U.S. Securities & Exchange Commission
SEC Seal
Home | Previous Page
U.S. Securities and Exchange Commission

THE UNITED STATES DISTRICT COURT
DISTRICT OF COLUMBIA


Securities and Exchange Commission,

Plaintiff,   

v.

SAM LEOPOLD, RICHARD R. ROSS, PHILLIP D. TEAL, JAMES T. MONTROSE, NORMAN B. COWGILL, JAY S. OZER, AND BRADLEY J. SCHMIDT,

Defendants.   


:
:
:
:
:
:
:
:
:
:
:
:
:
:

Civil Action No.

COMPLAINT

Plaintiff Securities and Exchange Commission ("Commission") alleges that:

SUMMARY

1. Between 1997 and 1999 the principal executive officers of Styling Technology Corporation ("Styling" or "the Company"), including its Chief Executive Officer Sam Leopold, its Chief Financial Officer Richard R. Ross and others, variously engaged in an extensive financial fraud, which, when finally detected, led to the collapse of the company. During this period, Styling fraudulently inflated its reported earnings by, among other things, recording revenue from transactions in which no product was shipped or in which it was merely shipped between warehouses controlled by the Company. The booking of these fictitious sales created a substantial build-up of uncollectible accounts receivable. In July 1999, Styling eliminated this build-up, and covered up its fraud, by taking a $5.1 million, one-time charge that it falsely attributed to a "strategic realignment of distributors."

2. Beginning in approximately August 1997, only nine months after its initial public offering, the Company began to record false revenue from certain sales transactions. Over the next four months, the Company transferred product to a warehouse in Amsterdam and recorded the transfers as sales to its European representative, who was acting only as a middleman between Styling and potential, uncommitted international distributors. At year-end, Styling also falsely recorded revenue from a large consignment sale with a company consultant and from transactions in which it had not yet shipped product to its customers.

3. During 1998 the fraudulent booking of sales at Styling increased significantly. In the beginning of that year, Phillip D. Teal, the manager of Styling's Body Drench division, began a systematic program of recording projected Body Drench sales for the remainder of the year. This practice culminated at year-end in the shipment of millions of dollars of product between two Styling-controlled warehouses. Styling's vice president of operations, Norman Bruce Cowgill, approved these year-end transactions. Further, by at least mid-February 1999, a month before the filing of the Company's annual report, Leopold, Ross and James T. Montrose, Styling's chief accounting officer, knew, or were reckless in not knowing, the nature and extent of the fraudulent sales at Body Drench.

4. The fraudulent sales practices at Styling were not confined to the Body Drench division during 1998. In the second and third quarters of that year, the Company recorded millions of dollars of revenue at two of its other divisions from bill and hold transactions that failed to meet the criteria for revenue recognition under Generally Accepted Accounting Principles ("GAAP"). As in the prior year, Styling also booked a significant number of sales at year-end, although it had not shipped the product to its customers. In both 1997 and 1998, the company reported allowances for doubtful accounts that were wholly inadequate.

5. Styling's fraudulent accounting practices continued through the first two quarters of 1999. In both quarters the company recorded improper bill and hold transactions. In addition, in the second quarter of the year, Styling wrote off over $5 million of its accounts receivable, which had accumulated from the practices described above, and attributed the write-off to a "strategic realignment" of its distributors. In fact, Styling never created any realignment plan or took any meaningful steps to implement one.

6. Arthur Andersen LLP ("Arthur Andersen") audited Styling's year-end financial statements and reviewed its quarterly reports for fiscal years 1997 through 1999. In connection with the 1998 year-end audit of Styling and the filing of its annual report, Jay S. Ozer, the engagement partner on the audit, and Bradley J. Schmidt, the audit manager, caused Arthur Andersen to issue an unqualified audit report, falsely stating, among other things, that Styling's financial statements were presented in conformity with GAAP and that the audit had been conducted in accordance with Generally Accepted Accounting Standards ("GAAS"). At the time this report was issued, both Ozer and Schmidt knew, or were reckless in not knowing, among other things, that a substantial portion of Styling's accounts receivable was uncollectible. Ozer and Schmidt further knew, or were reckless in not knowing, that the subsequent write-off of these accounts in the second quarter of 1999, which the company publicly attributed to a business realignment, was simply a device to eliminate a worthless asset from the company's balance sheet.

7. In the fall of 1999, Styling withdrew the registration statement that it had filed to conduct a secondary offering of its common stock and later announced that it had been unable to file its 1999 third quarter Form 10-Q because of "revenue recognition issues." Shortly thereafter, the National Association of Securities Dealers delisted Styling's stock for the Company's failure to file periodic reports with the Commission.

8. In August 2000, Styling filed a proceeding under Chapter 11 of the U.S. Bankruptcy Code. In November 2000, after an internal investigation by Styling's attorneys, the company restated its financial statements for the years ended December 31, 1997, and December 31, 1998, and for the first two quarters of 1999. Styling's restated financials reflect that the Company originally overstated its 1997 sales and net income by $1.6 million (4.4%) and $1.04 million (58.4%), respectively, and overstated its 1998 sales and net income by $7 million (8.4%) and $3.5 million (629%), respectively. Pursuant to a plan of reorganization filed in the bankruptcy court, Styling has now sold off all of its business assets.

9. From November 1996 to November 1999 Styling's common stock traded on the Nasdaq National Market System and reached a high of $26 5/8 in May 1998. Styling's stock is now quoted on the "Pink Sheets" disseminated by Pink Sheets LLC. As of the end of June 2003, Styling's common stock was quoted at $.002 per share.

JURISDICTION

10. The Securities and Exchange Commission ("Commission") brings this action pursuant to the authority conferred upon it by Section 20(b) of the Securities Act of 1933 [15 U.S.C. 77t(b)] ("Securities Act") and Section 21(d) of the Securities Exchange Act of 1934 [15 U.S.C. 78u(d)] ("Exchange Act") to enjoin all of the defendants permanently from future violations of the federal securities laws and to obtain other relief.

