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UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Litigation Release No. 16491A / March 29, 2000

SEC Sues Digital Lightwave, Inc. and Bryan J. Zwan For
Financial Fraud In Connection With An Earnings Management Scheme.
Digital Settles With SEC

Related Administrative Proceedings Settled
Against Seth P. Joseph, Beth A. Morris and Steven H. Grant

Securities and Exchange Commission v. Digital Lightwave, Inc. and Bryan J. Zwan, Civil Action No. 8:00-CV-614-T-26F (M.D. Florida, filed March 29, 2000)

The Securities and Exchange Commission ("Commission") announced today that it had brought a federal civil action against Digital Lightwave, Inc. ("Digital") and Bryan J. Zwan ("Zwan"), the former chief executive officer of Digital, and a settled administrative proceeding against Seth P. Joseph ("Joseph"), the former senior executive vice-president of Digital, in connection with a fraudulent earnings management scheme which took place during 1997 and involved the recognition of revenues based on fraudulent bill and hold transactions and other transactions which were incomplete or contained material contingencies. In addition, the Commission brought settled administrative proceedings against Beth A. Morris ("Morris") and Steven H. Grant ("Grant"), Digital's former and present principal accounting officers respectively, for false filings with the Commission as well as other violations. These actions are described below in greater detail.

The Commission sued Digital and Zwan, Digital's former president, chief executive officer and chairman of the board, who currently serves as a Digital director, for financial fraud in connection with this earnings management scheme. Without admitting or denying the Commission's allegations, Digital simultaneously consented to the entry of a permanent injunction that prohibits it from committing any future violation of the antifraud, reporting, recordkeeping, and internal control provisions of the Exchange Act. The complaint, filed in federal court in Florida's Middle District, also seeks an injunction and civil penalties against Zwan. All of the allegations in the Complaint arise out of events that relate to Digital's second and third quarters which ended June 30, 1997 and September 30, 1997, respectively.

The Complaint alleges that Digital, based in Clearwater, Florida, falsely reported its results of operations and other information in quarterly filings made with the Commission on Forms 10-Q for the quarters ended June 30, 1997 and September 30, 1997. The Complaint also alleges that Digital issued false press releases to the public, which materially overstated its revenues and earnings. The Complaint further alleges that Zwan, Digital's then chief executive officer, was the person principally responsible for making the false filings and issuing the false press releases and that he signed the fraudulent filings on behalf of Digital.

Specifically, the Complaint alleges that Digital's filings with the Commission materially overstated its revenues and accounts receivable by prematurely or incorrectly recognizing revenues on certain transactions which were incomplete or contained contingencies. In particular, the Complaint alleges that Digital recognized revenues based on fraudulent bill and hold transactions and fraudulent verbal purchase orders during the second and third quarters of 1997 in order to fraudulently manage its earnings to meet or exceed wall street analysts' expectations. The Complaint further alleges that Zwan made materially false statements and omissions to Digital's independent auditors in connection with their review of Digital's second and third quarter financial statements.

The SEC's complaint charges that Digital violated Sections 10(b), 13(a), and 13(b)(2) of the Exchange Act and Rules 10b-5, 12b-20 and 13a-13 thereunder and that Zwan violated Section 17(a)(1), 17(a)(2) and 17(a)(3) of the Securities Act of 1933, Section 10(b) of the Exchange Act, and Rules 10b-5 and 13b2-2, thereunder, and that he aided and abetted Digital's violations of Sections 13(a) and 13(b)(2) of the Exchange Act and Rules 13a-13, and 12b-20, thereunder.

Related Administrative Proceedings:

(1) In a related administrative proceeding, the Commission announced that it has issued an Order Instituting Public Cease-And-Desist Proceedings Pursuant to Section 21C of the Exchange Act, Making Findings and Imposing a Cease-and-Desist Order ("Order") against Joseph of Miami Beach, Florida. The Commission simultaneously accepted an Offer of Settlement in which Joseph, without admitting or denying the Commission's findings, consented to the entry of the Order which requires that he cease and desist from committing or causing any violation and any future violation of Section 10(b) of the Exchange Act and Rules 10b-5 and 13b2-2 thereunder and 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 and 13a-13 thereunder.

The Order finds that Joseph, while acting as the executive vice-president of Digital for the quarters ended June 30, 1997 and September 30, 1997, respectively, was responsible for drafting Digital's contracts and agreements, and for supervising the company's financial reporting. As part of these responsibilities, Joseph reviewed and participated in drafting Digital's quarterly filings with the Commission, including the Management Discussion and Analysis sections, and prepared Digital's press releases, all of which contained false statements of material facts. In addition, the Order finds that Joseph caused Digital to fail to make and keep books, records and accounts, and to devise and maintain a system of internal controls as required by the federal securities laws. Finally, the Order finds that Joseph made material omissions to Digital's independent accountants in connection with their review of Digital's second quarter financial statements. For more information please refer to, In the Matter of Seth P. Joseph, Securities Exchange Act of 1934 Release No. 34-42588; Accounting and Auditing Release No. 1244.

(2) The Commission also announced that it has issued an Order Instituting Public Cease-And-Desist Proceedings Pursuant to Section 21C of the Exchange Act, Making Findings and Imposing a Cease-and-Desist Order ("Order") against Morris, C.P.A. of Indian Rocks Beach, Florida and Grant, C.P.A. of St. Petersburg, Florida. The Commission simultaneously accepted Offers of Settlement in which Morris and Grant, without admitting or denying the Commission's findings, consented to the entry of the Order which requires that they cease and desist from committing or causing any violation and any future violation of Rule 13b2-2 under the Exchange Act and 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 and 13a-13 promulgated thereunder.

The Order finds that Morris and Grant, while acting as the principal accounting officers for Digital for the quarters ended June 30, 1997 and September 30, 1997, respectively, prepared false financial statements which were included in Digital's quarterly filings with the Commission and signed the filings on behalf of Digital. In addition, the Order finds that Morris and Grant caused Digital to fail to make and keep books, records and accounts, and to devise and maintain a system of internal controls as required by the federal securities laws. Finally, the Order finds that Morris made material omissions to Digital's independent accountants in connection with their review of Digital's second quarter financial statements and that Grant made misrepresentations and omissions to Digital's independent accountants in connection with their review of Digital's third quarter financial statements. For more information please refer to, In the Matter of Beth A. Morris and Steven H. Grant, Securities Exchange Act of 1934 Release No. 34-42587; Accounting and Auditing Release No. 1243.

http://www.sec.gov/litigation/litreleases/lr16491a.htm


Modified: 03/31/2000