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U.S. Securities and Exchange Commission

SECURITIES AND EXCHANGE COMMISSION

LITIGATION RELEASE NO. 18120 / April 30, 2003

ACCOUNTING AND AUDITING ENFORCEMENT RELEASE NO. 1766 / April 30, 2003

SEC v. Lawrence O'Shaughnessy, Gary H. Klein, Gary K. Levi and Mark Tucker, Civil Action No. 03 CV 3022 (RMB)

SEC v. Neil R. Cole, Civil Action No. 03 CV 3021 (RMB)

SEC FILES ACTIONS AGAINST CANDIE'S, INC., CANDIE'S CEO, AND
SEVERAL FORMER OFFICERS AND DIRECTORS ALLEGING FINANCIAL FRAUD

Today, the Commission filed a complaint in the United States District Court of the Southern District of New York, and instituted administrative cease-and-desist proceedings, alleging that Candie's Inc., Neil R. Cole, Candie's Chief Executive Officer, and other former directors and members of Candie's senior management were involved in financial fraud. The complaint and orders instituting cease-and-desist proceedings allege that from August 1997 until the spring of 1999, Candie's senior management employed various fraudulent accounting practices designed to improve Candie's publicly reported financial condition. Candie's, Cole, and other former officers and directors of the company have consented to the entry of injunctions and cease-and-desist orders, without admitting or denying the allegations.

The cease-and-desist orders name the following respondents:

  • Candie's Inc., a corporation based in Valhalla, NY, which designs, manufactures, and distributes women's footwear, handbags and other accessories.

  • Neil R. Cole, age 46, who resides in New York, NY, and is Candie's Chief Executive Officer, President and Chairman of the Board.

  • David Golden, age 49, who resides in Melville, NY, and was Candie's former Chief Financial Officer.

  • Maryann Brown, age 45, who resides in Little Falls, NJ, and was Candie's former manager of customer service.

The complaint in the injunctive action names the following defendants:

  • Lawrence O'Shaughnessy, age 53, who resides in Chester, NJ, and was Candie's former Chief Operating Officer and a former director.

  • Gary Klein, age 48, who resides in Harrison, NY, and was Candie's former Vice President of Finance.

  • Mark Tucker, age 56, who resides in New York, NY, and was a former director of Candie's, a member of Candie's audit committee, and Candie's principal contact at its buying agent.

  • Gary Levi, age 52, who resides in Port Washington, NY, and was a principal of a barter company that engaged in business with Candie's.

Specifically, the complaint and/or cease-and-desist orders allege the following. Candie's senior management, including O'Shaughnessy, Klein and Golden primarily employed two fraudulent accounting practices. First, O'Shaughnessy directed employees to engage in a practice known as "bill and hold" that allowed Candie's to prematurely record revenue from various purchase orders calling for future delivery of shoes, by recording these orders as final sales prior to shipping the shoes to customers. Generally Accepted Accounting Principles (GAAP) do not permit revenue recognition for sales unless risk and title has passed to the customer, which typically occurred only when Candie's shipped shoes to customers. In fact, Candie's own revenue recognition policy called for recognition of revenue upon shipment of goods with risk and title passing. Despite the prohibitions of GAAP and its own policy, Candie's prematurely recognized over $4.4 million in revenue in fiscal years 1998 and 1999 through the improper use of bill and hold and other irregular shipping practices. Brown, who was in charge of customer service, played a crucial role in carrying out the bill and hold practice. Golden and Klein were aware that Candie's was engaged in the bill and hold practice and permitted Candie's to report the resulting revenue and income in its Forms 10-K and 10-Q. Cole ignored red flags that Candie's was engaged in this practice and failed to prevent the company from recognizing revenue from this improper practice.

Second, Candie's improperly recognized over $3.1 million in revenue from two illusory sales transactions with a barter company that Levi controlled. In these transactions, which were purportedly entered into in August 1997 and October 1998, Candie's claimed to sell shoes to the barter company in exchange for a combination of cash and advertising credits. The revenue and income that Candie's recorded in connection with these transactions was improper because Candie's either never shipped the shoes described by the contracts underlying these transactions, or Candie's shipped the shoes many months after recording the revenue. O'Shaughnessy and Klein negotiated and/or signed the barter agreements with Levi. Golden was aware of at least one of these agreements. After Candie's auditors raised questions about these transactions, O'Shaughnessy, Golden and Levi provided the auditors with false information about Candie's purported sales of shoes to the barter company.

Finally, Candie's recorded several unsupported journal entries in the fourth quarter of fiscal year 1999 to recognize approximately $1.65 million in "sales credits" from one of its overseas buying agents. Tucker agreed to permit Candie's to record the credits and assisted Candie's in obtaining falsified documentation of the credits.