11. This Court has jurisdiction over this action under Section 20(b) of the Securities Act [15 U.S.C. 77t(b)] and Sections 21(d), 21(e) and 27 of the Exchange Act [15 U.S.C. 78u(d), 78u(e) and 78aa]. Venue lies in this Court pursuant to Section 22(a) of the Securities Act [15 U.S.C. 77v(a)] and Sections 21(d), 21(e) and 27 of the Exchange Act [15 U.S.C. 78u(d)(3), 78u(e) and 78aa].

12. The defendants, directly or indirectly, made use of the means or instrumentalities of interstate commerce or of the mails, or the facilities of a national securities exchange in connection with the acts, transactions, practices and courses of business alleged herein.

DEFENDANTS

13. Sam Leopold founded Styling in November 1996. Leopold was, at all relevant times, the chairman and chief executive officer of Styling. In these capacities, he signed Styling's annual reports on Form 10-K that were filed with the Commission for the years ended December 31, 1997, and December 31, 1998. Leopold is an attorney licensed in Arizona.

14. Richard R. Ross was the chief financial officer of Styling from April 1997 to April 2000. In June 1997, Ross was also named the company's vice president, secretary and treasurer. As Styling's chief financial officer, Ross was responsible for the preparation of the Company's annual and quarterly reports, and he signed all of the reports between 1997 and August 1999. Prior to joining Styling, Ross worked in the Phoenix, Arizona office of Arthur Andersen LLP and served as the audit manager on Styling's initial public offering and its 1996 year-end audit. Ross is a certified public accountant licensed in California.

15. Phillip D. Teal was the brand manager of the Body Drench division of Styling from March 1997 to August 1999, when the company terminated his employment.

16. Norman Bruce Cowgill was Styling's executive vice president of operations from June 1998 to November 1999. Cowgill owns a home in San Carlos, Mexico, and has no legal residence in the United States. Cowgill currently works and resides in the Atlanta, Georgia area.

17. James T. Montrose joined Styling in December 1996 as its accounting manager. He served as Styling's corporate controller from April 1997 until October 1998, as its chief accounting officer from October 1998 to May 1999, and as its senior vice president of operations from May 1999 until September 2000. Montrose signed Styling's annual report on Form 10-K for the year ended December 31, 1998. Montrose is not a certified public accountant.

18. Jay S. Ozer was, at all relevant times, a certified public accountant licensed in Arizona and in New York. Ozer was a partner at Arthur Andersen LLP from 1976 to August 2000 and was the engagement partner on Arthur Andersen's 1997 and 1998 audits of Styling's year-end financial statements and on Arthur Andersen's reviews of Styling's quarterly financial statements from the first quarter of 1997 through the second quarter of 1999.

19. Bradley J. Schmidt is a certified public accountant licensed in California. Schmidt was the audit manager on Arthur Andersen's 1997 and 1998 audits of Styling's year-end financial statements and on Arthur Andersen's reviews of Styling's quarterly financial statements from the first quarter of 1997 through the third quarter of 1998. Schmidt left Arthur Andersen in April 1999 and joined Styling as its senior vice president of financial reporting. Schmidt left Styling in the summer of 2000.

FACTS

20. Styling Technology Corporation is a Delaware corporation headquartered in Scottsdale, Arizona. From November 1996 until 2002, when it sold off its business assets in a Chapter 11 bankruptcy proceeding, Styling was engaged in the development, production and marketing of beauty salon products. Styling sold its products principally to beauty and tanning supply distributors, beauty salon chains, and beauty supply outlets. Styling's common stock is registered with the Commission under Section 12(g) of the Exchange Act and, until November 1999, was listed for trading on the Nasdaq National Market System.

21. Body Drench was a division of Styling that produced and marketed professional indoor and outdoor tanning and moisturizing products. Body Drench had its main offices in Lebanon, Tennessee. During 1997 and 1998, Body Drench was Styling's largest division, accounting for 21% and 19%, respectively, of Styling's total revenues.

During 1997, Styling improperly recorded revenue from certain international "sales."

22. In or about July 1997, Leopold and Ross entered into an agreement with Ronald Barber, a Dutch beauty salon products distributor, to serve as Styling's European tanning representative.

23. The terms of this agreement provided that Styling would pay Barber a base salary and a commission on any sales he brokered with other European distributors. Styling also agreed to provide Barber and his customers with ready access to Body Drench tanning products.

24. In or about October 1997, Leopold and Ross entered into a lease of a warehouse in Amsterdam, Netherlands, and Styling began shipping product to it. Styling paid for the rental of the warehouse, insured the product it maintained there, and, at all times, controlled shipments into and out of it. Barber had no independent authority to remove any product from this warehouse.

25. During the last four months of 1997, Styling shipped approximately $800,000 of Body Drench product to its Amsterdam warehouse, over $700,000 between December 29 and 31, 1997, alone.

26. Styling recorded these transfers of product from its domestic to its foreign warehouses as sales to Barber in contravention of GAAP. See Standards of Financial Accounting Concepts ("SFAC") No. 5, 83(a).

27. Both Leopold and Ross knew, or were reckless in not knowing, that the transactions with Barber did not involve the actual sale of product. Despite this knowledge or recklessness, they directed or approved the false accounting of the transactions in Styling's books and records.

28. During Arthur Andersen's 1997 year-end audit of Styling, Ozer, the engagement partner on the audit, asked Leopold and Ross about the nature of the arrangement with Barber. Leopold and Ross falsely stated to Ozer that Barber was responsible for payment on the product shipped to the Amsterdam warehouse.

Styling also improperly recorded revenue from certain consignment sales.

29. In October 1997, Leopold entered into a consignment sales arrangement with Charlie Hall, a former beauty industry executive, whereby Leopold agreed to provide Styling product to Hall's shell company W.T. Heck for sale into the retail market. The parties agreed that, when a sale was made, the retailer would pay W.T. Heck, and W.T. Heck would forward the payment, minus a 10% commission, to Styling.

30. On December 30, 1997, Styling made two shipments of product, totaling $1.6 million, to W.T. Heck's warehouse in Pennsylvania and recorded sales for the entire amount.

