 |
Home | Previous Page | |
|
||
 |
|
|
|
||
 |
|
|
|
|
|||||||||||||||
|
|
|||||||||||||||
|
|
THOMAS A. ZACCARO, Cal. Bar No. 183241
Attorneys for Plaintiff
UNITED STATES DISTRICT COURT
Plaintiff Securities and Exchange Commission ("Commission") alleges as follows: SUMMARY 1. This matter involves a wide-ranging scheme to inflate revenue at Portland, Oregon-based FLIR Systems, Inc. ("FLIR") during 1998 and 1999. FLIR inflated revenue and engaged in improper revenue recognition practices to meet earnings estimates and budget targets established by its President and ChiefExecutive Officer, J. Kenneth Stringer III. FLIR also misstated its income statement and balance sheet by booking expenses as assets. Further, FLIR overstated accounts receivable in 1998 by double-booking various transactions. 2. The fraudulent acts were carried out by senior management at FLIR, including Stringer, Senior Vice President of Finance and Chief Financial Officer J. Mark Samper, Senior Vice President of Sales for Airborne Products Worldwide William N. Martin, and Director of Sales Operations Steven R. Eagleburger. 3. Throughout 1998 and 1999, Stringer set internal earnings targets and pressured his finance and sales staff to meet those targets. As a result of that pressure, Samper, Martin and Eagleburger engaged in six improper revenue recognition practices: (1) booking false sales; (2) shipping products different from what the customer had ordered (referred to by FLIR personnel as "placeholders"); (3) entering into side agreements with customers providing rights of return or contingencies; (4) booking rental agreements as sales even though title to the product did not transfer to the renter; (5) recognizing revenue on sales with unmet consignments or contingencies; and (6) recognizing revenue for improper "bill and hold" transactions. These practices violated generally accepted accounting principles ("GAAP") and were inconsistent with FLIR's own revenue recognition policy. 4. Stringer was involved in a fraudulent $4.1 million transaction at year-end 1998, signed a side letter for an improperly recognized $480,481 sale at year-end 1998, and authorized his finance department improperly to recognize revenue based upon letters of intent for at least two additional sales transactions in 1998 and 1999. In addition, Stringer knew, or was reckless in not knowing, that three sales transactions in the second quarter of 1999 were fraudulently recognized. Stringer also knew, or was reckless in not knowing, that recognition of revenue on certain sales, the collectibility of revenue on numerous fraudulently recognized sales, and the effectiveness of FLIR's internal accounting controls wereproblematic during 1998 and 1999. Yet, notwithstanding Stringer's prior experience and training as a CPA and as FLIR's CEO and CFO, Stringer failed to take corrective action. As a result, Stringer knew, or was reckless in not knowing, that FLIR's financial statements in 1998 and 1999 were false and misleading. Stringer also misled FLIR's auditors regarding transactions for which revenue had been fraudulently recognized. 5. Samper selected units to ship as placeholders and authorized the recognition of revenue for false sales, sales with insufficient commitments to purchase from the customers, and contingent sales. In addition, Samper also concealed expenses incurred by FLIR as assets in a suspense account called the "project inventory" account. Through this account, Samper inflated FLIR's earnings to meet targets set by Stringer and concealed the costs of returned or reworked units related to some fraudulently recognized sales transactions. Samper also caused various receivables to be recorded twice in FLIR's accounts receivable by booking arbitrary adjustments to the accounting records. Finally, Samper provided false financial information for a press release issued by FLIR in February 2000. 6. Martin directed sales personnel to obtain non-binding letters of intent documenting purported sales from agents of FLIR when FLIR's customers declined to submit purchase orders before the close of an accounting period. Martin also approved contingent sales, consignment sales, and side letters granting customers the right to return units - and concealed the real terms of those sales from FLIR's independent auditors, PricewaterhouseCoopers, L.L.P. ("PwC"). Finally, Martin circumvented internal controls by directing FLIR's sales staff and accounting staff to enter sales orders without proper documentation from customers. 7. Eagleburger authorized sales order entry with insufficient documentation from customers demonstrating the existence of an order. Eagleburger also directed and approved changes to sales orders that caused placeholder units to be shipped to third-party warehouses or customers when FLIR could not provide a customer with the product it had actually ordered before the end of an accounting period. Eagleburger worked closely with Samper, Martin, and others to select these placeholder units for shipment. 8. Stringer, Samper, and Martin also concealed these actions from PwC through false and misleading representations in management representation letters. 9. Cumulatively, these actions caused FLIR's earnings before income taxes to be materially overstated for each of the quarters of 1998 and 1999 as well as for year-end 1998. FLIR reported pre-tax earnings for the first quarter of 1998 of $411,000 when FLIR actually had a loss of $325,000 for that quarter. Likewise, FLIR reported pre-tax earnings for the second and third quarters of 1998 that were overstated by 62% and 25%, respectively. For the year-end 1998, FLIR overstated pre-tax earnings by 165%. FLIR also understated losses before income taxes by 11% for the first quarter of 1999; overstated pre-tax earnings by 578% for the second quarter of 1999; and overstated pre-tax earnings by 60% for the third quarter of 1999. FLIR also filed false and misleading periodic reports on Forms 10-K and 10-Q that incorporated these earnings misstatements. Additionally, FLIR filed two registration statements with the Commission that incorporated these earnings misstatements: a registration statement on Form S-3 in May 1998, and a registration statement on Form S-1 in November 1999. 10. FLIR restated its 1998 and 1999 financial statements three times in 2000 and 2001 to correct these misstatements. 11. The Commission seeks, among other things: (1) to enjoin defendants from future violations of the federal securities laws; (2) to bar Stringer, Samper, and Martin from serving as an officer and director of a publicly traded company; (3) to obtain disgorgement of all benefits received by Stringer, Samper, and Martin from their violations of the securities laws; and (4) to obtain civil monetarypenalties for the violations. JURISDICTION AND VENUE 12. 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. Defendants have, directly or indirectly, made use of the means or instrumentalities of interstate commerce, of the mails, or of the facilities of a national securities exchange in connection with the transactions, acts, practices and courses of business alleged in this Complaint. 13. 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 District of Oregon and because certain of the defendants reside therein. THE DEFENDANTS 14. Defendant J. Kenneth Stringer III resides in Lake Oswego, Oregon. He was a CPA licensed by the State of Oregon until 1978. Stringer was FLIR's Chief Financial Officer from 1985 through 1995. In 1995, Stringer was promoted to President and Chief Operating Officer. From January 1999 to May 2000, Stringer was FLIR's President and Chief Executive Officer. 15. Defendant J. Mark Samper resides in Portland, Oregon. Samper is a CPA licensed by the State of Oregon. From 1990 to 1995, Samper was FLIR's controller. From 1995 until February 2000, Samper was FLIR's Senior Vice President of Finance and Chief Financial Officer. Samper reported to Stringer. 16. Defendant William N. Martin resides in Lake Oswego, Oregon. Martin joined FLIR in 1994 and held various positions in the sales department until 1997. In 1997, he became FLIR's Senior Vice President of Sales forAirborne Products Worldwide and held that position until June 2000. Martin reported to Stringer. 17. Defendant Steven R. Eagleburger resides in West Linn, Oregon. Eagleburger worked at FLIR from 1990 through 2000. In 1998 through 2000, he was the Director of Sales Operations. Eagleburger reported to Martin. GENERAL ALLEGATIONS The Company and Related Accounting Rules 18. FLIR is an Oregon corporation headquartered in Portland, Oregon. FLIR's common stock is registered with the Commission pursuant to Section 12(g) of the Exchange Act and trades on the Nasdaq National Market System. FLIR designs and manufactures thermal imaging and broadcast camera systems that detect infrared radiation. 