U.S. SECURITIES AND EXCHANGE COMMISSION

Litigation Release No. 16730 / September 27, 2000

Accounting and Auditing Enforcement Release No. 1325 / September 27, 2000

SEC v. Maurice B. Newman and Richard A. Gerhart, Civil Action No. SACV-00948GLT (Eex)(C.D. Cal.).

On September 27, 2000, the Securities and Exchange Commission filed an action alleging financial statement fraud against the former Chief Executive Officer and the former Chief Financial Officer of Sirena Apparel Group, Inc. ("Sirena"), a women's swimwear manufacturer located in Los Angeles County, California. The complaint alleges that, in order to meet revenue and earnings projections, Maurice B. Newman, former CEO, and Richard A. Gerhart, former CFO, caused Sirena to report false financial information in an earnings press release and a quarterly report for the third quarter ended March 31, 1999.

Also on September 27, 2000, the United States Attorney for the Central District of California announced indictments against Newman and Gerhart for conduct similar to that alleged in the Commission's complaint.

The Commission's action, filed in federal court in Los Angeles, alleges that Newman and Gerhart materially overstated Sirena's revenue by $3.6 million (or 13%) and earnings by $1.3 million (or 30%). As part of their fraudulent scheme, the complaint alleges that Newman and Gerhart engaged in the following conduct:

• Newman and Gerhart instructed Sirena personnel to hold open the March 1999 fiscal quarter until Sirena had reached its sales target for that period. The quarter was held open by resetting the date on Sirena's computer clock to March 30 or March 31. Manipulation of the computer clock allowed April shipments to be recorded as March revenue because the computer clock controlled the date that was printed on the company's invoices. The computer system also automatically recorded revenue earned as of the date of the invoice. In this way, Newman and Gerhart held the March 1999 quarter open until April 12, 1999.

• Newman and Gerhart told Sirena's independent auditors that the sales cutoff for the March 31, 1999 quarter was proper; in fact, Newman and Gerhart were circumventing the company's internal controls to extend the cutoff period improperly.

• Newman and Gerhart ordered Sirena personnel to create false shipping records to conceal their scheme. Newman and Gerhart knew that the bills of lading for the out-of-period shipments reflected April 1999 shipping dates. When Newman and Gerhart learned that Sirena's independent auditors would be testing shipping cutoff for the March 31, 1999 quarter, they instructed a subordinate to create false bills of lading to reflect March 1999 shipping dates in order to conceal the fraud from the auditors.

The Commission's complaint alleges that Newman and Gerhart violated the antifraud provision (Section 10(b) of the Securities Exchange Act of 1934 ("Exchange Act") and Rule 10b-5 thereunder), the books and records provision (Rule 13b2-1 of the Exchange Act), knowing circumvention of internal controls provision (Section 13(b)(5) of the Exchange Act) and lying-to-an-accountant provision (Rule 13b2-2 of the Exchange Act). Additionally, the complaint alleges that Newman and Gerhart aided and abetted Sirena's violations of the reporting provision (Section 13(a) of the Exchange Act and Rules 12b-20 and 13a-13 thereunder) and record-keeping provision (Section 13(b)(2)(A) of the Exchange Act).

The Commission's complaint seeks permanent injunctions and civil penalties against the defendants. Additionally, as to Gerhart, the complaint seeks an order barring Gerhart from serving as an officer or director of a public company.

Simultaneous with the filing of the Commission's complaint, Newman offered to settle the action by consenting to a permanent injunction, without admitting or denying the allegations in the complaint, for the violations outlined above. Newman also agreed to pay a civil penalty in the amount of $30,000.

The defendants named in the Commission's complaint are:

• Maurice B. Newman of Marina Del Rey, California. Newman was Sirena's Chairman of the Board of Directors and CEO. Before that, he was the President and CEO of the CaliforniaMart, the largest fashion and textile facility in the United States.

• Richard A. Gerhart of Irvine, California. Gerhart, as CFO, oversaw and reviewed all financial record-keeping and reporting for Sirena. He also signed Sirena's quarterly report filed with the Commission.

http://www.sec.gov/litigation/litreleases/lr16730.htm