Counsel of Record:
Thomas C. Newkirk, Esq., Securities and Exchange Commission,
450 Fifth St., NW, Washington, DC 20549-0801
(202) 942-4550 TN 7271
Susan Cassell, Assistant United States Attorney,
U.S. Attorney's Office, 970 Broad Street, Suite 700,
Newark, New Jersey 07102
(973) 645-2844 SC 8081
UNITED STATES DISTRICT COURT
DISTRICT OF NEW JERSEY
SECURITIES AND EXCHANGE COMMISSION,
450 Fifth Street, NW
Washington, D.C. 20549,
HAROLD J. MACSATA,
___ Civ. No. ________
Plaintiff, the Securities and Exchange Commission (the "Commission"), alleges as follows:
- This matter involves financial fraud. During the last half of 1996, in anticipation that USA Detergents, Inc. could not otherwise make its budget or meet analysts' expectations, defendant Harold J. Macsata (who resides at 2820 West Fox Chase Circle in Doylestown, Pennsylvania) resorted to fraudulent methods to increase the company's net income, including improperly reclassifying and amortizing marketing expenses, failing to book invoices, recording bogus vendor rebates and credits, improperly capitalizing certain labor costs, and recognizing revenue from post-period and sham transactions. As a result, for the third quarter of 1996, net income reported to investors by USA Detergents was overstated by $1.5 million, and, for the fourth quarter of 1996, the net loss reported to investors by USA Detergents was understated by $3 million.
- By virtue of the acts alleged herein, the defendant, among other things, violated, or aided and abetted violations of, statutes and rules prohibiting fraud in the purchase or sale of securities, requiring that financial information be accurately reported by public companies to the Commission and to investors, and requiring maintenance of accurate books and records by public companies.
- This Court has jurisdiction over this action pursuant to Section 21(d) and (e) of the Securities Exchange Act of 1934 ("Exchange Act") [15 U.S.C. § 78u(d) and (e)].
- The defendant, directly or indirectly, made use of the means and instrumentalities of interstate commerce, of the mails, or of the facilities of a national securities exchange in connection with the acts, practices, and courses of conduct alleged herein.
- Certain of the acts, practices, and courses of conduct constituting the violations of law alleged herein occurred within this judicial district.
- Harold J. Macsata ("Macsata"), age 58, was Vice-President of Finance and Chief Financial Officer of USA Detergents from January 1994 and Treasurer from 1995, until approximately May 1997.
- USA Detergents, Inc., at all times relevant, was a Delaware corporation with its principal executive offices in North Brunswick, New Jersey. The company was a manufacturer and marketer of laundry and household cleaning products. Its common stock was registered with the Commission pursuant to Section 12(g) of the Exchange Act and traded on the NASDAQ National Market System. On May 21, 2001, Church & Dwight Co., Inc. announced that it had acquired USA Detergents pursuant to a tender offer for its outstanding common stock.
Improper Deferral of Marketing Expenses
- During the third and fourth quarters of 1996, in order to improve USA Detergents' 1996 financial results, Macsata directed the improper reclassification of certain marketing costs as slotting fees. Marketing costs are costs incurred to promote products and should be expensed when incurred. Slotting fees are costs incurred in connection with obtaining shelf space in retail establishments and are deferred and amortized by the company over a one-year period from the date incurred. As a result of the improper reclassification, and subsequent deferral, of marketing costs, USA Detergents understated expenses and thereby overstated its income before taxes by $1,584,000 for the third quarter of 1996 and understated its loss before taxes by $679,000 for the fourth quarter of 1996.
Concealment and Failure to Record Invoices
- To further reduce 1996 expenses, Macsata kept approximately $2 million in vendor invoices off the company's books for fiscal year 1996. During the ordinary course of business, USA Detergents' accounts payable department periodically prepared a list of vendor invoices that did not have matching receipts for materials received from vendors. These lists were used to assist the company in recording its accounts payable and its vendor expenses and were reviewed from time to time. During January 1997, it was brought to Macsata's attention that the total value of vendor invoices without matching receipts exceeded the amount recorded in the corresponding accounts payable account by approximately $2 million. Instead of recording an upward adjustment to accounts payable, Macsata decided to conceal the $2 million in invoices.
- Because Macsata intentionally withheld the vendor invoices in fiscal 1996, and consequently failed to book the related expense, the company understated its loss before taxes by $2,154,000 for the fourth quarter of 1996.
