Securities and Exchange Commission
Litigation Release No. 16304 / September 28, 1999
Accounting and Auditing Enforcement Release No. 1174
SECURITIES AND EXCHANGE COMMISSION V. ROBERT H. SUTTON, U.S. District Court for the Northern District of Illinois, Civil Action No. 99 C 6342 (N.D. Ill. September 27, 1999)
The Securities and Exchange Commission announced that on September 27, 1999, it filed a Complaint for Permanent Injunction, Civil Penalties and Other Equitable Relief in the U.S. District Court for the Northern District of Illinois against Robert H. Sutton, a resident of Palatine, Illinois. The Complaint alleges that Sutton, at the time a plant controller for a unit of Material Sciences Corporation ("MSC"), a Delaware corporation based in Elk Grove Village, Illinois, violated the federal securities laws by making false entries in the company's inventory and accounts payable records. The Complaint alleges that, as a result of Sutton's false entries, MSC overstated by 29% the net earnings disclosed in its financial statements for the fiscal year ended February 29, 1996. The Complaint also alleges that the false entries caused MSC to overstate the net earnings disclosed on MSC's Forms 10-Q during fiscal years 1996 and 1997 by amounts ranging between 6.27% and more than 300%.
According to the Complaint, between March 1, 1995, and February 28, 1997, Sutton intentionally fabricated the inventory work in process and entered these values into the general ledger of MSC's Laminates and Composites unit. According to the Complaint, Sutton's fabrications falsely increased MSC's earnings by artificially inflating the book value of the unit's inventory on hand and understating the unit's cost of sales.
The Complaint also alleges that from March 1, 1996, to February 28, 1997, Sutton intentionally made false ledger entries for the Laminates and Composites unit's accounts payable. According to the Complaint, Sutton's improper entries falsely increased MSC's earnings by artificially deflating its liabilities.
The Complaint alleges that Sutton violated Section 10(b) of the Securities Exchange Act of 1934 ("Exchange Act") and Rule 10b-5 promulgated thereunder. The Complaint also alleges that Sutton violated Section 13(b)(5) of the Exchange Act and Rule 13b2-1 promulgated thereunder by circumventing MSC's system of internal accounting controls and falsifying MSC's books, records and accounts.
In a related matter, the Commission, by consent, entered an Order Instituting Public Administrative Proceedings against MSC. The Order requires MSC to cease and desist from committing or causing any violation and any future violation of Sections 13(a), 13(b)(2)(A), and 13(b)(2)(B) of the Exchange Act and Rules 12b-20, 13a-1, and 13a-13 thereunder, and to engage in certain undertakings.