31. Neither transaction constituted a sale under GAAP. See Statement of Financial Accounting Standards ("SFAS") No. 48, 6(b).

32. Both Leopold and Ross knew, or were reckless in not knowing, the true nature of the transactions with W.T. Heck yet directed or approved the false accounting of the transactions in Styling's books and records.

At year-end 1997, Styling recorded revenue from transactions that had not yet been completed.

33. On the last day of 1997, Styling invoiced two customers for $630,000 of Body Drench product, picked it from its warehouse inventory, and loaded it onto a trailer in the warehouse lot. Styling then recorded sales of this product in violation of its own stated policy to recognize sales only when product was shipped and in contravention of GAAP, as described above.

34. Leopold and Ross knew, or were reckless in not knowing, that these transactions could not properly be recorded as sales in Styling's books and records, yet directed or approved them being so recorded.

35. During Arthur Andersen's year-end audit of Styling, the auditors questioned the Company about these year-end sales. Leopold and Ross falsely assured the auditors that Styling's customers had agreed to accept the risk of loss on this product when it was staged for shipment.

Styling's 1997 financial statements included the false sales.

36. On March 31, 1998, Styling filed its 1997 annual report on Form 10-K with the Commission. In the financial statements accompanying the report, Styling materially overstated both its sales and its net income due to the recognition of sales revenue from the Barber, W.T. Heck and year-end transactions described above.

37. Ross prepared Styling's Form 10-K, and both Ross and Leopold signed it.

38. At the time they signed Styling's filing, both Ross and Leopold knew, or were reckless in not knowing, that Styling's financial statements included revenue from sales transactions that could not be properly recognized under GAAP.

39. Styling also included these financial statements in a registration statement on Form S-4 that it filed with the Commission on August 7, 1998, and in a registration statement on Form S-1 that it filed with the Commission on August 13, 1999.

Fraudulent sales increased significantly at Styling during 1998.

40. During 1998 Styling improperly recognized over $10 million of revenue, approximately $8 million of which derived from transactions at its Body Drench division and $2 million from transactions at its ABBA and Framesi divisions.

Body Drench recorded millions of dollars of improper "bill and hold" sales.

41. Beginning in the first quarter of 1998, Teal, the brand manager of Styling's Body Drench division, initiated a "bill and hold program" at Body Drench to boost Styling's sales. Leopold, the Company's CEO, knew, or was reckless in not knowing, that Teal had engaged in this program.

42. The bill and hold program at Body Drench worked as follows. Teal would calculate the amount of product a distributor historically ordered over an extended period of time (usually one year). Teal or one of his salespeople then called the distributor and proposed billing the entire projected amount (or more) in the current quarter. In exchange for its consent, Teal promised the distributor that Body Drench would set the invoiced product aside for the distributor's exclusive use, the distributor could draw on it as needed, and then pay for what it actually took. It was expressly understood that the distributor did not have to pay the original invoice. Teal informed the distributor that Body Drench would re-invoice the distributor for any product shipped and, upon payment, credit the original invoice in the appropriate amount.

43. Although many Body Drench customers eventually purchased the total amount of product for which they had been originally billed, they almost always took a different product mix than had been originally invoiced. For this and other reasons, Body Drench seldom set aside the invoiced product in its warehouse.

44. In addition, Body Drench booked millions of dollars of bill and hold transactions on the last day of each quarter in order to meet its sales goals. In many of these instances, the customer's consent to the arrangement was obtained after the fact or not at all.

45. During 1998, Teal booked over $6 million of bill and hold transactions where the product was never shipped to the customer or the product was shipped, but no payment was ever made. All of the revenue from these transactions was subsequently written off or restated by the Company.

46. Styling's recognition of revenue from the Body Drench bill and hold transactions was improper. To recognize revenue from a bill and hold sale, certain stringent criteria must be met. These include the requirements that: (1) the buyer, not the seller, request the sale on a bill and hold basis for a substantial business reason; (2) the buyer make a fixed commitment to purchase the goods and have a fixed schedule for their delivery; (3) the goods be segregated in the seller's inventory; and (4) the risks of ownership pass to the buyer at the time the goods are ordered.

47. The bill and hold sales at Body Drench failed to meet several of the criteria for revenue recognition. Few, if any, of these sales were initiated by the buyer, and their principal purpose was to accelerate Styling's recognition of sales revenue and income. The buyers made no firm commitments to purchase the product, as evidenced by the frequent change of product mix in the goods eventually delivered, and there were no fixed delivery schedules. Styling continued to pay the costs of warehousing and insuring the goods after they were "sold," indicating that the risks of ownership had not passed to the buyers. In fact, a substantial portion of these sales was never realized: no product was ever shipped or payments ever made.

48. The bill and hold transactions strongly affected the aging of Body Drench's accounts receivable. At the beginning of 1998, Body Drench had approximately $2 million of accounts receivable over 90 days past due. By September 30, 1998, this figure had more than tripled to $7.2 million, and by December 31, 1998, it stood at over $8 million, representing approximately 23% of Styling's total accounts receivable.

At year-end 1998, Body Drench recorded transfers of product between warehouses as sales.

49. At year-end 1998, Teal arranged to park approximately $2 million of Body Drench product at thirteen third-party warehouses in the hope that he would be able to find buyers for it early in the subsequent year and recorded the warehouse transfers as sales. Defendant Cowgill knew of and approved these transactions.

50. Styling's recognition of revenue from the third party warehouse transfers did not comport with GAAP. See Statement of Financial Accounting Concepts ("SFAC") No. 2, 63.

All of the defendants knew, or were reckless in not knowing, of the false sales that were booked at Body Drench.

51. Defendants Leopold, Ross, Teal, Montrose, Cowgill, Ozer and Schmidt each knew, or were reckless in not knowing, that a substantial portion of the Body Drench accounts receivable was not collectible and that revenue from them could not be properly recognized under GAAP.

