UNITED STATES DISTRICT COURT
PLAINTIFF SECURITIES AND EXCHANGE COMMISSION'S COMPLAINT FOR PERMANENT INJUNCTION AND OTHER ANCILLARY RELIEF
Plaintiff, the United States Securities and Exchange Commission ("SEC"), alleges as follows:
NATURE OF THE ACTION
1. This matter involves the effort of Spiegel, Inc. ("Spiegel") to conceal material information from the public to avoid negative business and market impact. Specifically, Spiegel withheld the fact that in or about the beginning of 2002, its outside auditor had notified Spiegel that Spiegel may not be able to continue as a "going concern." In or about January or February 2002, Spiegel's outside auditor notified Spiegel that the audit firm had "substantial doubts" about Spiegel's ability to continue as a going concern absent the company addressing certain financial issues.
2. Instead of disclosing this material information, Spiegel decided not to disclose the "going concern" notice in press releases and public statements that discussed its financial condition. To avoid disclosing the going concern notice in the company's Form 10-K due April 1, 2002, Spiegel decided not to file its 10-K or, for that matter, any subsequent 10-Qs. Instead, the company filed with the SEC a series of Forms NT (notices of late filing) indicating that it could not file because various lending agreements were not in place.
3. Statements by Spiegel executives confirm that Spiegel chose not to file the 10-K to avoid disclosing the going concern notice and to avoid the negative "disruptions" to its business and in the markets which this information would cause.
4. Spiegel, directly and/or indirectly, has engaged in transactions, acts, practices and courses of business which constitute violations of Sections 10(b) and 13(a) of the Securities Exchange Act of 1934 (the "Exchange Act") [15 U.S.C. §§78j(b)] [15 U.S.C. § 78m(a)] and Rules 10b-5, 13a-1 and 13a-13 [17 C.F.R. §§240.10b-5 ] [17 C.F.R. §§240.13a-1] [17 C.F.R. §§240.13a-13] promulgated thereunder.
5. The SEC brings this action to enjoin such transactions, acts, practices, and course of business pursuant to Sections 21(d) and 21(e) of the Exchange Act [15 U.S.C. §§78u(d) and 78u(e)].
JURISDICTION AND VENUE
6. The Court has jurisdiction over this action pursuant to Sections 21(d), 21(e) and 27 of the Exchange Act [15 U.S.C. §§ 78u(d), 78u(e) and 78aa]. Venue is proper in this Court pursuant to Section 27 of the Exchange Act [15 U.S.C. §78aa].
7. Spiegel's headquarters is located in Downers Grove, Illinois which is located within the Northern District of Illinois. The acts, practices and courses of business constituting the violations alleged herein have occurred within the jurisdiction for the United States District Court for the Northern District of Illinois and elsewhere.
8. Spiegel has made use of the means and instrumentalities of interstate commerce and of the mails in connection with the acts, practices and courses of business alleged herein in the Northern District of Illinois.
9. Spiegel, unless enjoined, is likely to continue to engage in the acts, practices and courses of business set forth in this Complaint and acts, practices and courses of business of similar purport and object.
10. Spiegel, based in Downers Grove, Illinois, was founded in 1865. Until June 2002 the company's stock traded on the NASDAQ. On June 3, 2002 the company was delisted from NASDAQ and now trades in the pink sheets. In 1988, Spiegel acquired Eddie Bauer, Inc. In 1990, Spiegel acquired First Consumers National Bank (FCNB) a special-purpose bank specializing in the issuance of credit cards. In 1993, Spiegel acquired Newport News, Inc. ("Newport News") a catalogue retailer.
11. In or about the beginning of 2002, the engagement partner on the Spiegel audit, informed Spiegel that the audit firm had doubts that Spiegel could continue as going concern. These concerns were later included in a proposed auditor report dated February 14, 2002 which stated in a separate paragraph that the firm had "substantial doubts" about the company's ability to continue as a going concern.
12. Because Spiegel had not resolved its financial problems by the due date of its Form 10-K, its outside auditor insisted on issuing an audit report containing a separate paragraph stating that it had substantial doubts about Spiegel's ability to continue as a going concern. However, instead of filing the Form 10-K with the audit report - Spiegel simply choose not to file at all. It likewise withheld the going concern notice from its press releases and public statements regarding its financial condition.
