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U.S. Securities and Exchange Commission

U.S. Securities and Exchange Commission
Washington, D.C.

Litigation Release No. 17426 / March 21, 2002

Accounting and Auditing Enforcement Release No. 1531

Securities and Exchange Commission v. Harold J. Macsata, Civil Action No. 02-1233 (JCL) (D.N.J. filed March 21, 2002)

SEC Files Civil Action Against Former CFO of USA Detergents, Inc. and Settles Administrative Proceedings with Seven Other Former Members of the Company's Management

The U.S. Securities and Exchange Commission ("Commission") today initiated civil litigation in the U.S. District Court for the District of New Jersey against Harold J. Macsata, who was the former Vice President of Finance, Chief Financial Officer, and Treasurer of USA Detergents, Inc. Macsata, without admitting or denying the Commission's allegations, has consented to the entry of a Final Judgment that would settle the Commission's action against him. The Commission also instituted and simultaneously settled administrative proceedings against seven other former members of USA Detergents' management. USA Detergents was a Delaware corporation that had its principal executive offices in North Brunswick, New Jersey, and was a manufacturer and marketer of laundry and household cleaning products. In May 2001, Church & Dwight Co., Inc. acquired the outstanding common stock of USA Detergents pursuant to a cash tender offer.

The Commission's complaint against Macsata alleges that he violated Sections 10(b) and 13(b)(5) of the Securities Exchange Act of 1934 ("Exchange Act") and Exchange Act Rules 10b-5, 13b2-1, and 13b2-2, and aided and abetted violations of Sections 13(a), 13(b)(2)(A), and 13(b)(2)(B) of the Exchange Act and Exchange Act Rules 12b-20, 13a-1, and 13a-13, by resorting to fraudulent methods to increase the company's reported income during the third and fourth quarters of its fiscal year ended December 31, 1996. As a result of the fraudulent acts, USA Detergents filed with the Commission and released to the public a false and misleading quarterly report on Form 10-Q for its quarter ended September 30, 1996, and a false and misleading annual report on Form 10-K for its fiscal year ended December 31, 1996. The reports included financial statements that materially misrepresented the company's results of operations, significantly overstating its income. The company's subsequently restated 1996 financial statements reduced the company's net income for the third quarter of 1996 by $1.5 million from the amount reported originally and reduced the company's net income for the fourth quarter of 1996 by $3 million from the amount reported originally.

The Commission's complaint alleges that Macsata used several methods in an attempt to inflate the company's income. The Commission's complaint alleges that Macsata directed the improper reclassification of certain marketing costs (which must be expensed when occurred) as slotting fees (fees the company paid for placing its products on merchants' shelves and which the company could amortize). The complaint alleges that Macsata kept approximately $2 million in vendor invoices off the company's books during 1996, concealing the invoices until the 1996 books were closed. The complaint further alleges that Macsata recorded bogus vendor rebates and credits. The Commission also alleges that Macsata lowered the company's 1996 expenses by improperly shifting ordinary labor costs onto capital projects. The complaint alleges that Macsata was also involved in the improper recognition of revenue in 1996 from post-period sales and from 1996 shipments for which no firm customer orders had yet been entered, including directing the company's Vice President for Distribution to backdate bills of lading for the post-period shipments. Finally, the complaint alleges that, with knowledge that the company's financial statements had been fraudulently and materially misstated, Macsata signed the company's quarterly report on Form 10-Q for the third quarter of 1996 and its annual report on Form 10-K for 1996. Macsata, without admitting or denying the Commission's allegations, consented to entry of a Final Judgment that would enjoin him from future violations of the federal securities laws and order him to pay a civil money penalty of $50,000.

The Commission today also issued administrative Orders instituting settled administrative proceedings against seven other former members of USA Detergents' management. In the first of five separate administrative Orders, the Commission found that Keith Spero, the company's Vice President for Distribution, violated the corporate record-keeping provisions of the federal securities laws and was a cause of violations of the antifraud, periodic reporting, corporate record-keeping, and lying to auditors provisions of the federal securities laws, in connection with the company's improper revenue recognition at year-end 1996. The Commission found that, when the company remained open on January 1, 1997, to ship merchandise, Spero caused the resulting bills of lading to be backdated to December 31, 1996. The Commission also found that Spero shipped merchandise at year-end 1996 even though no firm orders had been received for the goods. Simultaneous with the institution of the administrative proceeding, and without admitting or denying the findings contained therein, Spero consented to the issuance of the Commission Order ordering him to cease and desist from future violations of the federal securities laws.

In three separate administrative Orders, the Commission found that three former members of USA Detergents' management participated in improper practices, or directed acts, that they knew or should have known would have a material impact on the company's financial statements. In those Orders, the Commission found that Frank Valdez, the company's President; Harlan Schier, the Controller; and Daniel Parker, the Vice President for Materials Management, caused violations by USA Detergents of the periodic reporting provisions of the federal securities laws. Simultaneous with the institution of the administrative proceedings, and without admitting or denying the findings contained therein, each of Valdez, Schier, and Parker consented to the issuance of a Commission Order ordering him to cease and desist from future violations of the periodic reporting provisions.

In a fifth administrative Order, the Commission found that three former officers of USA Detergents knew, or should have known, of facts that should have put each of them on notice that the company's financial statements might well be false. Nevertheless, while on such notice, each of them, without further inquiry, signed the company's annual report on Form 10-K for 1996. In a joint Order, the Commission found that Uri Evan, the Chief Executive Officer and Chairman of the Board of Directors; Joseph S. Cohen, the Vice Chairman of the Board of Directors; and Frederick J. Horowitz, an Executive Vice President, the Chief Administrative Officer, and a director, each caused violations by USA Detergents of the periodic reporting provisions of the federal securities laws. Simultaneous with the institution of the administrative proceeding, and without admitting or denying the findings contained therein, each of Evan, Cohen, and Horowitz consented to the issuance of the Commission Order, which orders each of them to cease and desist from future violations of the periodic reporting provisions.

The Commission previously announced that it had initiated a subpoena enforcement action, Securities and Exchange Commission v. USA Detergents, Inc. and O'Sullivan Graev & Karabell, LLP, Misc. No. 01-326 (ES) (D.D.C. filed Aug. 2, 2001), in the U.S. District Court for the District of Columbia against USA Detergents and O'Sullivan Graev & Karabell, LLP, a law firm hired by a special committee of the company's board of directors to conduct an internal investigation of accounting errors and irregularities at USA Detergents, seeking production of certain documents for which the Commission contended any previously applicable privilege had been waived. See Lit. Rel. No. 17101 (Aug. 13, 2001). The District Court has issued no decision in that litigation. The Commission announced today, however, that the parties to that litigation had filed a stipulation of dismissal pursuant to Federal Rule of Civil Procedure 41(a)(1)(ii), predicated in part on an agreement between the parties whereby the Commission staff reviewed the documents that were the subject of that proceeding.

See Lit. Rel. No. 17101 (Aug. 13, 2001); Securities Exchange Act Rel. No. 45611 (March 21, 2002); Securities Exchange Act Rel. No. 45612 (March 21, 2002); Securities Exchange Act Rel. No. 45613 (March 21, 2002); Securities Exchange Act Rel. No. 45614 (March 21, 2002); Securities Exchange Act Rel. No. 45615 (March 21, 2002).

*  SEC Complaint in this matter.

 

http://www.sec.gov/litigation/litreleases/lr17426.htm


Modified: 03/22/2002