52. By at least late 1998, Leopold, Ross and Montrose all knew, or were reckless in not knowing, that Teal had engaged in bill and hold arrangements with Body Drench customers. In addition, each knew that Body Drench's aging accounts receivable had deteriorated significantly.

53. In January 1999, the Arthur Andersen auditors questioned Styling management about the Body Drench accounts receivable. Ozer, the engagement partner on the audit, discussed his concerns about these receivables with Leopold, and the Arthur Andersen audit team asked Ross and Montrose for a specific reserve analysis of the largest Body Drench accounts over 90 days past due, including about $2 million of outstanding 1997 account balances.

54. In late January 1999, Montrose, on Ross' instruction, prepared a spreadsheet of the balances owed by Body Drench's fifty largest customers. This spreadsheet showed a total outstanding balance of approximately $11 million, $5.9 million of which was over 90 days old.

55. On or about February 11, 1999, Montrose sent a memorandum to Teal with the spreadsheet attached, directing him to collect the outstanding balances. Montrose provided copies of the memorandum and attachment to both Ross and Leopold.

56. In response to Montrose's memorandum, Teal sent a letter to his supervisor and to Montrose describing two years of fraudulent sales practices at Body Drench, including the bill and hold transactions described above. Teal further described the off-site warehouse transfers he had engaged in at year-end 1998. Montrose provided a copy of the letter to Ross. Cowgill subsequently learned of this letter through Teal's supervisor.

57. In mid-February 1999, Leopold, Ross and Cowgill met to discuss the Body Drench receivables. At this meeting, Leopold directed Cowgill to establish which of the Body Drench sales were real and collectible, and to get the Body Drench customers with legitimate balances to pay as soon as possible.

58. Within days, Cowgill and Montrose had a series of meetings with Teal at which they discussed the collectibility of the Body Drench accounts. At one of these meetings, Teal and Montrose reviewed Body Drench's aging accounts receivable report line by line. Teal identified those portions of each account that were collectible and those that were not. Teal specifically identified bill and hold arrangements, the year-end third party warehouse transfers, and other fictitious sales. At the end of the process, Montrose calculated that only $3.1 million of the $14.1 million accounts receivable balance was collectible within 45 days and that a significant portion of it would never be collected.

59. Montrose promptly reported to Ross the substance of what he had learned from Teal and his estimate of what Styling could expect to collect.

60. Instead of reversing the fraudulent Body Drench receivables in Styling's books and records, Leopold and Cowgill, assisted by Ross, concocted a sham collection plan to persuade Styling's independent auditors and its internal Audit Committee that all of the aged Body Drench accounts were fully collectible. Pursuant to this plan, Styling sent letter agreements to the twenty-eight Body Drench distributors whose account balances Arthur Andersen had earlier questioned. These agreements purported, when executed, to convert the customers' account balances into notes payable over the coming year. The letter agreements, however, were non-binding and could be satisfied by the return or release of product. Despite the non-binding nature of the letter agreements, only seven customers ever signed the letters and returned them to the company. Some customers refused to sign them; others ignored them.

61. On or about February 23, 1999, Leopold, Ross and Cowgill met with Ozer and Schmidt of Arthur Andersen to discuss the aged Body Drench accounts receivable. Leopold and Cowgill falsely assured the auditors that all of the aged accounts at issue were fully collectible. They explained the collection plan that had been put into place and reported favorably on its progress, and individually discussed why each of the thirty or more largest delinquent accounts was fully collectible.

62. The following day, Leopold, Ross, Cowgill, Ozer and Schmidt met with Styling's Audit Committee. Leopold and Cowgill again explained the status of the collection efforts with respect to each aged account, and gave the same assurances they had made a day earlier that each debt would be paid.

63. In mid-March 1999, Styling provided Arthur Andersen with a management representation letter, which stated, among other things, that all of the 1997 account receivable balances for which there was no reserve were all fully collectible. Leopold, Ross and Montrose signed this letter.

The false bill and hold sales recorded by Styling during 1998 were not confined to the Body Drench division.

64. During the second and third quarters of 1998, Styling recorded approximately $2 million of revenue from a series of non-GAAP bill and hold transactions at its ABBA and Framesi divisions. These sales represented approximately 30% of Styling's net income for the second quarter of the year and 144% of its net income for the third quarter. Styling failed to reverse any of these sales when it restated its 1998 financial statements.

65. In the second quarter of 1998, Styling recorded $700,000 of revenue from three bill and hold sales at its ABBA and Framesi divisions, but did not ship the product to the customers until the third quarter of the year. At that point, the customers changed both the amount and the mix of product from the original order. These sales did not comply with GAAP.

66. At the end of the third quarter of 1998, ABBA and Framesi entered into bill and hold transactions of $275,000 and $775,000, respectively, with a large international customer. Under the terms of the sales, Styling was to ship $200,000 of the goods on November 27 and $850,000 on December 31. The customer was to make payment within 90 days after delivery.

67. Styling made the first shipment of goods in mid-December, but the product mix sent to the customer was different from that originally invoiced. Styling did not make the second shipment, and the customer never paid for any of the product. Revenue from these sales could not properly be recognized under GAAP. These third quarter transactions had a material effect on Styling's 1998 net income.

68. Both Leopold and Ross knew, or were reckless in not knowing, that Styling had improperly recorded revenue from the bill and hold transactions at ABBA and Framesi. During the course of the 1998 year-end audit, the Arthur Andersen auditors informed each of them that these transactions did not meet GAAP criteria for revenue recognition. In addition, Ozer informed Leopold and Ross that bill and hold sales were not common in the beauty industry and that there was no valid reason to engage in them. Despite this knowledge, Leopold and Ross allowed this revenue to be included in Styling's 1998 year-end financial statements.

At year-end 1998, Styling recorded revenue from transactions that had not yet been completed.

69. In a further effort to boost its earnings, Styling booked approximately $1.1 million of sales at ABBA on December 31, 1998, that did not ship until early January. Revenue could not be recognized from these sales under GAAP and the Company's own revenue recognition policies.

