UNITED STATES SECURITIES AND EXCHANGE COMMISSION Litigation Release No. 15417 / July 23, 1997 Accounting and Auditing Enforcement Release No. 939 / July 23, 1997 Securities and Exchange Commission vs. Policy Management Systems Corporation, George Larry Wilson, Robert L. Gresham, James P. Brown, David T. Bailey and Bernard C. Mazon, Civil Action No. 3:97-2193-10 (D.S.C. July 22, 1997) The Securities and Exchange Commission announced today that it had sued Policy Management Systems Corporation of Columbia, South Carolina ("PMSC") and five of its current and former officers. PMSC is engaged in the business of developing and licensing software used by insurance companies and its securities are listed and trade on the New York Stock Exchange. The SEC alleged in its complaint that from January 1991 through March 1993 PMSC and various of its employees engaged in a number of improper accounting practices which materially misstated PMSC s results of operations. These practices included the use of side letters to modify the terms of contracts, an undisclosed billing arrangement with one customer, undisclosed prebilling arrangements with other customers, and various practices which had the effect of holding the books open beyond the end of several reporting periods. The SEC also alleged that at the end of several reporting periods PMSC and certain of its employees recorded revenue from contracts which had not yet been finalized with customers. According to the SEC complaint, these practices, which did not comply with generally accepted accounting principles or PMSC's own publicly stated accounting policies, caused the revenues in PMSC's quarterly and annual financial statements for 1991, 1992 and the first quarter of 1993 to be misstated by amounts ranging up to $3.9 million. The individual defendants sued by the SEC are George Larry Wilson, the chief executive officer of PMSC, Robert L. Gresham, PMSC's former chief financial officer, James P. Brown, the company's former general counsel, David T. Bailey, an executive vice president of PMSC, and Bernard C. Mazon, formerly an executive vice president of the company. The complaint alleged that the chief executive officer and the chief financial officer signed the annual and quarterly reports PMSC filed with the Commission for the periods from January 1, 1991 through March 31, 1993 and provided the annual management representation letter to PMSC s auditors for 1992. According to the complaint, the CEO, CFO and general counsel controlled PMSC s revenue recognition policies and knew or should have known that in certain instances revenue was recognized from contracts which had not been finalized and were not executed until after the end of the period. In one specific instance, the complaint alleged that in 1993 a customer had notified the general counsel of its intent to cancel a $980,000 contract which had been included as revenue in - 2 - ======END OF PAGE 1====== the period ended September 30, 1992, pursuant to a cancellation right contained in a side letter given to conclude negotiations for the contract after the close of that period. The complaint further alleged that the chief financial officer learned of this side letter by February, 1993, but PMSC continued to recognize the revenue from the contract in its 1992 financial statements. The complaint also alleged that another side letter was given to conclude a $1.8 million contract in January, 1993. According to the complaint, in February, 1993, the general counsel stated to PMSC s auditors that two contracts PMSC had included as revenue in the period ended December 31, 1992, had been completed in December, 1992, despite the fact that the contracts had not been finally negotiated and signed until January, 1993. The complaint further alleged that the defendant executive vice presidents each negotiated contracts with customers where material terms were not agreed until after the close of the period, and each gave customers undisclosed side letters to conclude contracts, although each was aware of PMSC's revenue recognition policies. The SEC s complaint charged that each of the individual defendants violated Section 13(b)(5) of the Securities Exchange Act of 1934 ( Exchange Act ) and Rules 13b2-1 and 13b2-2 thereunder. The complaint also alleged that PMSC, and as controlling persons, the chief executive officer, chief financial officer and general counsel violated Sections 13(a) and 13(b)(2)(A) and (B) of the Exchange Act and Rules 12b-20, 13a-1 and 13a-13 thereunder. Simultaneously with the filing of the complaint, PMSC and the five individual defendants consented, without admitting or denying the allegations in the complaint, to the entry of final judgments ordering PMSC to pay a $1 million civil penalty and each individual defendant to pay a $20,000 civil penalty. The judgments also enjoin PMSC, Wilson, Gresham and Brown from future violations of the periodic reporting, books and records, and internal controls provisions of the Exchange Act and enjoin Bailey and Mazon from future violations of the internal control provisions. ======END OF PAGE 2======