SECURITIES AND EXCHANGE COMMISSION
Litigation Release No. 17550 / June 10, 2002
Accounting and Auditing Enforcement
Release No. 1574 / June 10, 2002
Securities and Exchange Commission v. Kenneth E. Kurtzman and Brian E. Bergeron, 1:02CV01126 (D.D.C.) (June 10, 2002).
In the Matter of Ashford.com, Inc., Kenneth E. Kurtzman, Brian E. Bergeron and Amazon.com, Inc., Administrative Proceeding File No. 3-10797 and Securities Exchange Act Release No. 46052.
SEC FILES SETTLED CEASE-AND-DESIST ORDER AGAINST ASHFORD.COM, INC., TWO OF ITS EXECUTIVES AND AMAZON.COM, INC.; THE COMMISSION FINDS THAT ASHFORD.COM BEAT ANALYSTS' PRO FORMA EARNINGS EXPECTATIONS BY MISSTATING ITS GAAP RESULTS
The Securities and Exchange Commission announced today the filing of a civil action filed in federal court against Kenneth E. Kurtzman (Ashford.com's former Chief Executive Officer) and Brian E. Bergeron (Ashford.com's former Vice President for Finance). Kurtzman and Bergeron consented, without admitting or denying the allegations in the Commission's complaint, to pay civil penalties of $60,000 and $25,000, respectively.
The Commission also announced the filing of a settled cease-and-desist order against Ashford.com, Inc., Kurtzman, Bergeron and Amazon.com, Inc. The Commission's Order finds that, in March 2000, Kurtzman and Bergeron, on behalf of Ashford.com, improperly deferred $1.5 million in expenses under a contract with Amazon.com, causing Ashford.com to materially understate its marketing expenses and allowing the company to report a pro forma net loss of $0.30 per share, just beating analysts' pro forma earnings estimates of a net loss of $0.31 per share for the quarter ended March 31, 2000. Without the understatement, Ashford.com would have reported a pro forma loss of $0.32 per share. The improper deferral resulted from the settlement of a dispute with Amazon.com using two separate documents which were prepared by Amazon.com at Ashford.com's request. Ashford.com subsequently failed to disclose one of the two documents to its auditors.
The Order also finds that in September 2000, Ashford.com misstated its pro forma results by changing the classification of expenses on its income statement. In two previous quarters, Ashford.com had properly classified these expenses as marketing expenses. But in September 2000, without disclosing that it had made a change, Ashford.com classified the expenses as "depreciation and amortization," which improved the company's pro forma results (which did not take depreciation and amortization into account).
Additionally, during 2000, Ashford.com misclassified a portion of the expenses arising under its contracts with Amazon.com, causing Ashford.com to materially understate its reported marketing expenses and improve its pro forma results. Under these agreements, Ashford.com issued common stock in exchange for advertising placements and an agreement not to compete. Ashford.com, however, classified all of the expenses under this contract as "depreciation and amortization." This classification was not in conformity with Generally Accepted Accounting Principles, because Ashford.com should have classified the portion attributable to advertising placements as marketing expenses.
The Commission's Order further finds that:
- Ashford.com violated Sections 10(b), 13(a) and 13(b)(2)(A) of the Securities Exchange Act of 1934 and Rules 10b-5, 12b-20, 13a-1 and 13a-13 thereunder;
- Kurtzman violated Sections 10(b) and 13(b)(5) of the Exchange Act and Rules 10b-5, 13b2-1 and 13b2-2 thereunder and was a cause of Ashford.com's violation of Sections 13(a) and 13(b)(2)(A) of the Exchange Act and Rules 12b-20 and 13a-1 thereunder;
- Bergeron violated Exchange Act Rule 13b2-1 and was a cause of Ashford.com's violation of Sections 13(a) and 13(b)(2)(A) of the Exchange Act and Rules 12b-20, 13a-1 and 13a-13 thereunder; and
- Amazon.com, Inc. was a cause of Ashford.com's violation of Section 13(a) of the Exchange Act and Rules 12b-20 and 13a-1 thereunder.
Ashford.com, Kurtzman, Bergeron and Amazon.com consented, without admitting or denying the findings in the Commission's Order, to cease-and-desist from committing or causing violations of the provisions of the federal securities laws cited above. The allegations in the Commission's civil action are substantially the same as set forth in the Commission's Order.