SECURITIES AND EXCHANGE COMMISSION
Litigation Release No. 16885 / January 31, 2001
Accounting and Auditing Enforcement Release No. 1365 / January 31, 2001
SECURITIES AND EXCHANGE COMMISSION v. DAVID W. MCCONNELL AND CHARLES P. MORRISON (United States District Court for the Eastern District of Pennsylvania, Civil Action No. 00 CV 2261)
Charles P. Morrison, the former chief financial officer of the Delaware Valley region of Allegheny Health Education and Research Foundation ("AHERF") and an AHERF senior vice president, consented, without admitting or denying the allegations of the Commission's Complaint, to the entry of a Final Judgment and Order in the case. The Order permanently enjoins him from violating Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder, and requires him to pay a civil money penalty in the amount of $25,000. The Order was entered on January 31, 2001, by the Honorable Norma L. Shapiro.
Also on January 31, 2001, the Commission instituted and simultaneously settled a Rule 102(e) proceeding against Morrison. Based upon the District Court injunction, the Commission suspended Morrison from appearing or practicing before the Commission as an accountant with the right to apply for reinstatement in three years.
The Commission's Complaint in the District Court action alleged that Morrison violated the securities laws by, among other things, creating, reviewing and approving false financial statements of AHERF and a group of its subsidiaries collectively known as the Delaware Valley Obligated Group ("Delaware Valley"), thereby masking, from at least December 1996 through July 1998, AHERF's severely deteriorating financial condition. Specifically, the Commission's Complaint alleged that the financial statements overstated: (a) the 1996 income of Delaware Valley by, approximately, $40 million; (b) the 1997 income of AHERF by approximately $59.6 million; and (c) the 1997 income of Delaware Valley by approximately $59.6 million, in documents issued to the public in December 1996 and February 1998.
AHERF is a Pennsylvania nonprofit healthcare organization. On July 21, 1998, AHERF filed for bankruptcy protection under Chapter 11 of the United States Bankruptcy Code on behalf of itself and four of its subsidiaries in the U.S. District Court for the Western District of Pennsylvania. By the time of its bankruptcy filing in 1998, groups of one or more of AHERF's subsidiaries ("obligated groups") were responsible for repaying at least thirteen bond issues issued by or for the benefit of these obligated groups, totaling more than $900 million (the "AHERF Bonds").
On behalf of the obligated groups, AHERF provided to nationally recognized municipal securities information repositories annual Secondary Market Disclosure Reports which contained a section explaining the financial health of the reporting entities, debt service coverage ratios, and which attached audited financial statements. The Disclosure Reports were made available to the public through these repositories and were the most easily accessible source of information for investors and potential investors in AHERF bonds.
According to the Complaint, between December 12, 1996 and January 7, 1997, AHERF sent Delaware Valley's 1996 Disclosure Report and audited financial statements to the repositories and numerous other third parties. The Complaint alleged that Delaware Valley's audited financial statements for the year ended June 30, 1996 were materially false and misleading, and failed to comply with Generally Accepted Accounting Principles ("GAAP"), because they materially overstated Delaware Valley's 1996 income by, approximately, $40 million and misrepresented the condition of Delaware Valley accounts receivable. The Complaint further alleged that Delaware Valley's 1996 Disclosure Report was materially false and misleading in that it mirrored the numerical misstatements in the 1996 financial statements and it materially misrepresented the condition of Delaware Valley accounts receivable.
The Complaint further alleged that, in February 1998, AHERF distributed its 1997 audited consolidated financial statements with consolidating schedules and consolidated Disclosure Report to the repositories and numerous other third parties. According to the Complaint, AHERF's audited consolidated financial statements with consolidating schedules for the year ended June 30, 1997, which purported to be prepared in accordance with GAAP, were materially false and misleading and failed to comply with GAAP in that they materially overstated AHERF's 1997 consolidated net income by, approximately, $59.6 million and they materially overstated the 1997 net income of Delaware Valley by, approximately, $59.6 million. AHERF's 1997 consolidated Disclosure Report allegedly was materially false and misleading in that it: (1) mirrored the numerical misstatements in the AHERF 1997 audited consolidated financial statements and consolidating schedules; (2) misrepresented the condition of Delaware Valley accounts receivable; and (3) misrepresented the financial condition of another AHERF obligated group, namely the Centennial obligated group.
See Litigation Release No. 16534, Accounting and Auditing Enforcement Release No. 1254 (May 2, 2000)