70. In the course of the audit, the Arthur Andersen auditors questioned Leopold and Ross about these sales. Leopold and Ross falsely assured them that the ABBA customers had agreed to accept the risk of loss on the goods when they had been staged for shipment, though not yet shipped. Leopold and Ross knew, or were reckless in not knowing, that, at year-end, Styling had no such agreement with these customers and that revenue could not be properly recognized from these transactions.

Styling's 1998 financial statements included the false sales.

71. On March 31, 1999, Styling filed its 1998 annual report on Form 10-K with the Commission. In the financial statements accompanying the report, Styling materially overstated both its sales and its net income due to the inclusion of the improper ABBA, Framesi and Body Drench bill and hold sales and the year-end transactions described above.

72. Ross prepared Styling's Form 10-K, and Ross, Leopold and Montrose signed it.

73. At the time they signed Styling's filing, Ross, Leopold and Montrose all knew, or were reckless in not knowing, that Styling's financial statements included revenue from sales transactions that could not be properly recognized under GAAP.

74. Styling also included these financial statements in a registration statement on Form S-1 that it filed with the Commission on August 13, 1999.

During 1998, Styling paid bonuses to Leopold and Ross.

75. In January and June 1998, Styling paid Leopold bonuses of $120,000 and $160,000, primarily for his role in the refinancing of the Company's debt.

76. In January and June 1998, Styling paid Ross bonuses of $52,500 and $70,000 for his work on the refinancings. In May 1998, Ross exercised options he had been granted to purchase Styling stock and immediately sold the stock for a profit of approximately $62,000.

Arthur Andersen's unqualified audit report on Styling's 1998 financial statements was false and misleading.

77. Ozer and Schmidt caused Arthur Andersen to render an unqualified audit report on Styling's 1998 financial statements. This report was incorporated into Styling's 1998 Form 10-K. The report represented, among other things, that:

We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 1997 and 1998, and the results of its operations and its cash flows for the period from November 27, 1996 to December 31, 1996 and for the years ended December 31, 1997 and 1998, in conformity with generally accepted accounting principles.

*  *  *  *  

ARTHUR ANDERSEN LLP

(Emphasis added.)

78. Ozer and Schmidt each knew, or were reckless in not knowing, that the representations in Arthur Andersen's audit report that the Styling audit had been conducted in accordance with GAAS and that Styling had reported its financial condition in conformity with GAAP were false and misleading.

79. In the course of the 1998 year-end audit, Ozer and Schmidt encountered numerous red flags that should have alerted them to significant financial problems at Styling and have caused them to approach the year-end audit with heightened skepticism. For example, during their preliminary audit work, Ozer and Schmidt learned that the Company had improperly recorded significant bill and hold transactions at its ABBA and Framesi divisions, as described above. Ozer and Schmidt also knew, or were reckless in not knowing, that the aged accounts receivable at Body Drench had quadrupled over the course of the year and that Styling could not provide them at year-end with accurate customer balances. Ozer and Schmidt further knew, or were reckless in not knowing, that, at the beginning of the audit, the Arthur Andersen auditors encountered some of the same issues that they had in prior years, such as year-end sales that had not shipped and accounts receivable that had not been paid from the prior year. Despite these flags, Ozer and Schmidt recklessly failed to ensure that the Arthur Andersen audit team follow basic audit procedures in its examination of Styling.

80. As discussed above, during the course of its preliminary audit work, the Arthur Andersen audit team discovered that Styling's ABBA and Framesi divisions had engaged in bill and hold transactions during the second and third quarters of 1998. Ozer and Schmidt informed senior company management that these sales failed to comport with GAAP, and Ozer personally told management that there was no valid business reason for them. Despite the impropriety and materiality of these sales, Ozer and Schmidt failed to determine whether any payments had been made on the third quarter transactions and to insist that Styling reverse them.

81. At year-end 1998, Styling's total accounts receivable had increased from approximately $6 million to $14 million and its aged accounts receivable from $2 million to $8 million. Nevertheless, the Company increased its allowance for doubtful accounts by only $600,000. Ozer and Schmidt failed to obtain an understanding of how Styling's management had estimated this allowance and then test the reasonableness of that estimate in relation to GAAP, as required by GAAS.

82. With respect to the aged Body Drench accounts receivable, the Arthur Andersen audit team initially requested that the Company provide them with a specific reserve analysis of the majority of the accounts. Ozer and Schmidt, however, failed ultimately to obtain sufficient competent evidence of the collectibility of these accounts, as required by GAAS, accepting instead meaningless "note" agreements from customers and uncorroborated oral representations from company management that all of the accounts would be paid in full. In fact, Styling subsequently wrote off or reversed approximately 97% of these accounts.

83. As discussed above, Styling recorded over $3 million of improper sales at its Body Drench and ABBA divisions at year-end 1998--$2 million from the third party warehouse transfers by Body Drench and $1.1 million from the ABBA sales that did not ship until January 1999.

84. With respect to the Body Drench transactions, the auditors reviewed shipping documents for the sales and discovered that none bore any shipping date. Ozer and Schmidt brought this to the attention of company management, who falsely assured them that the goods had shipped by year-end and provided a letter from the warehouse manager to corroborate this representation. Although this letter did not confirm that the product had been shipped, Ozer and Schmidt did not seek any further information concerning these purported sales in violation of GAAS.

85. With respect to the ABBA sales, where the customers had purportedly agreed to accept the risk of loss upon the product being "staged" for shipment, Ozer and Schmidt failed to obtain sufficient competent evidence reflecting the intentions of the parties at the time the sales were made.

86. Finally, Ozer and Schmidt failed to confirm the existence of Styling's accounts receivable at year-end 1998 in violation of GAAS. At the time of the 1998 audit, Styling could not produce accurate accounts receivable balances. As a result, Ozer and Schmidt decided not to send account receivable confirmations to Styling's customers and to rely instead on "sales cut-off testing" (i.e., checking the shipment of product by year-end). This sales cut-off testing, however, uncovered multiple issues concerning the validity of the accounts receivable that were never resolved by the auditors.

