U.S. SECURITIES & EXCHANGE COMMISSION
Litigation Release No. 18126 / May 7, 2003
Accounting and Auditing Enforcement
Securities and Exchange Commission v. Andrx Corp., Civil Action No. 03-60838-CIV-Zlock (S.D. Fla., Filed May 6, 2003)
SEC Brings Settled Enforcement Actions against Andrx Corp.
The Securities and Exchange Commission (Commission) announced today that it filed settled enforcement actions against Andrx Corp. in connection with alleged accounting improprieties that occurred at Andrx and its Internet subsidiary, Cybear, Inc. Andrx has consented, without admitting or denying the Commission's allegations against it, to pay a civil penalty of $100,000 in a civil action filed in federal district court, and to the entry of an order (Order) by the Commission that it cease and desist from certain violations of the issuer reporting, books and records and proxy provisions of the Securities Exchange Act of 1934 (Exchange Act).
The Commission's case arises from accounting improprieties in connection with a joint venture between Andrx and Cybear to sell Andrx distributed products over Cybear's website, and books and records violations regarding Andrx's accounts receivable balances between 1999 and 2002. More specifically, the complaint in the Commission's civil action (as well as Order in the related cease-and-desist proceedings) alleges that during the first two quarters of its fiscal year ended December 31, 2000, Cybear improperly recognized as Internet revenue telephone orders taken by Andrx telemarketers. According to the Commission's complaint, telephone orders for Andrx distributed products that should have been recognized by Andrx were instead input onto Cybear's Internet website by Cybear employees and recognized by Cybear as revenue. In some instances, Cybear employees input orders onto the Internet for customers who did not have Internet access or a computer. The complaint alleges that these orders accounted for a majority of Cybear's reported revenues during the relevant time periods. According to the Commission's complaint, Cybear's recognition of these revenues was not in conformity with generally accepted accounting principles.
The Commission's complaint further alleges that the Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A") section of Cybear's periodic filings with the Commission did not adequately disclose Cybear's revenues. Specifically, the complaint alleges that in July 2000, after senior management of Cybear and Andrx learned that Andrx telemarketing orders were being entered onto Cybear's website, Cybear described these sales as revenues derived from "orders placed through the Internet" in its Form 10-Q for the quarter ended June 30, 2000. Cybear also did not provide sufficient information regarding its revenues in a proxy solicitation sent to shareholders in connection with a corporate reorganization and tracking stock plan that created a separate tracking stock for Cybear.
The Order in the related cease-and-desist proceedings against Andrx also finds that between 1999 and the quarter ended March 31, 2002, Andrx filed financial statements with the Commission that overstated Andrx's net accounts receivable, and understated the related provision for doubtful accounts, by an aggregate of approximately $5.4 million. This conduct resulted from the unauthorized actions of an Andrx employee, but led to violations by Andrx of the books and records and internal controls provisions of the federal securities laws. In August 2002, after learning of these improper entries, Andrx promptly reported them to the Commission staff and disclosed them in a press release and Commission filing.
Based upon the conduct alleged in the complaint, the civil action alleges that Cybear violated Sections 13(a), 13(b)(2) and 14(a) of the Exchange Act and Rules 12b-20, 13a-13 and 14a-9 thereunder. The complaint also alleges that during the course of the Commission's investigation of Cybear's misconduct, Cybear's cooperation with the Commission's inquiry was at times less than complete. Without admitting or denying the Commission's allegations, Andrx has agreed to pay a $100,000 penalty based on Cybear's violations in order to settle the civil action.
In the related cease-and-desist proceedings, the Commission ordered Andrx to cease and desist from committing or causing any violation and any future violations of Sections 13(a), 13(b)(2) and 14(a) of the Exchange Act and Rules 12b-20, 13a-13 and 14a-9 thereunder, and ordered Scott Lodin, Andrx's general counsel, to cease and desist from causing any violations and any future violations of Section 13(a) of the Exchange Act and Rules 13a-13 and 12b-20 thereunder. The Commission also issued a separate order against Timothy E. Nolan, the former president and chief operating officer of Cybear, which ordered him to cease and desist from causing any violations and any future violations of Section 13(a) of the Exchange Act and Rules 13a-13 and 12b-20 thereunder.
SEC Complaint in this matter