Booking Bogus Rebates and Credits
- In an effort to further increase USA Detergents' income for fiscal 1996, Macsata booked bogus vendor rebates and credits. During late 1996 and early 1997, a USA Detergents manager solicited from vendors certain letters and other paperwork ostensibly supporting vendor rebates or credits that did not accurately reflect USA Detergents' commercial relationships with those vendors. The manager then gave the documentation to Macsata. Macsata subsequently recorded bogus rebates and credits on USA Detergents' books and selected as support some of the documentation that the manager had supplied.
- As a result, the company understated its cost of goods sold and understated its loss before taxes by $1,261,000 for the fourth quarter of 1996.
Improperly Capitalized Labor Costs
- Macsata also took steps to improve USA Detergents' 1996 financial results by improperly capitalizing certain labor costs. While the company's capital project costs could be capitalized and amortized over time, ordinary labor costs had to be expensed as incurred. During the 1996 year-end closing process, Macsata instructed the USA Detergents accounting staff to record capitalized labor costs that, in fact, Macsata had inflated. Macsata then attempted to create documentation to support the artificially inflated costs. In one instance, Macsata used a list of all USA Detergents employees hired and terminated during 1996 and arbitrarily assigned to various capital projects the entire salaries of employees hired during the last half of 1996. Macsata gave the compiled data to USA Detergents' auditors as "support" for the capitalized labor costs.
- By improperly deferring and amortizing these labor costs, the company understated its expenses for 1996, thereby understating its loss before taxes by $1,957,000 for the fourth quarter of 1996.
Fraudulent Revenue Recognition
- Macsata was also involved in efforts to inflate USA Detergents' income for the fourth quarter of 1996 by recognizing revenue in 1996 on shipments that, in fact, were made after the year-end and on shipments in which goods were merely transported to a warehouse and stored at company expense.
- During late 1996, Macsata participated in discussions in which certain managers broached the idea of having the company remain open on New Year's Day 1997 in order to ship merchandise. Ultimately, USA Detergents did ship merchandise on New Year's Day. Macsata directed that the bills of lading resulting from the New Year's Day shipments be backdated to 1996. The Vice-President for Distribution followed his instructions, and the subsequently prepared invoices used the backdated dates from the bills of lading.
- Macsata also participated in efforts to recognize revenue improperly on sham shipments of USA Detergents' goods. In one such instance, the company recognized revenue on goods it shipped to a company warehouse. A customer had, in fact, ordered those goods, but for delivery in 1997. Nevertheless, the goods were shipped before year-end to a warehouse that USA Detergents maintained for excess inventory. When Macsata learned where the goods were being stored, he ordered them moved to a third-party warehouse located out of state, so that the company's auditors would not discover them while taking inventory. The company recognized revenue on the "sale" of the goods in the fourth quarter of 1996. Ultimately, the merchandise was shipped to the customer in 1997.
- By recognizing revenue from backdated shipments actually made after the 1996 year-end and from shipments to warehouses, USA Detergents understated its loss before taxes by $94,000 for the fourth quarter of 1996.
- As a result of the fraudulent acts set forth herein, USA Detergents filed with the Commission and released to the public a false and misleading quarterly report on Form 10-Q for its quarter ended September 30, 1996, and a false and misleading annual report on Form 10-K for its fiscal year ended December 31, 1996. The reports included financial statements that materially misrepresented the company's financial condition and results of operations, significantly overstating its income.
- On August 11, 1997, the company announced that it had discovered a number of errors in its 1996 financial statements and that those financial statements would be restated. On March 17, 1998, USA Detergents filed its restated annual report on Form 10-K/A for 1996. The restated 1996 financial statements reduced the company's net income for the third quarter of 1996 by $1.5 million from the amount reported originally and reduced the company's net income for the fourth quarter of 1996 by $3 million from the amount reported originally.
Violations of Section 10(b) of the Exchange Act [15 U.S.C. § 78j(b)]; and
Exchange Act Rule 10b-5 [17 C.F.R. § 240.10b-5]
- Plaintiff realleges and incorporates herein by reference paragraphs 1 through 20 above.<
- While he was the Chief Financial Officer, with knowledge that the company's financial statements had been fraudulently and materially misstated, Macsata signed the company's quarterly report on Form 10-Q for the third quarter of 1996 and its annual report on Form 10-K for 1996.
- The Exchange Act prohibits use of a manipulative or deceptive device in connection with the purchase or sale of a security.