Styling continued to inflate its earnings through the first two quarters of 1999.

87. In its Forms 10-Q for the first and second quarters of 1999, Styling reported revenue from two bill and hold transactions in the amounts of $3.2 million and $3.5 million, respectively, with a large-volume, discount retailer. Neither sale met GAAP criteria for revenue recognition.

88. Styling executed the first bill and hold transaction, involving the sale of $3.2 million of ABBA product, at the end of the first quarter of 1999. This sale failed to comport with GAAP, because, among other things, it did not have a fixed delivery schedule or firm payment terms.

89. Styling executed the second bill and hold transaction, involving the sale of $3.5 million of ABBA product, at the end of the second quarter of 1999. Like the first sale, the second sale also lacked a fixed delivery schedule and firm payment terms. In addition, at the time the second sale was executed, Styling had shipped no more than $2.3 million of product to the customer under the terms of the first transaction. Of the total of $6.7 million of product "sold" in the two transactions, Styling shipped only $3.7 million.

90. Styling's 1999 first and second quarter Forms 10-Q were prepared and signed by Ross, and reviewed and approved by Leopold. Schmidt, who had left Arthur Andersen in April 1999 and joined Styling as its Senior Vice President of Financial Reporting, also assisted in the preparation of the second quarter Form 10-Q.

91. As of the dates Styling filed its 1999 first and second quarter Forms 10-Q with the Commission, Leopold and Ross each knew, or were reckless in not knowing, that the financial statements reported revenue that could not be properly recognized under GAAP. Schmidt also knew, or was reckless in not knowing, that the financial statements accompanying Styling's 1999 second quarter Form 10-Q reported revenue that could not be properly recognized under GAAP.

92. During the review of Styling's 1999 first quarter financial statements, Ozer examined the $3.2 million bill and hold transaction. Ozer knew, or was reckless in not knowing, that this bill and hold sale did not meet GAAP criteria, yet he failed to object to the Company's recognition of revenue from it.

Styling misrepresented the purpose of the write-off taken in the second quarter of 1999.

93. In its 1999 second quarter Form 10-Q, filed with the Commission on August 13, 1999, Styling disclosed that it had changed the method of distributing its Body Drench products, stating:

The Company has historically utilized numerous non-exclusive tanning supply distributors to sell the tanning products of its Body Drench division in the tanning market. In June 1999, the Company changed the method of distribution of its Body Drench products by eliminating a significant number of tanning supply distributors. Distribution of Body Drench products to the tanning market will now be sold through a limited number of exclusive distributors. This change in the Company's business resulted in a write-off of receivables from cancelled distributors of approximately $5.1 million for the quarter ending June 30, 1999.

(Emphasis added.)

94. At the time of this announcement, Styling had no substantive plan to realign its distribution channels, and the Company never implemented one. In fact, the true purpose of Styling's write-off was to improve the appearance of its balance sheet without disclosing that the Company had amassed a substantial amount of uncollectible receivables from its improper revenue recognition practices.

95. Leopold, Ross and Schmidt, who all participated in the preparation of Styling's 1999 second quarter Form 10-Q, knew, or were reckless in not knowing, that the statements made regarding Styling's write-off were false and misleading.

96. Ozer reviewed Styling's 1999 second quarter Form 10-Q before it was filed. Ozer also knew, or was reckless in not knowing, that the statements made regarding Styling's write-off were false and misleading, but raised no objection to their inclusion in the Company's filing.

LEGAL CLAIMS

FIRST CLAIM

(Violations of the Antifraud Provisions of the Securities Act)

(Section 17(a) of the Securities Act [15 U.S.C. 77q(a)])

(Defendants Leopold, Ross, Teal, Montrose, Cowgill, Ozer, and Schmidt)

97. The Commission re-alleges and incorporates by reference the allegations contained in Paragraphs 1 through 96 above.

98. As set forth more fully above, defendants Leopold, Ross, Teal, Montrose, Cowgill, Ozer, and Schmidt, and each of them, directly or indirectly, in the offer or sale of securities and by the use of the means or instruments of transportation or communication in interstate commerce or by use of the mails have employed devices, schemes or artifices to defraud; have obtained money or property by means of untrue statements of material fact and omissions to state materials facts necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading; or have engaged in transactions, acts, practices and courses of business which operated or would operate as a fraud upon purchasers of securities.

99. By reason of the foregoing, defendants Leopold, Ross, and Montrose, and each of them, have violated Section 17(a) of the Securities Act.

100. By reason of the foregoing, defendants Teal, Cowgill, Ozer, and Schmidt, and each of them, have violated, or aided and abetted violations of, Section 17(a) of the Securities Act.

SECOND CLAIM

(Violations of the Antifraud Provisions of the Exchange Act)

(Section 10(b) of the Exchange Act [15 U.S.C. 78j(b)] and

Commission Rule 10b-5 [17 C.F.R. 240.10b-5])

(Defendants Leopold, Ross, Teal, Montrose, Cowgill, Ozer, and Schmidt)

101. The Commission re-alleges and incorporates by reference the allegations contained in Paragraphs 1 through 96 above.

102. As set forth more fully above, defendants Leopold, Ross, Teal, Montrose, Cowgill, Ozer, and Schmidt, and each of them, directly and indirectly, by the use of the means and instrumentalities of interstate commerce, or of the mails, or of the facilities of a national securities exchange in connection with the purchase and sale of securities have employed devices, schemes or artifices to defraud; have made untrue statements of material facts or omissions to state material facts necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading; or have engaged in acts, practices or courses of business which operated or would operate as a fraud or deceit upon any person.

103. By reason of the foregoing, defendants Leopold, Ross, and Montrose, and each of them, have violated Section 10(b) of the Exchange Act and Commission Rule 10b-5 thereunder.

104. By reason of the foregoing, defendants Teal, Cowgill, Ozer, and Schmidt, and each of them, have violated, or aided and abetted violations of, Section 10(b) of the Exchange Act and Commission Rule 10b-5 thereunder.

