rules 12b-20 and 13a-1 thereunder, 17 C.F.R. §§ 240.12b-20 and 240.13a-1, Section 13(b)(2)(A) of the Exchange Act, 15 U.S.C. § 78m(b)(2)(A), and Section 13(b)(2)(B) of the Exchange Act, 15 U.S.C. § 78m(b)(2)(B); and (b) enjoining Bromberg from violating Section 17(a) of the Securities Act, 15 U.S.C. § 77q(a), Section 10(b) of the Exchange Act, 15 U.S.C. §§ 78j(b), and Rule 10b-5 thereunder, 17 C.F.R. § 240.10b-5, Section 13(a) of the Exchange Act, 15 U.S.C. § 78m(a), and Rules 12b-20 and 13a-1 thereunder, 17 C.F.R. §§ 240.12b-20 and 240.13a-1, Section 13(b)(2)(A) of the Exchange Act, 15 U.S.C. § 78m(b)(2)(A), Rule 13b2-1 under the Exchange Act, 17 C.F.R. § 240.13b2-1, Section 13(b)(2)(B) of the Exchange Act, 15 U.S.C. § 78m(b)(2)(B), Section 13(b)(5) of the Exchange Act, 15 U.S.C. §78m(b)(5), and Rule 13b2-2 under the Exchange Act, 17 C.F.R. § 240.13b2-2. III. Enter an order, pursuant to Section 21(d)(2) of the Exchange Act, 15 U.S.C. § 78u(d)(2), prohibiting Bromberg from acting as an officer or director of any issuer that has a class of securities registered pursuant to Section 12 of the Exchange Act, 15 U.S.C. § 781, or that is required to file reports pursuant to Section 15(d) of the Exchange Act, 15 U.S.C. § 78o(d). IV. Enter an order directing Bromberg to disgorge all ill-gotten gains from his illegal conduct, gained directly or indirectly from the transactions complained of herein, together with prejudgment interest thereon pursuant to 28 U.S.C. § 1961. V. Enter an order directing Bromberg to pay civil penalties under Section 20(d) of the Securities Act, 15 U.S.C. § 77t(d), and Section 21(d)(3) of the Exchange Act, 15 U.S.C. § 78u(d)(3). VI. Retain jurisdiction of this action in accordance with the principles of equity and the Federal Rules of Civil Procedure in order to implement and carry out the terms of all orders and decrees that may be entered, or to entertain any suitable application or motion for additional relief within the jurisdiction of this Court. / / /
VII. Grant such other and further relief as this Court may determine to be just and necessary.
http://www.sec.gov/litigation/complaints/comp17736.htm
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