13. Despite receiving its outside auditor's "going concern" notice, Spiegel issued a number of press releases and public statements regarding its financial condition without disclosing this important and negative piece of information. These press releases discussed in great detail its Fourth Quarter and Fiscal Year 2001 results. These press releases also provided Spiegel's "financial outlook" for 2002 stating that it expected "modest improvement" in revenue by the second half of the year and provided "updates on business developments." Spiegel executives made similar statements in its conference calls with analysts. Yet the company failed to disclose that its auditor had actually questioned the company's ability to exist as a going concern absent the company addressing certain financial issues.
14. Spiegel was required to file its Form 10-K for 2001 on April 1, 2002. Had it done so, it would have been required to include its outside auditor's going concern report with the filing. However, Spiegel did not file the Form 10-K. Instead, on April 1, 2002, Spiegel, with the assistance of its then outside counsel, filed with the Commission a Form NT inaccurately stating that it was not in a position to file its Form 10-K because it had violated certain of its loan covenants and because it had decided to sell its bank subsidiary. No mention was made of the going concern report.
15. Spiegel withheld information from the public to avoid a negative impact on its stock price and to its business operations.
16. On April 22, 2002, in order to avoid immediate delisting, Spiegel requested a hearing before NASDAQ to explain why it had not filed its Form 10-K. NASDAQ scheduled a delisting hearing in Washington D.C. for May 17, 2002. In attendance at the May 17, 2002 hearing two of Spiegel's officers, a member of Spiegel's Audit Committee and an attorney who attended the meeting at the invitation of Spiegel's majority shareholder.
17. In the hearing, Spiegel's representatives did not dispute that the company had the ability to file timely its Form 10-K. Instead they stated that the reason Spiegel did not file its Form 10-K was because it did not want to reveal the going concern report to the public.
18. Spiegel's officials told the NASDAQ panel that it felt that certain loan covenant problems with its lenders would be resolved within five business days of the hearing and asked for an extension until May 28th, by which time, it would have worked out a new deal with its lenders, a consortium of three American banks and fifteen European banks with close ties to the majority shareholder, which the company indicated would enable it to file its Form 10-K without any going concern report.
19. In discussing the real reasons why Spiegel had not filed its Form 10-K, one of Spiegel's officers at the hearing stated:
"Well, because, again it comes back to we could file today. If we did, all we would do is create a going concern, some upset in the market, some turmoil in the market."
20. A member of Spiegel's Audit Committee in attendance at the hearing stated:
"It was very important to get this company really in the shape where you could say they have a clean opinion, an unqualified opinion, also to safeguard all this money we have, so to say, put in the company . . ."
* * *
". . . we want of course, to have an unqualified opinion because the vendor side is important, the image of the company is important . . ."
21. When May 28th arrived, the NASDAQ had not yet ruled upon the delisting petition and Spiegel still did not file its Form 10-K, but instead asked for an additional 48 hours to file. Eventually, on Monday June 3rd, when Spiegel had still not filed its Form 10-K, NASDAQ finally sent notice to Spiegel that it was being delisted. Spiegel had not filed its Form 10-K despite specific assurances given to NASDAQ that it would file on May 28th regardless of the status of the negotiations with its lenders.
22. The board committee of Spiegel's board of directors and its audit committee participated in the decision to withhold the Form 10-K reflecting the going concern report. In fact, some Spiegel officers sought, but failed to gain, authority from Spiegel's board committee to file the Form 10-K. For instance, on May 30th 2002, at least one of Spiegel's officers sent the board's audit committee a letter requesting that the company be authorized to file its Form 10-K. Instead, the audit committee passed a resolution recommending to the board committee of the board of directors that the company delay filing its Form 10-K.
23. An article in the Chicago Tribune on June 4, 2002, the day after Spiegel was delisted and nearly six months after learning of the audit firm's concerns, stated that the Form 10-K was not filed because a new lending agreement was not in place and that without that Spiegel's outside auditor would have had to express doubts about the company's ability to continue as a going concern. A company spokeswoman was quoted in the article: "We felt it would be detrimental to file it now without a clean opinion from the auditors . . . The board is doing what they think is right to preserve the value of the company."