19. FLIR 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 FLIR 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 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"); (d) file with the Commission quarterly reports on the appropriate form (known as a "Form 10-Q") for each fiscal year including a financial statementdisclosing the company's balance sheet and statements of income and cash flows prepared in conformity with GAAP; and (e) file with the Commission periodic 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. 20. FLIR used a calendar year as its fiscal year. In 1998 and 1999, FLIR's first quarter ended March 31; its second quarter ended June 30; its third quarter ended September 30; and its fourth quarter ended December 31. 21. Under GAAP, the Commission's rules and regulations, and FLIR's own publicly stated accounting policies, FLIR's sales revenue and income were recorded and reported for specific periods - i.e., at the end of each quarter and at the end of its fiscal year. FLIR could recognize revenue from a sale during a particular reporting period only if: (1) persuasive evidence existed of a sales arrangement with a customer; (2) delivery of the product had occurred; (3) the price for the product was fixed or determinable; (4) collectibility of the sales price was reasonably assured; and (5) FLIR had substantially performed all of its obligations to the customer. 22. FLIR used a third-party warehouse (the "bonded warehouse") to hold systems that were being exported to foreign customers while those systems were awaiting export licenses from the Department of State or the Department of Commerce. Because of delays between applying for an export license and the receipt of the license, FLIR's revenue recognition policy allowed revenue to be recognized upon shipment to the bonded warehouse under "bill and hold" principles if the only remaining obligation was the approval of a license for the units. These bill and hold principles required: (1) the risks of ownership for the units had to have passed to the buyer; (2) the customer must have made a fixed commitment to purchase the goods, preferably reflected in written documentation;(3) the buyer, not the seller, must have requested that the transaction be on a bill and hold basis and must have had a substantial business purpose for ordering the goods on a bill and hold basis; (4) there must have been a fixed schedule for delivery of the goods that was reasonable and consistent with the buyer's business purpose; (5) the seller must not have retained any specific performance obligations such that the earnings process was not complete; (6) the ordered goods must have been segregated from the seller's inventory and not have been subject to being used to fill other orders; and (7) the equipment must have been complete and ready for shipment. 23. GAAP does not permit companies to recognize revenue for contingent sales. As used herein, a "contingent sale" refers to a sale in which the reseller (FLIR's purported customer) does not have an obligation to pay for the systems purchased. A contingent sale may arise when a reseller is informally assured that it has the right to cancel a sale before any payment is made, or to exchange systems for other products, or to delay payment until a final sale is made to an end-user. Under GAAP, contingent sales may not be recognized as revenue because collectibility of the sales price is not probable. 24. GAAP also does not permit sales with rights of return to be recognized as revenue except when there is a history of such sales to provide a basis for estimating the amount of future returns and if income is reduced to reflect the estimated future returns through the establishment of a reserve for returned merchandise. 25. GAAP also does not permit companies to recognize revenue for rental transactions in which the lessee does not take title to the systems. Rather, under GAAP, the lessor should recognize only the rental revenue earned in the reporting period. Stringer Pressured FLIR Personnel to Meet Analysts' Estimates 26. Throughout 1998 and 1999, Stringer established budgets andexpected results for FLIR's growth. During this time, Stringer maintained sales and revenue data comparing FLIR's actual results against both budgeted results and several analysts' estimates. This data was maintained by Stringer in various spreadsheets. Samper updated this data regularly with actual sales and revenue numbers, which he and Stringer used to track FLIR's performance to budget. Throughout 1998 and 1999, Stringer held senior staff meetings with, among others, Samper and Martin, to discuss FLIR's performance as reflected in Stringer's data. FLIR's actual earnings per share generally met or exceeded analysts' estimates, although its revenues did not. 27. During Stringer's senior staff meetings, Stringer pressured management, including Samper and Martin, to meet internal earnings projections. In periods preceding major events at FLIR, such as public offerings, bank loan approvals, or mergers, this pressure for results was exacerbated. In response to this pressure, FLIR personnel, including Samper, Martin, and Eagleburger, took a variety of actions aimed at achieving expected results. Together they engaged in improper revenue recognition practices by manipulating FLIR's sales order entry processes and circumventing internal controls. Additionally, Samper used suspense accounts to overstate assets and understate expenses, and double-booked two accounts receivables, causing earnings to be overstated in 1998. 28. Stringer had information about the improper conduct of Samper, Martin, and Eagleburger and nevertheless failed to take action to ensure that revenue was being properly recognized. As FLIR's CEO and based on his experience at FLIR and as a former CPA, Stringer knew, or was reckless in not knowing, that from at least October 1998 through March 2000, FLIR's financial statements were false and misleading. Stringer also assisted in the fraudulent revenue recognition scheme by participating in at least four transactions at year-end 1998 and one transaction in the quarter ended September 30, 1999 that were improperly reported as revenue. 29. Stringer further engaged in fraudulent conduct by improperly managing earnings throughout 1998 and 1999. Stringer accomplished this by refusing to reverse transactions that he knew were uncollectible until FLIR had obtained new sales that would offset the impact on FLIR's earnings of the reversal. FLIR personnel referred to this practice as "revenue borrowing." 30. Stringer had substantial motives to meet quarterly and annual pre-tax earnings targets he had set and presented to FLIR's board of directors. He received a salary plus significant annual bonuses based, in large part, on FLIR's pre-tax profit performance. Depending upon FLIR's pre-tax profit performance, Stringer could earn a cash bonus of as much as 50-100% of his salary and stock grants of 15,000 to 40,000 shares. If FLIR did not reach certain levels of pre-tax profit, officers did not receive a bonus or stock grants. In connection with FLIR's 1998 results, Stringer received a bonus of $180,000 on a salary of $225,726 and $240,049 in restricted stock grants. Stringer also received 25,000 stock options in 1998. 31. Stringer reviewed FLIR's Forms 10-Q for each of the 1998 and 1999 quarters, reviewed, approved, and signed the Form 10-K for 1998, and reviewed and signed a registration statement filed by FLIR in November 1999, all of which contained false and misleading financial statements. Stringer also reviewed and approved certain earnings releases issued by FLIR that were based on those financial statements. 32. As FLIR's CFO, Samper prepared, signed, and reviewed FLIR's Forms 10-Q for each of the 1998 and 1999 quarters, the Form 10-K for 1998, and registration statements filed by FLIR in May 1998 and November 1999. Samper drafted the financial statement footnote disclosures and prepared the financial statements throughout 1998 and 1999. Samper had responsibility for the accounting records of FLIR in 1998 and 1999, reporting only to Stringer. He knew of and approved revenue recognition decisions. He performed quarterly andannual reconciliations of journal entries at the end of every period in 1998 and 1999. 33. As FLIR's Senior Vice President of Worldwide Airborne Sales, Martin approved sales practices, including authorizing non-binding letters of intent, side agreements, extended payment terms, rental agreements, and contingent sales. He had responsibility for FLIR's airborne sales organization, reporting only to Stringer. 