As a result of these fraudulent accounting practices, Candie's falsely inflated its reported financial results for numerous fiscal quarters, including the quarter ended October 31, 1997, the fiscal year ended January 31, 1998, and for the quarters ended April 30, 1998, July 31, 1998, and October 31, 1998. Additionally, Cole recklessly authorized a misleading press release that preannounced fiscal year 1999 earnings at a time when he and others at Candie's knew that the company's auditors were refusing to sign-off on Candie's financial statements because of a variety of questions they had about the barter transactions and sales credits.

The complaint and/or cease-and-desist orders charge Candie's, O'Shaughnessy, Golden, and Klein with primary violations of the antifraud provisions as well as with primary or aiding and abetting reporting violations, books and records violations and internal control violations. The complaint and/or orders also charge Brown, Levi and Tucker with aiding or abetting or causing Candie's violations of the antifraud provisions as well as reporting violations. Finally, a cease-and-desist order charges Cole with causing violations of Section 10(b) of the Exchange Act and Rule 10b-5, as well as causing certain violations of the reporting provisions, and falsifying certain of Candie's books and records.

Specifically, the cease-and-desist orders charge:

Candie's with violations of Section 17(a) of the Securities Act of 1933 ("Securities Act"), Sections 10(b), 13(a), 13(b)(2)(A)&(B) and 13(b)(5) of the Securities Exchange Act of 1934 ("Exchange Act"), and Rules 10b-5, 12b-20, 13a-1, 13a-13 and 13b2-1;

Cole with causing violations of Sections 10(b), 13(a) and 13(b)(2)(A) of the Exchange Act and Rules 10b-5, 12b-20 and 13a-13, and with violating Rule 13b2-1;

Golden with violations of Section 17(a) of the Securities Act, Sections 10(b) and 13(b)(5) of the Exchange Act, and Rules 10b-5, 13b2-1 and 13b2-2, and causing violations of Sections 13(a) and 13(b)(2)(A)&(B) of the Exchange Act and Rules 12b-20, 13a-1, and 13a-13; and

Brown with causing violations of Section 17(a) of the Securities Act, Sections 10(b) and 13(a) of the Exchange Act and Rules 10b-5, 12b-20, 13a-1 and 13a-13.

The complaint charges:

O'Shaughnessy with violations of Section 17(a) of the Securities Act, Sections 10(b) and 13(b)(5) of the Exchange Act, and Rules 10b-5, 13b2-1, and 13b2-2, and aiding and abetting violations of Sections 13(a) and 13(b)(2)(A) & (B) of the Exchange Act, and Rules 12b-20, 13a-1, and 13a-13;

Klein with violations of Section 17(a) of the Securities Act, Sections 10(b) and 13(b)(5) of the Exchange Act, and Rules 10b-5 and 13b2-1; and aiding and abetting violations of Sections 13(a) and 13(b)(2)(A) & (B) of the Exchange Act, and Rules 12b-20, 13a-1, and 13a-13;

Tucker with violations of Section 13(b) of the Exchange Act and Rule 13b2-2, and aiding and abetting violations of Sections 10(b) and 13(a) of the Exchange Act, and Rules 10b-5, 12b-20, and 13a-1; and

Levi with aiding and abetting violations of Sections 10(b) and 13(a) of the Exchange Act, and Rules 10b-5, 12b-20, 13a-1, and 13a-13.

Cole and Brown consented to the entry of cease-and- desist orders without admitting or denying the Commission's allegations. Cole has also agreed to pay a civil penalty in the amount of $75,000. O'Shaughnessy, Tucker and Levi consented to the entry of injunctions without admitting or denying the Commission's allegations. O'Shaughnessy has agreed to pay a civil penalty of $100,000 and consent to an officer and director bar. Tucker has agreed to pay a civil penalty of $25,000, disgorgement of $10,000 in directors' fees he received from Candie's in fiscal year 1998 and 1999, interest, and consent to a five year officer and director bar. Levi has agreed to pay a $25,000 civil penalty.

Candie's and Golden also have consented to the entry of cease-and-desist orders without admitting or denying the allegations. In determining to accept settlement offers from Candie's and Golden, the Commission considered the cooperation Candie's and Golden afforded the Commission staff, and that Golden came forward to report the violation to authorities.

SEC Complaint in this matter (O'Shaughnessy, Klein, Levi and Tucker)

SEC Complaint in this matter (Cole)

 

http://www.sec.gov/litigation/litreleases/lr18120.htm

Modified: 05/23/2003