SECURITIES AND EXCHANGE COMMISSION Washington, D.C. Litigation Release No. 16051 / February 2, 1999 Accounting and Auditing Enforcement Release No. 1105 / February 2, 1999 Securities and Exchange Commission v. Richard F. Rubin, Edward T. Creevy, Ronald H. Hollandsworth, and Kymberlee W. Kulis, 99 CV 239 (RCL) (D.D.C) (Feb. 2, 1999) SEC Sues Four Former Senior Executives and Employees of Donnkenny Inc. for Perpetrating A Financial Fraud and Insider Trading The Securities and Exchange Commission today filed an enforcement action charging four former senior executives and employees of Donnkenny, Inc.(a manufacturer and marketer of women’s sportswear and other apparel(with perpetrating a financial fraud at the company and engaging in illegal insider trading. The complaint alleges as follows: Beginning in at least early 1994 and continuing until at least August 1996, Donnkenny’s former chief executive officer and chairman, Richard F. Rubin, fraudulently managed the company’s reported revenues and earnings. Rubin directed a scheme whereby the company improperly reported revenue both on bogus transactions as well as on sales before they occurred. His purpose was to create the illusion that each quarter the company’s financial results met or exceeded projections and analysts’ expectations. Assisting Rubin in the scheme were three company employees: Donnkenny’s former chief financial officer, Edward T. Creevy, its former controller, Ronald H. Hollandsworth, and former assistant controller, Kymberlee W. Kulis. Together these four individuals caused Donnkenny to improperly recognize revenue by: * holding open quarters to book out-of-period shipments; * recording revenue on orders without shipping the goods to customers; * recording fictitious sales from non-existent contract work and through false journal entries; and * recording revenue on inventory hidden at an idle Donnkenny facility and a third-party warehouse. According to the complaint: Rubin was aware of each of the improper methods, but he primarily relied on Hollandsworth and Kulis to select the combination used to fraudulently reach his targeted revenue figures. And, while not involved day-to-day in the scheme, Creevy was aware of the fraud and assisted in its cover-up. The defendants’ scheme caused Donnkenny to disseminate materially false and misleading financial statements and other disclosures through press releases and filings with the SEC. The complaint also alleges that: The defendants engaged in illegal insider trading by selling Donnkenny securities knowing that the company’s publicly reported financial results were materially misstated. The defendants’ securities transactions included the following: * Rubin sold 780,000 shares, and caused his wife to sell 77,000 shares, of Donnkenny stock, from which the Rubins received proceeds of approximately $17.9 million. In addition, in July 1996, immediately before the fraud was detected, Rubin entered into an options transaction known as a "no-cost collar" from which he received approximately $3.6 million after the fraud was revealed and the price of Donnkenny’s stock plummeted. * Creevy and Hollandsworth each sold 14,000 shares of Donnkenny stock, receiving profits of $148,325 and $139,250, respectively. * Kulis sold 899 shares of Donnkenny stock receiving profits and avoiding losses of $10,599.38. In addition to civil money penalties, the Commission seeks to permanently enjoin the defendants from violating or aiding and abetting or causing violations of the antifraud provisions of both the Securities Act of 1933 and the Securities Exchange Act of 1934, as well as the periodic reporting, books and records, and internal accounting control provisions of the Exchange Act. The Commission also requested that the court order the defendants to disgorge their ill-gotten gains from their insider trading, and with respect to Rubin, that he disgorge the bonuses he received from the company while directing the fraud. In addition, the Commission asked that the court permanently bar Rubin, Creevy, and Hollandsworth from serving as officers or directors of public companies. Simultaneously with the filing of the complaint, without admitting or denying the complaint’s allegations, Kulis agreed to settle the charges against her by consenting to a final judgment. The final judgment will prohibit Kulis from violating or aiding and abetting or causing 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-13, and 13b2-1 thereunder. The judgment will also order Kulis to pay $34,576.66, representing disgorgement of her trading profits and losses avoided (plus prejudgment interest thereon) and civil money penalties totaling $20,599.38. Also simultaneously with the filing of the complaint, the Commission instituted related administrative proceedings against Donnkenny. Without admitting or denying the Commission’s findings, Donnkenny consented to an order finding that the company violated the antifraud provisions of the Securities Act and the Exchange Act as well as the periodic reporting, books and records, and internal control provisions of the Exchange Act. The order directed Donnkenny to cease and desist from committing or causing any violations or future violations of the following provisions: Section 17(a) of the Securities Act, and 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, and 13a-13 thereunder. In the Matter of Donnkenny, Inc., Securities Act Release No. 33- 7636, February 2, 1999. Also today, the United States Attorney for the Eastern District of New York announced that today Rubin pleaded guilty to conspiracy to commit securities fraud, a felony. In related criminal actions, the U.S. Attorney also announced that Creevy and Hollandsworth each have similarly pled guilty to conspiracy to commit securities fraud. U.S. v. Edward T. Creevy, 99 CR 13 (JBW) (E.D.N.Y., entered January 14, 1999); U.S. v. Ronald Hollandsworth, 98 CR 1055 (JBW) (E.D.N.Y., entered December 2, 1998). The Commission thanks the U.S. Attorney’s Office for its cooperation in this matter.