STYLING'S FORMER CEO, CFO AND CHIEF ACCOUNTING OFFICER SETTLE ACTION
SEC SUES TWO FORMER ARTHUR ANDERSEN AUDITORS FOR FRAUD
On December 3, 2003, the Securities and Exchange Commission filed a civil injunctive action in the United States District Court for the District of Columbia, alleging that the principal executive officers of Styling Technology Corporation ("Styling"), including its former chairman and CEO, Sam Leopold, and its former CFO, Richard R. Ross, engaged in an extensive financial fraud between 1997 and 1999 by inflating the company's reported earnings in its filings with the Commission. The Commission's Complaint also alleges that two of the company's auditors engaged in the fraud by recklessly causing their accounting firm, Arthur Andersen LLP, to issue an unqualified audit report on Styling's 1998 year-end financial statements and by failing to object to false and misleading statements in Styling's 1999 first and second quarter reports.
The Commission's Complaint alleges that, beginning in 1997, Styling began to record false revenue from certain sales transactions, including ones that involved nothing more than the transfer of product to an overseas warehouse. It also alleges that the fraudulent booking of sales increased significantly during 1998, when the manager of Styling's Body Drench division, Phillip D. Teal, began systematically booking projected sales for the entire year in the current quarter--a practice that culminated at year-end in the recording of revenue from the mere shipment of millions of dollars of product between two company-controlled warehouses. According to the Complaint, Styling's vice president of operations, Norman B. Cowgill, approved these year-end transactions. The Commission's Complaint alleges that, at least one month prior to the filing of Styling's 1998 annual report on Form 10-K, Leopold, Ross, Cowgill and James T. Montrose, the company's former chief accounting officer, knew, or were reckless in not knowing, the nature and extent of the fraudulent sales at Body Drench, yet took no steps to correct the company's improperly recorded accounts receivable. Leopold, Ross and Montrose, have consented to the entry of permanent injunctions on all of the legal violations alleged against them, without admitting or denying the allegations of the Commission's Complaint.
The Commission also alleges that Styling's fraudulent accounting practices continued through the first two quarters of 1999, when the company improperly booked millions of dollars of sales. In June 1999, it charges, Styling attempted to cover up its fraud by writing off $5.1 million of uncollectible accounts receivable and attributing the lost revenue to a strategic business decision.
The Commission further alleges that two former Arthur Andersen auditors, Jay S. Ozer and Bradley J. Schmidt, recklessly failed to detect the fraudulent sales at Styling during 1998. It alleges that, despite encountering a number of red flags at Styling, Ozer, the engagement partner on the audit, and Schmidt, the audit manager, failed to ensure that the audit was conducted in accordance with generally accepted auditing standards and recklessly caused Arthur Andersen to render an unqualified audit report on Styling's 1998 financial statements. Ozer and Schmidt, the Commission alleges, also knew or were reckless in not knowing that Styling's statements concerning the $5.1 million write-off in its second quarter report were false and misleading.
The Complaint alleges that all of the defendants violated or aided and abetted violations of Section 17(a) of the Securities Act of 1933 and Section 10(b) of the Securities Exchange Act of 1934 ("Exchange Act") and aided and abetted violations of Section 13(a) of the Exchange Act and the rules thereunder, and that defendants Leopold, Ross, Teal, Montrose, Cowgill and Schmidt violated or aided and abetted violations of the internal control provisions of the Exchange Act, Section 13(b), and various rules thereunder. It seeks permanent injunctions and civil penalties from each defendant and seeks disgorgement of certain bonuses paid to Leopold and Ross and an order barring each of them from serving as officers and directors of any public company.
Three of Styling's officers, Leopold, Ross and Montrose, have consented to the entry of permanent injunctions on all of the legal violations alleged against them, without admitting or denying the allegations of the Commission's Complaint. In addition, Leopold has agreed to pay $225,000 in disgorgement and pre-judgment interest and $100,000 as a civil penalty. Ross has agreed to pay $100,000 in disgorgement. Both Leopold and Ross have consented to the entry of orders barring them from serving as officers and directors of any public company. Montrose was not ordered to pay any penalty, based on sworn financial statements and other documents submitted to the Commission.