34. As FLIR's Director of Sales Operations, Eagleburger managed the sales department's inside sales and applications groups. These groups worked with the finance department to enter sales orders into FLIR's accounting system and, when necessary, to change them. Systems could not be shipped, and revenue could not be recognized, without a sales order having been created and entered into the system. Eagleburger reported to Martin, but took direction from Samper as well. Eagleburger knew: (1) that shipment of units generally resulted in recognition of revenue; (2) that placeholder units were not what had been ordered by the customer; (3) that those units, although shipped, would not be accepted by the customer; and (4) that those units would be returned to FLIR after the close of the accounting period to fill the order with the units actually ordered at a later date. FLIR's Sales Order Process 35. In 1998 and 1999, FLIR's sales order entry process constituted its primary system of internal controls protecting against the improper recognition of revenue. A sales order was not supposed to be entered into the accounting system if there was no binding commitment from a customer or if there were collectibility problems with a customer that rendered revenue recognition questionable. 36. The sales order entry process began with the inside sales group and the sales applications group within the FLIR sales department. Eagleburger managed these groups as the Director of Sales Operations. These groups wereresponsible for beginning the process of sales order entry by generating a sales order entry worksheet based upon the information contained in a customer's purchase order. Once the worksheet was complete, these groups sent it to FLIR's finance department for entry into FLIR's system to generate a sales order. 37. FLIR's internal controls required a customer's purchase order to begin the process of creating a sales order. Nevertheless, Samper, Martin, and Eagleburger frequently authorized the entry of sales orders without purchase orders. 38. The entry of a sales order in FLIR's system caused manufacturing to begin ordering parts and building the units described by the part numbers on the sales order. When manufacturing was complete, the units were shipped. Shipment of all the units in a sales order caused a pack slip to be generated and the sales order to be closed out, so that no further costs could be incurred in relation to that order. The pack slip was sent to the finance department as evidence that the units had been shipped. The finance department then ran an invoicing program in the computer system to generate an invoice and recognize revenue for units that had been shipped. 39. At FLIR, revenue could only be recognized for units that were shipped against a sales order and customer purchase order. The part numbers of the units shipped had to match the part numbers on the sales order and purchase order. 40. In some cases, the units ordered by a customer were unavailable to ship before the end of an accounting period because either they had not yet been manufactured or they involved advanced technology under development. To recognize revenue in those situations, Samper, Martin, and Eagleburger circumvented FLIR's internal controls and directed sales orders to be changed to reflect the part numbers of units held in FLIR's inventory, even though those units were not what the customer had actually ordered in the purchase order. FLIRpersonnel colloquially referred to these substitute units as "placeholders." FLIR Materially Misstated Its Results for the First Quarter Ended March 31, 1998 41. On May 15, 1998, FLIR filed with the Commission its Form 10-Q for the first quarter ended March 31, 1998. In the financial statements included in the filing, FLIR reported total revenue of $27,699,000 and pre-tax earnings of $411,000 for the quarter. These reported numbers included two transactions that were fraudulently recognized. FLIR should have reported total revenue of $25,963,000 and pre-tax losses of $325,000. Thus, revenue was overstated by 7% and reported earnings were actually losses. 42. In a transaction with Raytheon and the United States Border Patrol, FLIR recognized $1,136,000 in revenue before March 31, 1998 based upon a letter of intent from the Border Patrol expressing that it intended to place a delivery order for $1.415 million with FLIR after April 1, 1998 (i.e., after the end of the quarter). FLIR improperly recognized revenue on this transaction because the transaction failed to comply with the requirements for revenue recognition under GAAP as a result of the lack of a firm commitment to purchase systems before the close of the first quarter. 43. FLIR also recognized $600,000 in revenue on a contingent sale to Heli-Dyne Systems in March 1998. The purchase order documentation submitted by Heli-Dyne stated that the order could be revoked without penalty should Heli-Dyne fail to obtain a contract with its end-user. The purchase order was redacted to remove the contingent language from the face of the purchase order. Although the sale was contingent, the units were shipped to FLIR's bonded warehouse and revenue was improperly recognized. FLIR Included its Overstated First Quarter Revenue and Pre-tax Earnings in a Form S-3 Registration Statement 44. In May 1998, FLIR filed a registration statement with theCommission on Form S-3 registering 2.4 million shares of its common stock. 45. As alleged in paragraphs 41 through 43 above, FLIR materially overstated its revenue for the first quarter of 1998 by $1,736,000, or 7%, and overstated pre-tax earnings by $736,000 and by reporting a gain instead of a loss. FLIR then included these inflated numbers in the Form S-3 registration statement. Samper signed FLIR's Form S-3 as the company's CFO. FLIR Materially Misstated Its Results for the Second Quarter Ended June 30, 1998 46. On August 12, 1998, FLIR filed with the Commission its Form 10-Q for the quarter ended June 30, 1998. In the financial statements included in FLIR's Form 10-Q, FLIR reported total revenue of $35,072,000 and pre-tax earnings of $3,883,000. These reported revenue and pre-tax earnings numbers were overstated by 9% and 62%, respectively, because five transactions were improperly recognized as revenue. 47. In one of these transactions, FLIR recognized $630,000 in revenue at the end of June 1998 despite having no purchase order from the purported customer, Schweizer Aircraft. Schweizer never intended to purchase units from FLIR, and this purported sale was fabricated by Martin. FLIR improperly recognized revenue on this transaction because it was a sham transaction with no commitment to purchase from the customer and therefore failed to comply with the requirements for revenue recognition under GAAP. 48. In the second quarter of 1998, FLIR also booked $773,000 in revenue for a purported sale to the Venezuelan Navy without a purchase order. FLIR improperly recognized revenue on this transaction in June 1998 because it was a sham transaction with no commitment to purchase from the customer and therefore failed to comply with the requirements for revenue recognition under GAAP. 49. FLIR also recognized $225,000 in revenue for a contingent sale to U.S. Helicopters. The purchase order submitted to FLIR by U.S. Helicoptersstated that payment for the ordered systems was not due until the system was sold by U.S. Helicopters to a third party. FLIR improperly recognized revenue on the U.S. Helicopters transaction in June 1998 because it failed to comply with the requirements for revenue recognition under GAAP as a result of the contingent payment terms noted in the purchase order. 50. FLIR also recognized revenue on three sales in the second quarter of 1998 totaling $1,122,000 that had insufficient or no documentation from the customer indicating a commitment to purchase systems from FLIR before June 30, 1998. In one of these sales, FLIR had only a facsimile communication from the customer stating that the customer was not ready to issue an actual purchase order for another two to three weeks, after the close of the second quarter of 1998. As a result, the customer provided FLIR with a "preliminary" purchase order number in the facsimile. Based upon that preliminary purchase order number, FLIR recognized revenue of $549,000. This customer did not issue a purchase order until November 1998 for this transaction. FLIR improperly recognized revenue on this transaction in June 1998 because the customer refused to issue a purchase order until months after the close of the second quarter. As such, revenue recognition for the transaction violated GAAP. 51. In two other sales, FLIR recognized $573,000 in revenue based solely upon a non-binding letter of intent provided to FLIR by one of its South American sales representatives. FLIR shipped the systems for these sales to its bonded warehouse. FLIR improperly recognized revenue on these transactions because: (1) the risks of ownership had not passed to the buyer; (2) the customer had not provided a fixed commitment to purchase; and (3) the customer had not requested that the transaction be on a bill and hold basis. As such, the reporting of revenue for these transactions was false and misleading in that it failed to comply with applicable accounting literature regarding requirements for accounting for bill and hold transactions and with FLIR's own revenue recognition policy. FLIR Materially Misstated Its Results for the Third Quarter Ended September 30, 1998 52. On November 16, 1998, FLIR filed with the Commission its Form 10-Q for the quarter ending September 30, 1998. In the financial statements included in FLIR's Form 10-Q, FLIR reported total revenue of $41,261,000 and pre-tax earnings of $7,166,000. These reported revenue and pre-tax earnings numbers were overstated by 8% and 25%, respectively, because multiple transactions were improperly recognized as revenue. 