Securities and Exchange Commission
Litigation Release No. 17710 / September 4, 2002
Accounting and Auditing Enforcement Release No. 1623 / September 4, 2002
Former Top Officers of Sunbeam Corp. Settle SEC Charges;
Dunlap and Kersh Consent to Fraud Injunctions, Permanent Officer and Director Bars,
Civil Monetary Penalties
Securities and Exchange Commission v. Albert Dunlap et al., Civil Action No. 01-8437-CIV (Middlebrooks)(S.D. Fla.)
The former Chairman and CEO of Sunbeam Corporation, Albert Dunlap, and Sunbeam's former Chief Financial Officer, Russell Kersh, have consented to the entry of final judgments against them in litigation brought by the Securities and Exchange Commission in U.S. District Court for the Southern District of Florida. Without admitting or denying the allegations in the Commission's complaint, Dunlap and Kersh agreed to the entry of judgments: (1) permanently enjoining each of them from violating the antifraud, reporting, books and records, and internal controls provisions of the federal securities laws; (2) permanently barring each of them from serving as officers or directors of any public company, and (3) requiring Dunlap to pay a civil penalty of $500,000 and Kersh to pay a civil penalty of $200,000. The Honorable Judge Donald Middlebrooks signed the final judgments today.
According to the Commission's Complaint, Dunlap and Kersh, together with others, employed improper accounting techniques and undisclosed non-recurring transactions to misrepresent Sunbeam's results of operations. As a result, Sunbeam's financial statements and press releases reporting 1996 year-end results, quarterly and year-end 1997 results, and first-quarter 1998 results were materially false and mis-leading. More specifically, the Commission alleged:
- The illegal conduct began at year-end 1996 with the creation by Kersh and others of inappropriate accounting reserves, which increased Sun-beam's reported loss for 1996. These "cookie-jar" reserves were then used to inflate income in 1997, thus contributing to the false picture of a rapid turnaround in Sunbeam's financial performance. In addition, to further boost income in 1997, Dunlap, Kersh and others caused the Company to recognize revenue for sales, including "bill and hold sales," that did not meet applicable accounting rules. As a result, for fiscal 1997, at least $60 million of Sunbeam's reported $189 million in earnings from continuing operations before income taxes came from accounting fraud.
- Also in 1997, Dunlap, Kersh and others failed to disclose that Sunbeam's 1997 rev-enue growth was, in part, achieved at the expense of future results. The Com-pany had offered discounts and other inducements to customers to sell merchan-dise immediately that otherwise would have been sold in later periods, a practice known as "channel stuffing."
- Sunbeam's improper accounting and chan-nel stuffing in 1997 created the prospect of diminished results in 1998. In early 1998, Dunlap, Kersh and others took increasingly desperate measures to conceal the Company's mounting financial problems. They again caused Sunbeam to recognize revenue for sales that did not meet the applicable accounting rules and to engage in accel-eration of sales revenue from later periods, and, further, misrepresented or caused the Company to misrepresent its per-formance and future prospects in its filing on Form 10-Q for the first quarter of 1998, its offering materials in connection with a bond offering, its press releases, and in communications with analysts.
The consent judgments permanently bar Dunlap and Kersh from serving as an officer or director of a public company, require them to pay civil monetary penalties of $500,000 and $200,000, respectively, and enjoin Dunlap and Kersh from violating or aiding and abetting violations of the anti-fraud provisions of the federal securities laws (Section 17(a) of the Securities Act of 1933 and Section 10(b) of the Exchange Act of 1934 ("Exchange Act") and Rule 10b-5 thereunder), the reporting provisions (Section 13(a) of the Exchange Act and Rules 12b-20, 13a-1 and 13a-13 thereunder), and the books and records and internal controls provisions (Sections 13(b)(2)(A), 13(b)(2)(B) and (with respect to Kersh) 13(b)(5) of the Exchange Act and Rules 13b2-1 and 13b2-2 thereunder).
Dunlap paid $15,000,000 and Kersh $250,000 out of their own funds to settle a related class action. Neither Dunlap nor Kersh sold Sunbeam stock or received performance-based bonuses during the relevant period.
The Commission's action against three other former officers of Sunbeam, Robert J. Gluck, Donald R. Uzzi and Lee B. Griffith, and against Phillip Harlow, the audit partner on the Arthur Andersen engage-ments to audit Sunbeam's 1996, 1997 and 1998 year-end financial statements, remains pending. Trial is scheduled for January 2003.
See also Lit. Release No. 17001 (May 15, 2001).