Litigation Release No. 17439 / March 27, 2002
Accounting and Auditing Enforcement Release No. 1535 / March 27, 2002
SEC Sues Former Top Officers of Defense Contractor Signal Technology Corp. for Accounting Fraud
Securities and Exchange Commission v. Dale Peterson et al. (United States District Court for the Northern District of California C.A. No. C02-01467)
The Securities and Exchange Commission yesterday filed a civil fraud action against seven former senior officers of Signal Technology Corp., a Danvers, Massachusetts defense contractor formerly located in Sunnyvale, California. In the suit, filed in federal court in the Northern District of California, the Commission alleged that defendants caused Signal Tech to inflate its reported earnings by over $9 million from January 1996 through June 1998. According to the Complaint, each of the individual defendants personally directed or participated in the company's improper accounting practices at its Florida-based Keltec division, when it failed to record known losses on major contracts, prematurely recognized revenue, and failed to write off worthless inventory. The Commission alleged that the defendants' conduct violated the antifraud, periodic reporting, record keeping, internal controls and lying to auditors provisions of the federal securities laws.
All of the individual defendants were members of senior management at Signal Tech or its Keltec division. The Complaint alleges that defendants flouted accounting principles to improve the company's bottom line and repeatedly failed to follow generally accepted accounting principles (GAAP). The Complaint alleges that the company's disregard for proper accounting came from the top, with the company's former CEO, defendant Dale Peterson, remarking that he was "sick of people thinking GAAP was important. As a result of its accounting fraud, the Complaint alleges, Signal Tech misstated its net income by amounts ranging from 8% to 294% in financial statements filed for reporting periods during January 1996 through March 1998 and reported a profit, rather than its actual loss, for the year 1997.
In its complaint, the Commission named the following defendants:
Dale Peterson, age 66, who resides in Saratoga, California. Peterson was Signal Tech's Chief Executive Officer and Chairman of the Board from 1994 to mid-1998.
Russell Kinsch, age 52, who resides in Saratoga, California. Kinsch was Signal Tech's Chief Financial Officer from February 1996 through June 1997.
James Walsh, age 68, who resides in Sunnyvale, California. Walsh was president of Signal Tech from May 1993 until August 1997; and vice chairman and chief technical officer from August 1997 until December 1997. He served as Keltec's de facto president during the third quarter of 1997.
Richard Nabozny, age 68, who resides in Panama City Beach, Florida. Nabozny was vice president of operations of Signal Tech from 1992 through June 1998 and served as Keltec's president from January through June 1998.
Michael Smith, age 53, who resides in Chelmsford, Massachusetts. Smith was vice-president of marketing for Signal Tech beginning in February 1995. Smith served as president of the company's Keltec division from February 1996 until March 1997.
Charles Balentine, age 54, who resides in McElhattan, Pennsylvania. Balentine was controller of the Keltec division from February 1996 to March 1998.
Wayne Armstrong, age 55, who resides in Navarre, Florida. Armstrong was president of Keltec from March 1997 through December 1997.
Defendant officers' individual roles in alleged fraudulent accounting
Specifically, the Complaint alleges that from 1996 through 1998, Signal Tech's Keltec division was experiencing severe financial difficulties due to cost overruns on its defense contracts. Signal Tech's CEO, Dale Peterson, and its CFO, Russell Kinsch, knew of, directed and approved of Keltec's failure to record contract losses, but signed Signal Tech's materially misleading Forms 10-K and 10-Q, knowing that they incorporated misleading financial results for Keltec. Peterson and Kinsch also signed false management representation letters to Signal Tech's auditors.
The other defendants, James Walsh, Richard Nabozny, Michael Smith and Wayne Armstrong, who served as Keltec's division presidents, and Charles Balentine, its division controller, participated in Signal Tech's filing of false financial reports by directing Keltec to provide inaccurate figures for inclusion in Signal Tech's consolidated financial statements. Walsh directed Keltec to conceal over $1 million in contract costs during 1997. Nabozny directed concealment of costs, made unsupported reductions to Keltec's reserves which improved its profit figures, and approved Keltec's failure to write off worthless inventory. Smith approved Keltec's failure to record contract cost increases and its premature recognition of revenue. Balentine implemented directives by Keltec's president to record revenues prematurely and not to record contract costs. He directed inadequate write-offs of worthless inventory. Armstrong knew of Keltec's failure to record contract cost increases, but allowed Keltec to report the misleading results.
According to the Complaint, the accounting improprieties came to light after a change in Signal Tech's management in mid-1998. Balentine's replacement discovered unrecorded losses at Keltec. Signal Tech's board of directors initiated an examination of the company's books which led to the restatement of its financial results for 1996 and 1997. By the time of the restatement, none of the seven defendants remained at Signal Tech.
Commission seeks permanent injunctions, civil money penalties and officer and director bars
In its Complaint, the Commission requests that the court issue a final judgment of permanent injunction and other relief enjoining each of the individual defendants from violating or aiding and abetting violations of the antifraud, periodic reporting, record keeping and internal controls provisions of the federal securities laws, Sections 10(b), 13(a), 13(b)(2)(A), 13(b)(2)(B) and 13(b)(5) of the Securities Exchange Act of 1934 and Exchange Act Rules 10b-5, 12b-20, 13a-1, 13a-13 and 13b2-1, and additionally as to Peterson and Kinsch, Rule 13b2-2, which prohibits officers of a company from lying to auditors. In addition to civil monetary penalties from all individual defendants, the Commission is seeking an order permanently barring Peterson, Kinsch, Walsh, Nabozny and Smith from acting as officers or directors of any public company.
Commission settles Cease-and-Desist proceeding with Signal Tech
In a related action, the Commission instituted and simultaneously settled an administrative cease-and-desist proceeding against Signal Tech pursuant to which the company, without admitting or denying the Commission's findings, consented to an order requiring it to cease and desist from committing or causing any violation, and any future violation, of the periodic reporting, record keeping and internal controls provisions of the federal securities laws, 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. The Commission found that in 1996 and 1997 and for the first quarter of 1998, Signal Tech overstated its revenues and net income in annual and periodic filings with the Commission.