53. In four transactions with the same customer, Gannett Broadcasting, FLIR recognized $900,000 in revenue on September 30, 1998 despite having no purchase orders from the customer. These sales were fabricated and Gannett never intended to purchase units from FLIR. Nevertheless, although these facts were known to FLIR management, including Samper and Martin, FLIR improperly recognized revenue on these transactions in September 1998 because they were sham transactions with no commitment to purchase from the customer. As such, they failed to comply with the requirements for revenue recognition under GAAP. 54. In the third quarter of 1998, FLIR also booked $320,000 in revenue for a purported sale to Riana Taxi based upon a non-binding letter of intent. This non-binding letter had no pricing terms and stated that Riana Taxi intended to continue negotiating pricing at a future date. The letter also stated that Riana Taxi would sign the "final contract" for the sale at a future date. FLIR improperly recognized revenue on the Riana Taxi transaction in September 1998 based on the non-binding letter because it failed to comply with the requirements for revenue recognition under GAAP. 55. FLIR also recognized $150,000 in revenue for a contingent sale to U.S. Helicopters. The purchase order submitted by U.S. Helicopters stated that payment for the ordered systems was not due until the system was sold by U.S. Helicopters to a third party. FLIR improperly recognized revenue on the U.S.Helicopters transaction in September 1998 because it failed to comply with the requirements for revenue recognition under GAAP because of the contingent payment terms. 56. FLIR also recognized revenue in September 1998 for a sale totaling $1,373,000 to the New Zealand Department of Defense even though the systems sent to the bonded warehouse for that sale were not what the customer had ordered. FLIR improperly recognized revenue on this transaction because: (1) the risks of ownership had not passed to the buyer; (2) the customer had not requested that the transaction be on a bill and hold basis; (3) the seller had retained specific performance obligations such that the earnings process was not complete; and (4) the equipment was not complete and ready for shipment because it was not even what the customer had ordered. As such, the reporting of revenue for these transactions was false and misleading in that it failed to comply with applicable accounting literature regarding requirements for accounting for bill and hold transactions and with FLIR's own revenue recognition policy. FLIR Materially Misstated Its Results for the Fiscal Year Ended December 31, 1998 57. On April 20, 1999, FLIR filed with the Commission its annual report on Form 10-K. The originally filed Form 10-K reported total revenue of $153,932,000 and pre-tax earnings of $22,192,000. In the fiscal year ended December 31, 1998, nine transactions that had been improperly recognized in prior periods and ten additional transactions that were improperly recognized as revenue in December 1998, caused FLIR's pre-tax earnings for the fiscal year ended December 31, 1998 to be overstated by 57% and its revenue to be overstated by 10%. FLIR should have reported $139,456,000 in revenue and $14,163,000 in pre-tax earnings. 58. In addition to these revenue overstatements, FLIR overstated its pre-tax earnings for the fiscal year ended December 31, 1998 by $5.6 million throughdouble booking accounts receivable and recording additional improper adjustments to accounts receivable. 59. As a result of the revenue and receivable overstatements, FLIR's pre-tax earnings for the fiscal year ended December 31, 1998 were overstated by 161%. FLIR should have reported pre-tax earnings of $8,507,000 instead of the $22,192,000 actually reported. A. FLIR Improperly Recognized Revenue on Alfonso Jaramillo Y Cia Transactions Totaling $4,100,000 60. At year-end 1998, FLIR recognized $4.1 million in revenue by shipping units different from what the customer had ordered to its bonded warehouse based upon non-binding letters of intent provided to FLIR by one of its independent sales representatives in South America, Alfonso Jaramillo Y Cia ("Alfonso"), rather than by the actual customer for the transaction, Sikorsky Aircraft. Alfonso agreed to provide these non-binding letters of intent to FLIR with the understanding that Alfonso would not be obligated to purchase or pay for the systems because Alfonso was not the actual customer. Sikorsky was the actual customer, but was unwilling to issue a purchase order before December 31, 1998. 61. In October 1998, Stringer learned that the U.S. Congress was considering legislation authorizing the use of funds to purchase helicopters for drug interdiction efforts in Colombia. From October 1998 through December 16, 1998, Stringer pressured Martin to obtain a contract from the anticipated helicopter manufacturer, Sikorsky, for the purchase of FLIR units to use in the drug interdiction effort. 62. When Sikorsky declined to issue a purchase order before year-end 1998, Martin instructed FLIR sales personnel to obtain non-binding letters of intent from Alfonso instead. 63. FLIR sales staff delivered the Alfonso non-binding letters of intent to Stringer, Samper, Martin, and Eagleburger before year-end 1998. Samperreviewed and discussed the letters of intent with Stringer, who assured him that revenue recognition for the transaction was appropriate. Samper authorized the entry of sales orders based upon the letters of intent. Stringer and Samper knew, or were reckless in not knowing, that these letters of intent were not binding commitments to purchase or pay for the systems and therefore that revenue recognition for the transactions violated GAAP. 64. In December 1998, however, FLIR did not have on hand to ship to its bonded warehouse stock that comported with the systems Alfonso "ordered" in the non-binding letters of intent. Samper, Martin, and Eagleburger chose substitute units to ship to the bonded warehouse that were different from those specified in the Alfonso letters of intent. Samper and Eagleburger then caused these placeholder units to ship to the bonded warehouse, resulting in FLIR's accounting system automatically recognizing revenue in 1998. 65. Eagleburger informed Stringer on December 8, 1998 that modifying the systems to include a feature as requested by Alfonso/Sikorsky pursuant to the drug interdiction program would require an additional two months of work. Stringer knew, or was reckless in not knowing, that revenue recognition for the systems before December 31, 1998 would violate GAAP because the systems could not be completed by that date. 66. FLIR improperly recognized revenue on the Alfonso transactions in December 1998 because the transactions failed to comply with the requirements for revenue recognition under GAAP as a result of the non-binding nature of the letters of intent and the fact that placeholder systems were sent to the bonded warehouse instead of the actual systems ordered by the customer. 67. Stringer, Samper, Martin, and Eagleburger each knew or were reckless in not knowing that the non-binding letters of intent and the placeholder shipments to the bonded warehouse would cause the Alfonso transactions to be recorded improperly on FLIR's books and records, which in turn would causematerial misrepresentations in the company's Form 10-K for the year ended December 31, 1998. B. FLIR Improperly Recognized Revenue on a Transaction with Flight International Totaling $480,000 68. At the end of 1998, FLIR sales staff arranged for Flight International to submit a purchase order for two used FLIR systems as demonstration units for Flight International's potential customer. Flight International agreed to submit a purchase order for these systems with a corresponding side agreement providing Flight International with a right to return the units by March 1, 1999 and extended payment terms. Flight International required that the side letter be signed by an officer of FLIR. 69. Stringer signed a side letter providing Flight International with this right to return and extended payment terms. FLIR then recorded $480,000 in revenue for the year ended 1998. 