U.S. SECURITIES AND EXCHANGE COMMISSION
Litigation Release No. 19675 / April 27, 2006
Accounting And Auditing Release No. 2423 / April 27, 2006
SEC v. Lumenis Ltd., Sagi A. Genger and Kevin Morano, United States District Court for the Southern District of New York, Civil Action No. 06-3225-LAK
SEC Charges Lumenis Ltd. and One Former and One Current Officer With Fraudulent Scheme to Inflate Revenue
The Commission filed a civil fraud action today in federal district court in the Southern District of New York against Lumenis Ltd., its former chief operating officer, Sagi A. Genger, and its former chief financial officer and current senior vice president of marketing and development, Kevin Morano, for their participation in a series of fraudulent transactions that resulted in the publication of materially false financial statements by Lumenis in 2002 and 2003. Lumenis is an Israeli corporation with executive offices in New York whose stock was publicly traded in the United States. Genger is a resident of New York, New York and Morano is a resident of Pennington, New Jersey. Without admitting or denying the Commission's allegations, Lumenis and Genger each consented to the entry of final judgments enjoining them from future violations of certain federal securities laws, and, as to Genger, ordering payment of a $75,000 civil penalty and imposing a five year officer and director bar.
The Commission's Complaint alleges that from at least late 2001 through early 2003, Lumenis, acting through senior officers, engaged in a fraudulent scheme to inflate revenue and misrepresent other important financial metrics so as to deceive investors as to the company's true financial condition. According to the Complaint, the scheme involved the improper recognition of a series of sales transactions that resulted in Lumenis' publication of materially false and misleading financial statements in six consecutive financial reporting periods, starting with those for the year ended December 31, 2001. According to the Complaint, Genger and Morano worked in concert to further the fraudulent scheme at Lumenis. The Complaint alleges Genger induced distributors and other customers to make excessive end-of-the-quarter product purchases that for various reasons should not have been included in Lumenis' reported financial results, and that Genger knowingly or recklessly disregarded the fact that these transactions did not qualify for recognition as proper sales. For example, according to the Complaint, in one transaction Genger agreed that a distributor would not have to pay for products it ordered from Lumenis until the distributor had collected on certain sales orders Lumenis was to provide it. The Complaint alleges that Lumenis' recognition of revenue when such a contingency arrangement existed departed from generally accepted accounting principles, and that Genger knowingly or recklessly disregarded this fact at the time the revenue was improperly recognized. The Complaint also alleges that Morano allowed Lumenis to recognize revenue and profits from a number of the improper transactions while knowingly or recklessly disregarding the various conditions that should have precluded recognition.
The Complaint alleges that through their fraudulent conduct, (1) Lumenis violated Section 17(a) of the Securities Act of 1933 ("Securities Act") and Sections 10(b), 13(a), 13(b)(2)(A) and 13(b)(2)(B) of the Securities Exchange Act of 1934 ("Exchange Act") and Rules 10b-5, 12b-20, 13a-1, 13a-11 and 13a-13 thereunder; (2) Genger violated Section 17(a) of the Securities Act and Sections 10(b) and 13(b)(5) of the Exchange Act and Rules 10b-5, 13b2-1, and 13b2-2 thereunder, and aided and abetted Lumenis' violations of Sections 13(a), 13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act and Rules 12b-20, 13a-1, 13a-11 and 13a-13 thereunder; and (3) Morano violated Section 17(a) of the Securities Act and Sections 10(b) and 13(b)(5) of the Exchange Act and Rules 10b-5, 13a-14, 13b2-1, and 13b2-2 thereunder, and aided and abetted Lumenis' 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, 13a-11 and 13a-13 thereunder.
Without admitting or denying the allegations of the Complaint, Lumenis and Genger have consented to the entry of final judgments. With respect to Lumenis, the final judgment permanently will enjoin it from violating Section 17(a) of the Securities Act and Sections 10(b), 13(a), 13(b)(2)(A) and 13(b)(2)(B) of the Securities Exchange Act and Rules 10b-5, 12b-20, 13a-1, 13a-11 and 13a-13 thereunder. With respect to Genger, the final judgment will (1) permanently enjoin him from variously violating or aiding and abetting violations of Section 17(a) of the Securities Act and 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-11, 13a-13, 13b2-1 and 13b2-2 thereunder; (2) order him to pay a civil monetary penalty in the amount of $75,000; and (3) prohibit him from serving as an officer or director of a publicly traded company for five years.
In related administrative proceedings, the Commission (1) issued an Order revoking Lumenis' securities registration for its repeated failure to file required periodic reports with the Commission; and (2) issued a separate Order finding that Chaim Schwartzbard, an audit partner at Israel's Deloitte & Touche Brightman Almagor, engaged in improper professional conduct pursuant to Rule 102(e)(1)(ii) of the Commission's Rules of Practice in connection with his former role as a Lumenis outside auditor. The Schwartzbard Order found that he engaged in repeated instances of unreasonable conduct that indicate a lack of competence to practice before the Commission, and denied him the privilege of practicing before the Commission as an accountant for three years. Lumenis and Schwartzbard separately consented to the issuance of their respective Orders without admitting or denying any of the findings contained therein.
For further information, see Securities Exchange Act Release No. 53724 (April 26, 2006)[Order revoking Lumenis's securities registration]; and Securities Exchange Act Release No. 53725 (April 26, 2006)[Order suspending Schwartzbard].