THIRD CLAIM

(Violations of the Financial Reporting Provisions of the Exchange Act)

(Section 13(a) of the Exchange Act [15 U.S.C. 78m(a)] and Rules 12b-20,

13a-1 and 13a-13 [17 C.F.R. 240.12b-20, 240.13a-1 and 240.13a-13])

(Defendants Leopold, Ross, Teal, Montrose, Cowgill, Ozer, and Schmidt)

105. The Commission re-alleges and incorporates by reference the allegations contained in Paragraphs 1 through 96 above.

106. By engaging in the conduct described above, defendants Leopold and Ross, and each of them, aided and abetted Styling's filing of a materially false and misleading annual report on Form 10-K with the Commission for the year ending December 31, 1997.

107. By engaging in the conduct described above, defendants Leopold, Ross, Teal, Montrose, Cowgill, Ozer, and Schmidt, and each of them, aided and abetted Styling's filing of a materially false and misleading annual report on Form 10-K with the Commission for the year ending December 31, 1998.

108. By engaging in the conduct described above, defendants Leopold, Ross and Ozer and each of them, also aided and abetted Styling's filing of materially false and misleading quarterly reports on Form 10-Q with the Commission for the quarters ending March 31, 1999, and June 30, 1999, and Schmidt aided and abetted Styling's filing of a materially false and misleading quarterly report on Form 10-Q with the Commission for the quarter ending June 30, 1999.

109. By reason of the foregoing, defendants Leopold, Ross, Teal, Montrose, Cowgill, Ozer, and Schmidt, and each of them, aided and abetted violations by Styling of Section 13(a) of the Exchange Act and Rules 12b-20 and 13a-1 thereunder, and defendants Leopold, Ross, Ozer, and Schmidt, and each of them, aided and abetted violations by Styling of Section 13(a) of the Exchange Act and Rules 12b-20 and 13a-13 thereunder.

FOURTH CLAIM

(Violations of Internal Controls and Books and Records Provisions of the Exchange Act)

(Sections 13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act [15 U.S.C. 78m(b)(2)(A) and 78m(b)(2)(B)] and Rule 13b2-1 [17 C.F.R. 240.13b2-1])

(Defendants Leopold, Ross, Montrose, Cowgill, Teal, and Schmidt)

110. The Commission re-alleges and incorporates by reference the allegations contained in Paragraphs 1 through 96 above.

111. By engaging in the conduct described above, defendants Leopold, Ross, Montrose, Cowgill, Teal, and Schmidt aided and abetted Styling's failures to make and keep books, records and accounts which accurately and fairly reflected its transactions and dispositions of its assets.

112. By engaging in the conduct described above, Leopold, Ross and Schmidt further aided and abetted Styling's failure to devise and maintain a system of internal accounting controls sufficient to provide reasonable assurances that its corporate transactions were executed in accordance with management's authorization and in a manner to permit the preparation of financial statements in conformity with generally accepted accounting principles.

113. By engaging in the conduct described above, defendants Leopold, Ross, Montrose, Cowgill, Teal, and Schmidt, directly or indirectly, falsified or caused to be falsified Styling's books, records and accounts subject to Section 13(b)(2)(A) of the Exchange Act.

114. By reason of the foregoing, defendants Leopold, Ross, Montrose, Cowgill, Teal, and Schmidt aided and abetted violations by Styling of Section 13(b)(2)(A) of the Exchange Act and violated Rule 13b2-1.

115. By reason of the foregoing, defendants Leopold, Ross, and Schmidt aided and abetted violations by Styling of Section 13(b)(2)(B) of the Exchange Act.

FIFTH CLAIM

(Further Violations of the Internal Control Provisions of the Exchange Act)

(Section 13(b)(5) of the Exchange Act [15 U.S.C. 78m(b)(5)])

(Defendants Leopold, Ross, Montrose, Cowgill, Teal, and Schmidt)

116. The Commission re-alleges and incorporates by reference the allegations contained in Paragraphs 1 through 96 above.

117. By engaging in the conduct described above, defendants Leopold, Ross, Montrose, Cowgill, Teal, and Schmidt knowingly circumvented or knowingly failed to implement the system of internal financial controls at Styling.

118. By reason of the foregoing, defendants Leopold, Ross, Montrose, Cowgill, Teal, and Schmidt violated Section 13(b)(5) of the Exchange Act.

SIXTH CLAIM

(Violations of the Representations to Auditors Rule)

(Exchange Act Rule 13b2-2 [17 C.F.R. 240.13b2-2])

(Defendants Leopold, Ross, Montrose and Cowgill)

119. The Commission re-alleges and incorporates by reference the allegations contained in Paragraphs 1 through 96 above.

120. By engaging in the conduct described above, defendants Leopold, Ross, Montrose and Cowgill, directly or indirectly, made or caused to be made false and misleading statements or omitted or caused others to omit to state material facts necessary in order to make statements made, in light of the circumstances under which such statements were made, not misleading to Styling's independent accountants in connection with their audits and examinations of Styling's required financial statements and in connection with the preparation and filing of documents and reports required to be filed with the Commission.

121. By reason of the foregoing, Leopold, Ross, Montrose and Cowgill violated and aided and abetted violations of Exchange Act Rule 13b2-2.

RELIEF REQUESTED

WHEREFORE, the Commission respectfully requests that this Court:

I.

Enter an Order permanently enjoining defendant Leopold from violating Section 17(a) of the Securities Act [15 U.S.C. 77q(a)] and Sections 10(b) and 13(b)(5) of the Exchange Act [15 U.S.C. 78j(b) and 78m(b)(5)] and Rules 10b-5, 13b2-1 and 13b2-2 thereunder [17 C.F.R. 240.10b-5, 240.13b2-1 and 240.13b2-2] thereunder and from aiding and abetting violations of Sections 13(a), 13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act [15 U.S.C. 78m(a), 78m(b)(2)(A), 78m(b)(2)(B)] and Rules 12b-20, 13a-1 and 13a-13 [17 C.F.R. 240.12b-20, 240.13a-1 and 240.13a-13] thereunder.

II.