70. FLIR improperly recognized revenue on the Flight International transaction in December 1998 because the transaction failed to comply with the requirements for revenue recognition under GAAP as a result of the right to return and extended payment terms. 71. Stringer knew, or was reckless in not knowing, that the extended payment terms and right to return the systems granted to Flight International in the side letter he signed would cause the Flight International transaction to be recorded improperly on FLIR's books and records, which in turn would cause material misrepresentations in FLIR's Form 10-K for the year ended December 31, 1998. C. FLIR Improperly Recognized Revenue on a Transaction with Heli-Dyne Totaling $934,000 72. At the end of 1998, Heli-Dyne submitted a letter of intent to purchase systems from FLIR for resale to the Brazilian Navy. The letter of intent stated that Heli-Dyne was not obligated to purchase the systems until it received a contract with a third-party end-user. FLIR improperly recognized revenue on the Heli-Dyne transaction in December 1998 because the transaction failed to comply with the requirements for revenue recognition under GAAP as a result of the contingent terms of the transaction and the non-binding nature of the letter of intent. D. FLIR Improperly Recognized Revenue on Two Transactions with Raytheon for $1,758,000 73. At the end of 1998, Raytheon Aerospace Company submitted a purchase order to buy three systems from FLIR for resale to the United States Customs Service ("USCS"). The purchase order specified that delivery of the systems should occur by July 30, 1999, and the three systems were specifically described by part number in the purchase order. Raytheon's purchase order had a carbon copy duplicate page attached to it when it was sent to FLIR. The carbon copy pages were separated and used to create two orders - instead of the one order actually placed by Raytheon. 74. Eagleburger ordered sales personnel to create a sales order for $1,055,154 based upon the actual purchase order submitted by Raytheon. Two of the three units ordered by Raytheon could not be shipped by December 31, 1998 because FLIR did not have them in inventory. To recognize revenue by December 31, 1998, Eagleburger directed FLIR's sales staff to change the product specifications on the Raytheon sales order from the units actually ordered by Raytheon to other units that FLIR had in inventory and could ship by the end of the year. 75. Eagleburger then directed his staff to provide Raytheon with FLIR's Federal Express account number and a return authorization number for the return of the improperly built units. Eagleburger gave these instructions before the unitswere shipped to Raytheon because he knew that the units did not conform to the specifications in the purchase order. The improper units were shipped to Raytheon before year-end 1998 and were later returned to FLIR. When the units were shipped to Raytheon, revenue in the amount of $703,000 was automatically recognized for the placeholder units. 76. Revenue recognition for this transaction was improper under GAAP because the two units sent to Raytheon were not what it had ordered. 77. In addition, Eagleburger ordered sales personnel to create a second sales order for Raytheon/USCS even though Raytheon did not submit an additional purchase order. After the second sales order was created, Samper authorized the entry of the sales order into the accounting system based upon the carbon copy of the actual purchase order. Eagleburger and Samper had three systems shipped for this duplicate sale, causing $1,055,154 in revenue to be automatically recognized in the FLIR accounting system. Revenue recognition for this transaction was improper under GAAP because this was a sham transaction. E. FLIR Improperly Recognized Revenue on Two Rental Transactions for $1,700,000 78. FLIR also recognized revenue in December 1998 totaling $1,700,000 on two transactions that were actually rental transactions rather than sales. In one of these transactions, the customer never wanted to purchase the units, and in the other, title did not transfer to the customer until September 2000. 79. FLIR improperly recognized $1,700,000 in revenue for these transactions in violation of GAAP because they were not sales in substance, as the earnings process had not been completed and the risks of ownership had not transferred. Stringer, Samper and Martin Lied to FLIR's Auditors Concerning FLIR's 1998 Financial Statements 80. In connection with FLIR's fiscal year end 1998 audit, Stringer,Samper, and Martin signed false management representation letters to FLIR's auditor, PwC. Stringer and Samper signed the same false management representation letters and Martin signed a separate management representation letter. 81. In these letters, Stringer and Samper made the following false representations: (a) FLIR's financial statements were fairly presented in conformity with GAAP; (b) there were no material transactions, agreements, or accounts that were not properly recorded; (c) receivables recorded in the financial statements represented bona fide claims; (d) there had been no fraud involving management or employees who had significant roles in FLIR's internal controls; and (e) the requirements for bill and hold transactions had been satisfied for specific transactions identified in the letter, including Alfonso and Heli-Dyne/Brazilian Navy, and revenue had been properly recognized for those transactions. 82. Based on the conduct alleged in paragraphs 26 to 79 above, Stringer and Samper each knew, or were reckless in not knowing, that these representations were false when they signed the letter. 83. In the letter signed by Martin, Martin made the following false representations: (a) FLIR had fulfilled all obligations related to every sale sent to the bonded warehouse; (b) none of the products at the bonded warehouse would be returned to FLIR for a credit to the customer; (c) risk of ownership and title had transferred for units in the bonded warehouse; (d) the customer had made a fixed commitment to purchase goods via a written purchase order; (e) PwC had been provided with complete customer contract files for all requested transactions; (f) there were no side letters or oral agreements with customers that would modify or supersede the terms of the purchase orders; (g) there were no rights of return for any products granted by FLIR; (h) there were no contingent sales; (i) all sales terms had been fully disclosed to PwC; and (j) revenue recognition for transactionslisted on the letter was appropriate. Martin knew, or was reckless in not knowing, that these representations were false when he signed the letter. FLIR Materially Misstated Its Results for the First Quarter Ended March 31, 1999 84. During the first quarter of 1999, FLIR overstated assets and understated expenses, thereby overstating pre-tax earnings, through the use of a suspense account - i.e., an account used to hold miscellaneous accounting entries until they could be reconciled or resolved - called the "project inventory" account. On May 14, 1999, FLIR filed with the Commission its Form 10-Q for the quarter ended March 31, 1999. In the financial statements included in FLIR's Form 10-Q, FLIR reported pre-tax losses of $28,068,000. These reported numbers understated FLIR's losses because expenses were not properly recorded. Instead, FLIR should have reported pre-tax losses of $31,465,000. 85. The project inventory account was intended to account for units removed from finished goods inventory by engineers at FLIR for use in research and development. Because FLIR still had an asset (the unit), the amounts in project inventory were accounted for as assets in inventory on FLIR's balance sheet. When the engineers were done using the unit, it was transferred back into finished goods inventory if it was undamaged. If the product was damaged and could not be returned to finished goods inventory, it was expensed to research and development costs. 86. In the first quarter of 1999, Samper used the project inventory account as a suspense account to hold returned units, traded-in units, underabsorbed overhead, shutdown expenses for foreign operations, and other arbitrary entries. None of these entries were appropriate under GAAP, nor were they appropriate uses of the project inventory account. 