- By reason of the foregoing, Macsata, directly and indirectly, violated, and unless restrained will violate, Section 10(b) of the Exchange Act [15 U.S.C. § 78j(b)]; and Exchange Act Rule 10b-5 [17 C.F.R. § 240.10b-5].
Violations of Section 13(a) of the Exchange Act [15 U.S.C. § 78m(a)] and Exchange Act Rules 12b-20, 13a-1, and 13a-13 [17 C.F.R. §§ 240.12b-20, 240.13a-1, and 240.13a-13]
- Plaintiff realleges and incorporates herein by reference paragraphs 1 through 20 and paragraph 22 above.
- The Exchange Act and rules promulgated thereunder require every issuer of a registered security to file reports with the Commission which accurately reflect the issuer's financial performance and provide other information to the public.
- By reason of the foregoing, Macsata aided and abetted violations, and unless restrained will continue to aid and abet violations, of Section 13(a) of the Exchange Act [15 U.S.C. § 78m(a)] and Exchange Act Rules 12b-20, 13a-1, and 13a-13 [17 C.F.R. §§ 240.12b-20, 240.13a-1, and 240.13a-13].
Violations of Section 13(b) of the Exchange Act [15 U.S.C. § 78m(b)] and Exchange Act Rules 13b2-1 and 13b2-2 [17 C.F.R. §§ 240.13b2-1 and 240.13b2-2]
- Plaintiff realleges and incorporates herein by reference paragraphs 1 through 20 above.
- While he was the Chief Financial Officer, Macsata signed a March 24, 1997, management representation letter to the company's auditors, thereby misrepresenting to the auditors that the company's financial statements for the fiscal year ended December 31, 1996, were stated in conformity with generally accepted accounting principles, all capitalized internal labor and all deferred slotting costs were properly recorded or disclosed, and there had been no irregularities involving management or employees.
- The Exchange Act and rules promulgated thereunder require each issuer of registered securities to make and keep books, records, and accounts which, in reasonable detail, accurately and fairly reflect the business of the issuer and to devise and maintain a system of internal accounting controls sufficient to provide reasonable assurances that, among other things, transactions are recorded as necessary to permit preparation of financial statements and to maintain the accountability of assets. Rules promulgated thereunder also prohibit the making of misleading statements to an accountant, by an officer or director of such an issuer, in connection with an audit or in connection with the preparation or filing of any document or report required to be filed with the Commission.
- By reason of the foregoing, Macsata, directly and indirectly, violated, and unless restrained will violate, Section 13(b)(5) of the Exchange Act [15 U.S.C. § 78m(b)(5)] and Exchange Act Rules 13b2-1 and 13b2-2 [17 C.F.R. §§ 240.13b2-1 and 240.13b2-2].
- By reason of the foregoing, Macsata aided and abetted violations, and unless restrained will continue to aid and abet violations, of Section 13(b)(2)(A) and (b)(2)(B) of the Exchange Act [15 U.S.C. § 78m(b)(2)(A) and (b)(2)(B)].
Prayer For Relief
WHEREFORE, the Commission respectfully requests that this Court:
Permanently restrain and enjoin Macsata, and his officers, agents, servants, employees, and attorneys, and those persons in active concert or participation with him, and each of them, from violating Sections 10(b) and 13(b)(5) of the Exchange Act [15 U.S.C. §§ 78j(b) and 78m(b)(5)], and Exchange Act Rules 10b-5, 13b2-1, and 13b2-2 [17 C.F.R. §§ 240.10b-5, 240.13b2-1, and 240.13b2-2], 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 Exchange Act Rules 12b-20, 13a-1, and 13a-13 [17 C.F.R. §§ 240.12b-20, 240.13a-1, and 240.13a-13].
Order the defendant to pay a civil penalty under Section 21(d)(3) of the Exchange Act [15 U.S.C. § 78u(d)(3)].
Grant such other relief as this Court may deem just and appropriate.
Dated: March ____, 2002
Thomas C. Newkirk TN 7271
James T. Coffman
Louis J. Gicale, Jr.
Attorneys for Plaintiff
Securities and Exchange Commission
450 Fifth Street, NW
Washington, D.C. 20549-0801
(202) 942-4550 (Newkirk)
Susan Cassell, SC 8081
Assistant United States Attorney
U.S. Attorney's Office
970 Broad Street, Suite 700
Newark, New Jersey 07102