Enter an order permanently enjoining defendant Ross from violating Section 17(a) of the Securities Act [15 U.S.C. 77q(a)] and Sections 10(b) and 13(b)(5) of the Exchange Act [15 U.S.C. 78j(b) and 78m(b)(5)] and Rules 10b-5, 13b2-1 and 13b2-2 [17 C.F.R. 240.10b-5, 240.13b2-1 and 240.13b2-2] thereunder and from aiding and abetting violations of Sections 13(a), 13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act [15 U.S.C. 78m(a), 78m(b)(2)(A) and 78m(b)(2)(B)] and Rules 12b-20, 13a-1 and 13a-13 [17 C.F.R. 240.12b-20, 240.13a-1 and 240.13a-13] thereunder.

III.

Enter an order permanently enjoining defendant Teal from violating and aiding and abetting violations of Section 17(a) of the Securities Act [15 U.S.C. 77q(a)] and Section 10(b) of the Exchange Act [15 U.S.C. 78j(b)] and Rule 10b-5 [17 C.F.R. 240.10b-5] thereunder, from violating Section 13(b)(5) of the Exchange Act [15 U.S.C. 78m(b)(5)] and Rule 13b2-1 [17 C.F.R. 240.13b2-1] thereunder, and from aiding and abetting violations of Sections 13(a) and 13(b)(2)(A) of the Exchange Act [15 U.S.C. 78m(a) and 78m(b)(2)(A)] and Rules 12b-20 and 13a-1 [17 C.F.R. 240.12b-20 and 240.13a-1] thereunder.

IV.

Enter an order permanently enjoining defendant Montrose from violating Section 17(a) of the Securities Act [15 U.S.C. 77q(a)] and Sections 10(b) and 13(b)(5) of the Exchange Act [15 U.S.C. 78j(b) and 78m(b)(5)] and Rules 10b-5, 13b2-1 and 13b2-2 [17 C.F.R. 240.10b-5, 240.13b2-1 and 240.13b2-2] thereunder and from aiding and abetting violations of Sections 13(a) and 13(b)(2)(A) of the Exchange Act [15 U.S.C. 78m(a) and 78m(b)(2)(A)] and Rules 12b-20 and 13a-1 [17 C.F.R. 240.12b-20 and 240.13a-1] thereunder.

V.

Enter an order permanently enjoining defendant Cowgill from violating and aiding and abetting violations of Section 17(a) of the Securities Act [15 U.S.C. 77q(a)] and Section 10(b) of the Exchange Act [15 U.S.C. 78j(b)] and Rule 10b-5 [17 C.F.R. 240.10b-5] thereunder, from violating Section 13(b)(5) of the Exchange Act [15 U.S.C. 78m(b)(5)] and Rules 13b2-1 and 13b2-2 [17 C.F.R. 240.13b2-1 and 240.13b2-2] thereunder, and from aiding and abetting violations of Sections 13(a) and 13(b)(2)(A) of the Exchange Act [15 U.S.C. 78m(a) and 78m(b)(2)(A)] and Rules 12b-20 and 13a-1 [17 C.F.R. 240.12b-20 and 240.13a-1] thereunder.

VI.

Enter an Order permanently enjoining defendant Ozer from violating and aiding and abetting violations of Section 17(a) of the Securities Act [15 U.S.C. 77q(a)] and Section 10(b) of the Exchange Act [15 U.S.C. 78j(b)] and Rule 10b-5 [17 C.F.R. 240.10b-5] thereunder and from aiding and abetting violations of Section 13(a) of the Exchange Act [15 U.S.C. 78m(a)] and Rules 12b-20, 13a-1 and 13a-13 [17 C.F.R. 240.12b-20, 240.13a-1 and 240.13a-13] thereunder.

VII.

Enter an Order permanently enjoining defendant Schmidt from violating and aiding and abetting violations of Section 17(a) of the Securities Act [15 U.S.C. 77q(a)] and Section 10(b) of the Exchange Act [15 U.S.C. 78j(b)] and Rule 10b-5 [17 C.F.R. 240.10b-5] thereunder, from violating Section 13(b)(5) of the Exchange Act [15 U.S.C. 78m(b)(5)] and Rule 13b2-1 [17 C.F.R. 240.13b2-1] thereunder, and from aiding and abetting violations of Sections 13(a), 13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act [15 U.S.C. 78m(a), 78m(b)(2)(A) and 78m(b)(2)(B)] and Rules 12b-20, 13a-1 and 13a-13 [17 C.F.R. 240.12b-20, 240.13a-1 and 240.13a-13] thereunder.

VIII.

Enter an Order directing defendants Leopold and Ross to account for and disgorge all bonuses paid to them by Styling from 1997 through 2000, and to account for and disgorge the proceeds from any transactions in Styling securities from 1997 through 2000, together with pre-judgment and post-judgment interest thereon.

IX.

Enter an Order directing defendants Leopold, Ross, Teal, Montrose, Cowgill, Ozer and Schmidt to pay civil penalties under Section 20(d) of the Securities Act [15 U.S.C. 77t(d)] and Section 21(d) of the Exchange Act [15 U.S.C. 78u(d)].

X.

Enter an Order barring Leopold and Ross from serving as officers and directors of any public company under Section 20(d) of the Securities Act [15 U.S.C. 77t(d)] and Section 21(d) of the Exchange Act [15 U.S.C. 78u(d)].

XI.

Grant all further legal or equitable relief that the Court deems appropriate.


Dated: December ___, 2003

Respectfully submitted,

______________________
John L. Hunter, Esq.

U.S. Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549
(202) 942-4825 (telephone)
(202) 942-9569 (fax)
hunterj@sec.gov (email)

______________________
Robert C. Besse, Esq.

U.S. Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549
(202) 942-4534 (telephone)
(202) 628-1471 (fax)
besser@sec.gov (email)

Of Counsel:

Paul R. Berger, Esq.
Mark Kreitman, Esq.

U.S. Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549


http://www.sec.gov/litigation/complaints/comp18485.htm

Modified: 12/04/2003