87. In the first quarter of 1999, Samper's misuse of the project inventory account resulted in FLIR overstating inventory by $3,397,000. As a result, FLIR'sfinancial statements were misstated for the first quarter of 1999 because they underreported FLIR's losses by 11%. 88. Samper knew, or was reckless in not knowing, that his entries into and out of the project inventory account violated GAAP because they resulted in reflecting expenses as assets, thereby overstating assets and understating expenses. FLIR Materially Misstated Its Results for the Second Quarter Ended June 30, 1999 89. On August 16, 1999, FLIR filed with the Commission its Form 10-Q for the quarter ended June 30, 1999. In the financial statements included in FLIR's Form 10-Q, FLIR reported total revenue of $42,202,000 and pre-tax earnings of $4,188,000. During the second quarter of 1999, FLIR again overstated assets and understated expenses, thereby overstating pre-tax earnings, through the "project inventory" account. FLIR also improperly recorded $1,353,000 in revenue for three sales transactions. As a result, FLIR overstated inventory by $2,634,000 for project inventory misstatements and overstated revenue and pre-tax earnings by $1,353,000 and $3,570,000 respectively. Thus, FLIR's revenue and pre-tax earnings were overstated by 3% and 578% respectively. A. Samper Caused FLIR to Overstate Assets and Understate Expenses 90. In the second quarter of 1999, Samper used the project inventory account as a suspense account to hold returned units, traded-in units, underabsorbed overhead, shutdown expenses for foreign operations, and other arbitrary entries. None of these entries were appropriate under GAAP, nor were they appropriate uses of the project inventory account. 91. Samper knew, or was reckless in not knowing, that his entries into and out of the project inventory account violated GAAP because they resulted in reflecting expenses as assets, thereby overstating assets and understating expenses. B. FLIR Improperly Recognized Revenue on Two Transactions with KCAL-TV 92. In March 1999, KCAL-TV ordered a system from FLIR called an "Ultramedia LE." FLIR shipped KCAL-TV a "placeholder" unit, an "Ultramedia II," because the Ultramedia LE units were not available for production and shipment to customers. FLIR recognized $250,000 in revenue for the shipment of the placeholder unit in the second quarter of 1999. FLIR improperly recognized revenue on the first KCAL-TV transaction because the system shipped to the customer was not what the customer had ordered and was going to be returned to FLIR by the customer. 93. Stringer, Samper, and Martin each knew, or was reckless in not knowing, that KCAL-TV was shipped a placeholder Ultramedia II unit in the second quarter of 1999 and revenue was recognized for that placeholder. 94. On June 28, 1999, two days before the end of the second quarter, FLIR shipped KCAL-TV an Ultramedia LE as a "loaner" unit. FLIR recognized $255,000 in revenue for the second shipment to KCAL-TV of this "loaner" unit. KCAL-TV was not obligated to purchase the unit, and could return it without penalty if it did not perform as desired. In fact, KCAL-TV did return the Ultramedia LE unit and placed an order for a different unit, the Ultramedia III. 95. Because KCAL-TV had no obligation to purchase the unit, FLIR improperly recognized revenue on the second KCAL-TV transaction. 96. Stringer, Samper, and Martin each knew, or was reckless in not knowing, that KCAL-TV was shipped a "loaner" Ultramedia LE unit at the end of the second quarter of 1999, thereby causing revenue to be recognized. As a result, Stringer, Samper, and Martin each knew, or was reckless in not knowing, that the KCAL-TV transactions were improperly recognized as revenue, thereby causing the financial statements in FLIR's original Form 10-Q for the quarter ended June 30, 1999 to be materially false and misleading at the time the Form 10-Q was filedwith the Commission. C. FLIR Improperly Recognized Revenue on a Transaction with Provincial Aviation 97. In June 1999, Provincial Aviation ordered a system from FLIR called a "Super Star Safire." FLIR shipped Provincial a placeholder unit, a "Star Safire," because the Super Star Safires were not available for production or shipment to customers. FLIR recognized $848,000 in revenue for the shipment of the placeholder unit in the second quarter of 1999. 98. FLIR improperly recognized revenue on the Provincial transaction because the system shipped to the customer was not what the customer had ordered and was going to be returned to FLIR by the customer. 99. Stringer, Samper, and Martin each knew, or was reckless in not knowing, that Provincial was shipped a placeholder Star Safire unit in the second quarter of 1999. As a result, Stringer, Samper, and Martin each knew, or was reckless in not knowing, that the Provincial transaction was improperly recognized as revenue, thereby causing the financial statements in FLIR's original Form 10-Q for the quarter ended June 30, 1999 to be materially false and misleading at the time the Form 10-Q was filed with the Commission. FLIR's Form S-1 Registration Statement Included its Overstated 1998 and 1999 Financial Statements 100. On November 11, 1999, FLIR filed a registration statement with the Commission on Form S-1 registering 2.1 million shares of its common stock for a secondary offering. 101. As alleged in paragraphs 57 through 99 above, FLIR materially overstated its revenue and pre-tax earnings for the fiscal year ended December 31, 1998, the quarter ended March 31, 1999, and the quarter ended June 30, 1999. In addition, as alleged in paragraphs 84 through 99, FLIR materially overstated inventory and understated costs of goods sold through misuse of the projectinventory account in the quarter ended March 31, 1999 and the quarter ended June 30, 1999. FLIR then included these inflated numbers in the Form S-1 registration statement. 102. Samper signed FLIR's Form S-1 as the CFO when he knew, or was reckless in not knowing, that the registration statement included reported revenue and pre-tax earnings for the fiscal year ended December 31, 1998 that were overstated and reported revenue, inventory and pre-tax earnings for the quarters ended March 31, 1999 and June 30, 1999 that were overstated. 103. Stringer signed FLIR's Form S-1 as the president and CEO when he knew, or was reckless in not knowing, that the registration statement included reported revenue and pre-tax earnings for the fiscal year ended December 31, 1998 that were overstated and reported revenue, inventory and pre-tax earnings for the quarters ended March 31, 1999 and June 30, 1999 that were overstated. FLIR Materially Misstated Its Results for the Third Quarter Ended September 30, 1999 104. On November 15, 1999, FLIR filed with the Commission its Form 10-Q for the quarter ended September 30, 1999. In the financial statements included in FLIR's Form 10-Q, FLIR reported total revenue of $54,706,000 and pre-tax earnings of $12,564,000. During the third quarter of 1999, FLIR again overstated assets and understated expenses, thereby overstating pre-tax earnings, through the use of a suspense account called the "project inventory" account. FLIR also improperly recognized $3,820,000 in revenue for three sales transactions, and overstated inventory by $2,433,000 for project inventory misstatements. FLIR also overstated revenue and pre-tax earnings by $3,820,000 and $4,706,000, respectively. Thus, FLIR's revenue and pre-tax earnings were overstated by 8% and 60%, respectively. A. Samper Caused FLIR to Overstate Assets and Understate Expenses 105. In the third quarter of 1999, Samper used the project inventoryaccount as a suspense account to hold returned units, traded-in units, underabsorbed overhead, shutdown expenses for foreign operations, and other arbitrary entries. None of these entries were appropriate under GAAP, nor were they appropriate uses of the project inventory account. 106. Samper knew, or was reckless in not knowing, that his entries into and out of the project inventory account violated GAAP because they resulted in reflecting expenses as assets, thereby overstating assets and understating expenses. B. FLIR Improperly Recognized Revenue on a Transaction with the Royal Saudi Air Force 107. In a transaction with Bell Helicopter Textron and the Royal Saudi Air Force, FLIR recognized $2,650,000 in revenue before September 30, 1999, based upon a non-binding letter of intent that lacked a delivery schedule and allowed the customer to change the configuration of the units ordered at any time. 108. FLIR improperly recognized revenue on the Royal Saudi Air Force transaction because the transaction failed to comply with the requirements for revenue recognition under GAAP as a result of the lack of a firm commitment to purchase. 