24. After this article appeared, there were no press releases or interviews discussing the going concern issue.
25. Since being delisted, Spiegel has filed three separate Forms NT claiming that it was not in a position to file its Forms 10-Q because, among other things, it was still negotiating new lending agreements. None of these filings mentioned the going concern issue. Spiegel also continued to issue press releases discussing portions of the company's financial condition including sales figures and revenues. Once again, none of these press releases mentioned the going concern issue.
26. After being contacted by the Enforcement Division of the SEC, Spiegel finally filed its Form10-K for 2001 on February 4, 2003. The Form 10-K contained the outside auditor's going concern report and also revealed that Spiegel had a net loss of $587.5 million in 2001.
27. The belated Form 10-K also revealed that Spiegel had $1 billion in debt on the books as well as an additional $3.55 billion in debt off the books. At least $700 million of the balance sheet debt and all $3.55 billion of the off balance sheet debt may become due in 2003 due to the company's violation of its loan covenants.
28. Spiegel did not begin to file any of its long-overdue quarterly reports, Forms 10-Q, until February 26, 2003.
Violations of 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]
29. Paragraphs 1 through 28 are realleged and incorporated by reference.
30. During the relevant time period set forth above in paragraphs 1 - 28 above, Spiegel, in connection with the purchase and sale of securities, by the use of the means and instrumentalities of interstate commerce and/or by the use of the mails, directly and/or indirectly, among other things, made untrue statements of material facts and omitted to state material facts necessary in order to make the statements made, in light of the circumstances under which they were made, not misleading, as more fully described in paragraphs 1 - 28 above.
31. Spiegel knew or was reckless in not knowing of the facts and circumstances alleged in Paragraphs 1 - 28 above.
32. As a result of the conduct alleged in Paragraphs 1 - 28 above, Spiegel violated 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].
Violations of Section 13(a) of the Exchange Act [15 U.S.C. § 78m(a)] and Rules 13a-1 and 13a-13 thereunder
[17 C.F.R. §§ 240.13a-1 and 240.13a-13]
33. Paragraphs 1 - 28 above are realleged and incorporated herein by reference.
34. During the relevant time period set forth above in paragraphs 1 - 28 above, Spiegel failed to file timely with the Commission financial statements in its annual reports on Form 10-K and quarterly reports on Form 10-Q in accordance with such rules and regulations that the Commission has prescribed as necessary and appropriate in the public interest and for the protection of investors.
35. As a result of the conduct alleged in Paragraphs 1 - 28 above, Spiegel violated Section 13(a) of the Exchange Act [15 U.S.C. § 78m(a)] and Rules 13a-1 and 13a-13 thereunder [17 C.F.R. §§ 240.13a-1 and 240.15d-13].
PRAYER FOR RELIEF
WHEREFORE, the SEC requests that the Court:
Find that Spiegel committed the violations charged and alleged herein.
Grant an Order of Permanent Injunction, in a form consistent with Rule 65(d) of the Federal Rules of Civil Procedure, permanently restraining and enjoining Spiegel, its officers, servants, employees, and those persons in active concert or participation with them who receive actual notice of the Order, by personal service or otherwise, and each of them from, directly or indirectly, engaging in the transactions, acts, practices or courses of business described above, or in conduct of similar purport and object, in violation of Sections 10(b) and 13(a) of the Exchange Act [15 U.S.C. §§78j(b)] [15 U.S.C. §§78m(a)] and Rules 10b-5, 13a-1 and 13a-13 [17 C.F.R. §§240.10b-5] [17 C.F.R. §§240.13a-1] [17 C.F.R. §§240.13a-13] promulgated thereunder.
Issue an Order requiring Spiegel to disgorge any ill-gotten gains that it received as a result of its wrongful conduct, including prejudgment interest.
With regard to Spiegel's violative acts, practices and courses of business set forth herein issue an Order imposing appropriate civil penalties pursuant to Section 21(d)(3) of the Exchange Act [15 U.S.C. §§78u(d)(3)].
Grant an Order for any other relief this Court deems appropriate.
Retain jurisdiction of this action in accordance with the principals 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.
Grant Orders for such further relief as the Court may deem appropriate.
Dated: March 7, 2003