109. Martin was involved in the negotiations with Bell Helicopter Textron regarding purchasing the units for the Royal Saudi Air Force. Martin obtained the non-binding letter of intent at the request of Stringer and provided it to Samper. Samper and Stringer discussed the non-binding letter of intent. Stringer represented to Samper that a purchase order was forthcoming for the transaction. Based upon this representation, Samper allowed revenue to be recognized for the transaction. 110. Stringer, Samper, and Martin each knew, or were reckless in not knowing, that revenue recognition based upon this non-binding letter of intent was improper under GAAP and, as a result, that the financial statements in FLIR's original Form 10-Q for the quarter ended September 30, 1999, were materiallyfalse and misleading at the time the Form 10-Q was filed with the Commission. Stringer and Samper Lied to the Auditors Concerning FLIR's Financial Statements for the First Three Quarters of 1999 111. In fiscal year 1999, Samper and Stringer also signed a false management representation letter to PwC in connection with PwC's review of FLIR's registration statement filed in November 1999. In this letter, Samper and Stringer made the following false representations: (a) the financial statements for the first, second and third quarters of 1999 were fairly presented in conformity with GAAP; and (b) no events occurred subsequent to the interim balance sheet dates of March 31, 1999, June 30, 1999, and September 30, 1999 that would require adjustment or disclosure in the financial statements. 112. Based on the conduct alleged in paragraphs 84 to 110 above, Stringer and Samper each knew, or were reckless in not knowing, that these representations were false. Stringer was a Control Person of FLIR in 1998 and 1999 113. In early 1998, FLIR's CEO at the time informed Stringer that he would be retiring by the middle of 1998. At this time, Stringer was FLIR's President and COO. As a result of the CEO's imminent retirement, Stringer acted as the de facto CEO of FLIR throughout 1998 and strove to have the promotion made permanent. In January 1999, Stringer officially became FLIR's President and CEO. 114. Throughout 1998 and 1999, Stringer was actively involved in the day-to-day operations of FLIR, particularly as they related to sales and financial performance. Stringer had power to control FLIR's corporate actions in these and other areas, and routinely exercised this power. 115. In 1998 and 1999, Stringer also met regularly with Samper to discuss FLIR's financial performance. Stringer maintained detailed internal charts tracking FLIR's actual sales as compared to budgeted results he had established. Samper and Stringer worked together to keep these internal charts updated with actual revenue and cost numbers for operations over time. In addition, Stringer received reports from manufacturing regarding the building schedules, called "master calendars" to track what units were being built in particular periods. In 1999, Stringer also regularly met with FLIR's financial personnel to review FLIR's aging accounts receivable reports. 116. Stringer also met with Martin regularly to discuss the status of sales transactions and business opportunities at FLIR. Stringer tracked sales through a sales forecast which he reviewed regularly with Martin. 117. In 1998 and 1999, Stringer reviewed all of FLIR's Form 10-Q and Form 10-K filings with the Commission, including each of the misstated filings enumerated within this Complaint. 118. Further, FLIR issued earnings releases on: (1) March 3, 1999, reporting FLIR's results for the fiscal year 1998; (2) July 27, 1999, reporting FLIR's results for the second quarter of 1999; and (3) October 26, 1999, reporting FLIR's results for the third quarter of 1999. Each of these earnings releases included the same overstated revenue and earnings numbers reported in FLIR's overstated Forms 10-Q and Form 10-K. Stringer edited, reviewed, and approved the issuance of these earnings releases. FLIR Issued a False Press Release in February 2000 119. In February 2000, Stringer and Samper started to believe that FLIR was not going to meet analysts' earnings estimates for the fourth quarter of 1999. As a result, Stringer wanted to issue a press release informing the market of this negative news. Stringer asked Samper to provide the financial information for the fourth quarter of 1999 to report in this press release. 120. Samper provided Stringer with anticipated earnings and revenue for inclusion in this press release based upon internal projections without support from FLIR's books and records. These internal projections materially overstatedFLIR's earnings and revenue for the fourth quarter of 1999. Ultimately, Samper included these projections in a press release, reviewed and approved by Stringer, that FLIR issued on February 8, 2000. 121. FLIR's earnings per share for the fourth quarter as reported in the February 8, 2000 press release were $0.57 to $0.59 per share; in fact, FLIR's results were subsequently reported as a loss of $2.43 per share. Stringer, Samper, and Martin were Unjustly Enriched by Their Fraudulent Conduct 122. Stringer, Samper, and Martin were eligible to receive cash bonuses if FLIR's earnings before income taxes reached pre-set targets. The targets were derived from FLIR's budget for the year. There were five bonus levels based upon FLIR's earnings for the year. 123. In fiscal year 1998, Samper and Martin were eligible to receive 37% to 75% of their salary as a bonus based upon FLIR's performance in that year. Martin received a bonus of $40,000 and Samper received a bonus of $52,500. Had FLIR accurately reported its earnings in 1998, Samper and Martin would not have received a bonus. 124. In fiscal year 1998, Stringer was eligible to receive a cash bonus of 50% to 100% of his salary. In connection with FLIR's 1998 results, Stringer received a bonus of $180,000. Had FLIR accurately reported its earnings in 1998, Stringer would not have received a bonus. 125. Stringer also received $240,049 in restricted stock grants and 25,000 stock options as part of his compensation package for 1998. FLIR Restated its 1998 and 1999 Financial Statements Three Times 126. In 2000 and 2001, FLIR restated its 1998 and 1999 financial statements three times. Each of these restatements caused originally reportednumbers for revenue to change and resulted, in part, from the fraudulent scheme perpetuated by Stringer, Samper, Martin, and Eagleburger. 127. In February 2000, Samper resigned in the midst of a discovery by PwC that FLIR had massive accounting irregularities. As FLIR management and PwC attempted to resolve this problem, they concluded that a restatement was necessary to correct errors discovered in FLIR's project inventory account and intercompany accounts, and to reverse revenue transactions booked by FLIR as bill and hold transactions. 128. Consequently, in April 2000, FLIR restated its 1998 and 1999 financial statements to correct revenue recognition for sales held in the bonded warehouse. This restatement reduced 1998 revenue by $11.8 million and pre-tax earnings by $5.1 million. Many of these sales were improperly recognized by FLIR as part of the fraudulent scheme. FLIR also restated its 1998 and 1999 financial statements to correct the errors discovered in the project inventory account and the overstatement of accounts receivable. 129. After completing the audit for fiscal year ended December 31, 1999, PwC informed FLIR's board of directors that it would not perform a quarterly review of FLIR's first quarter 2000 because FLIR's internal controls were unreliable. 130. On November 15, 2000, FLIR issued a second restatement in its third quarter 2000 Form 10-Q, restating its financial statements for the third and fourth quarters of 1999. 131. In April 2001, FLIR issued a third restatement based upon its discovery that certain sales transactions in 1998 and 1999 had been improperly recognized as revenue in a manner inconsistent with the company's revenue recognition policy. As a result of these restatements, previously reported revenue for the fiscal year ended December 31, 1998 was decreased by $11.1 million and previously reported revenue for the fiscal year ended December 31, 1999 wasincreased by $700,000. FLIR's previously reported pre-tax earnings for the fiscal year ended December 31, 1998 were reduced by $6.2 million and previously reported pre-tax earnings for the year ended December 31, 1999 were reduced by $1.8 million. FIRST CLAIM FRAUD IN THE OFFER OR SALE OF SECURITIES Violations of Section 17(a) of the Securities Act (Against Defendants Stringer and Samper) 132. The Commission realleges and incorporates by reference paragraphs 1 through 131 above. 133. Defendants Stringer and Samper, 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 the use of the mails: (a) with scienter, employed devices, schemes or artifices to defraud; (b) obtained money or property by means of untrue statements of a material fact or by omitting 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 operates or would operate as a fraud or deceit upon the purchaser. 134. By engaging in the conduct described above, defendants Stringer and Samper have violated, and unless restrained and enjoined will continue to violate, Section 17(a) of the Securities Act, 15 U.S.C. § 77q(a). SECOND CLAIM FRAUD IN CONNECTION WITH THE
Violations of Section 10(b) of the Exchange Act
135. The Commission realleges and incorporates by reference paragraphs 1 through 131 above. 136. Defendants Stringer, Samper, Martin, and Eagleburger, 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. 137. By engaging in the conduct described above, defendants Stringer, Samper, Martin, and Eagleburger have violated, and unless restrained and enjoined will continue to violate, 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. THIRD CLAIM AIDING AND ABETTING FLIR'S FAILURE TO FILE
Aiding and Abetting Violations of Section 13(a) of the Exchange Act
138. The Commission realleges and incorporates by reference paragraphs 1 through 131 above. 139. FLIR violated Section 13(a) of the Exchange Act and Rules 12b-20, 13a-1 and 13a-13 thereunder, by filing with the Commission materially false and misleading quarterly and annual reports on Forms 10-Q and Form 10-K during the first three quarters of 1998, year-end 1998 and first three quarters of 1999. 140. Defendants Stringer, Samper, and Martin knowingly provided substantial assistance to FLIR's violation of Section 13(a) of the Exchange Act and Rules 12b-20, 13a-1 and 13a-13 thereunder. Defendant Eagleburger knowingly provided substantial assistance to FLIR's violation of Section 13(a) of the Exchange Act and Rules 12b-20 and 13a-1 thereunder. 141. By engaging in the conduct described above and pursuant to Section 20(e) of the Exchange Act, 15 U.S.C. § 78t(e), defendants Stringer, Samper, and Martin aided and abetted FLIR's violations, and unless restrained and enjoined will continue to aid and abet violations, of Section 13(a) of the Exchange Act, 15 U.S.C. § 78m(a), and Rules 12b-20, 13a-1 and 13a-13 thereunder, 17 C.F.R. §§ 240.12b-20, 240.13a-1 and 240.13a-13. 142. By engaging in the conduct described above and pursuant to Section 20(e) of the Exchange Act, 15 U.S.C. § 78t(e), defendant Eagleburger aided and abetted FLIR's violations, and unless restrained and enjoined will continue to aid and abet violations, of 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. FOURTH CLAIM RECORD-KEEPING VIOLATIONS Aiding and Abetting Violations of Section 13(b)(2)(A)
143. The Commission realleges and incorporates by reference paragraphs 1 through 131 above. 144. FLIR violated Section 13(b)(2)(A) of the Exchange Act, 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, by failing to make and keep accurate books, records, and accounts, which, in reasonable detail, accurately and fairly reflected the transactions and disposition of the assets of the issuer. 145. Defendants Stringer, Samper, Martin, and Eagleburger knowingly provided substantial assistance to FLIR's violation of Section 13(b)(2)(A) of the Exchange Act. 146. By engaging in the conduct described above and pursuant to Section 20(e) of the Exchange Act, 15 U.S.C. § 78t(e), defendants Stringer, Samper, Martin, and Eagleburger aided and abetted FLIR's violations, and unless restrained and enjoined will continue to aid and abet violations, of Section 13(b)(2)(A) of the Exchange Act, 15 U.S.C. § 78m(b)(2)(A). 147. Defendants Stringer, Samper, Martin, and Eagleburger also 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, defendants Stringer, Samper, Martin, and Eagleburger will continue to violate Rule 13b2-1 under the Exchange Act. FIFTH CLAIM INTERNAL CONTROL VIOLATIONS Aiding and Abetting Violations of Section 13(b)(2)(B) and
148. The Commission realleges and incorporates by reference paragraphs 1 through 131 above. 149. FLIR violated Section 13(b)(2)(B) of the Exchange Act, 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, by failing to devise and maintain a system of internal accounting controls sufficient to provide reasonable assurances that financial statements are prepared in conformity with GAAP. 150. Defendants Stringer, Samper, Martin, and Eagleburger knowingly provided substantial assistance to FLIR's violation of Section 13(b)(2)(B) of the Exchange Act. 151. By engaging in the conduct described above and pursuant to Section 20(e) of the Exchange Act, 15 U.S.C. § 78t(e), defendants Stringer, Samper, Martin, and Eagleburger aided and abetted FLIR's violations, and unless restrained and enjoined, defendants Stringer, Samper, Martin, and Eagleburger will continue to aid and abet violations of, Section 13(b)(2)(B) of the Exchange Act, 15 U.S.C. § 78m(b)(2)(B). 152. Defendants Stringer, Samper, Martin, and Eagleburger violated Section 13(b)(5) of the Exchange Act, 15 U.S.C. § 78m(b)(5), by circumventing or failing to implement a system of internal accounting controls. Unless restrained and enjoined, defendants Stringer, Samper, Martin, and Eagleburger will continue to violate Section 13(b)(5) of the Exchange Act. SIXTH CLAIM LYING TO THE AUDITORS Violations of Exchange Act Rule 13b2-2
153. The Commission realleges and incorporates by reference paragraphs 1 through 131 above. 154. By engaging in the conduct described above, and in connection with an examination of the financial statements of FLIR and the preparation and filing of statements and reports with the Commission, defendants Stringer, Samper, and Martin, 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. 155. Defendants Stringer, Samper, and Martin have violated and, unless restrained and enjoined, will continue to violate Exchange Act Rule 13b2-2, 17 C.F.R. § 240.13b2-2. SEVENTH CLAIM CONTROL PERSON LIABILITY FOR FLIR'S VIOLATIONS Section 20(a) Liability for FLIR's Violations of
156. The Commission realleges and incorporates by reference paragraphs 1 through 131 above. 157. Between approximately January 1998 and May 2000, Defendant Stringer was, directly or indirectly, a control person of FLIR for purposes of Section 20(a) of the Exchange Act, 15 U.S.C. § 78t(a). 158. Between approximately January 1998 and May 2000, FLIR violated Sections 10(b), 13(a), 13(b)(2)(A), and 13(b)(2)(B) of the Exchange Act and Rules 10b-5, 12b-20, 13a-1, and 13a-13 thereunder, as alleged above. 159. As a control person of FLIR between approximately January 1998 and May 2000, defendant Stringer is jointly and severally liable with and to the same extent as FLIR for FLIR's violations of Sections 10(b), 13(a), 13(b)(2)(A), and 13(b)(2)(B) of the Exchange Act and Rules 10b-5, 12b-20, 13a-1, and 13a-13 thereunder during this time period. PRAYER FOR RELIEF WHEREFORE, the Commission respectfully requests that the Court: I. Issue findings of fact and conclusions of law that defendants Stringer, Samper, Martin, and Eagleburger 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 Stringer from violating, directly or indirectly, Section 17(a) of the Securities Act, Sections 10(b), 13(a), 13(b)(2)(A), 13(b)(2)(B), and 13(b)(5) of the Exchange Act and Rules 10b-5, 12b-20, 13a-1 and 13a-13, 13b2-1, and 13b2-2 under the Exchange Act; (b) enjoining Samper from violating Section 17(a) of the Securities Act, Sections 10(b), 13(a), 13(b)(2)(A), 13(b)(2)(B), and 13(b)(5) of the Exchange Act, and Rules 10b-5, 12b-20, 13a-1, 13a-13, 13b2-1, and 13b2-2 under the Exchange Act; (c) enjoining Martin from violating Section 10(b), 13(a), 13(b)(2)(A), 13(b)(2)(B), and 13(b)(5) of the Exchange Act and Rules 10b-5, 12b-20, 13a-1,13a-13, 13b2-1, and 13b2-2; and (d) enjoining Eagleburger from violating Sections 10(b), 13(a), 13(b)(2)(A), 13(b)(2)(B), and 13(b)(5) of the Exchange Act and Rules 10b-5, 12b-20, 13a-1, and 13b2-1. III. Enter an order, pursuant to Section 21(d)(2) of the Exchange Act, 15 U.S.C. § 78u(d)(2), prohibiting Stringer, Samper, and Martin, and each of them, 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. Order defendants Stringer, Samper, and Martin 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. Order defendants Stringer, Samper, Martin, and Eagleburger to pay civil penalties under Section 21(d)(3) of the Exchange Act, 15 U.S.C. § 78u(d)(3), and additionally as to Stringer and Samper, to pay civil penalties under Section 20(d) of the Securities Act, 15 U.S.C. § 77t(d)(2). 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. DATED: September 30, 2002 ________________________ http://www.sec.gov/litigation/complaints/comp17760.htm
|