U.S. Securities and Exchange Commission
Litigation Release No. 18734 / June 3, 2004
Accounting and Auditing Enforcement Release No. 2029 / June 3, 2004
SEC v. Symbol Technologies, Inc., Tomo Razmilovic, Kenneth Jaeggi, Leonard Goldner, Brian Burke, Michael DeGennaro, Frank Borghese, Christopher DeSantis, James Heuschneider, Gregory Mortenson, James Dean and Robert Donlon, CV 04 2276 (LDW)(WDW) (EDNY)
SEC CHARGES SYMBOL TECHNOLOGIES, INC. AND 11 FORMER SYMBOL EXECUTIVES WITH SECURITIES FRAUD
SYMBOL AGREES TO PAY $37 MILLION PENALTY
On June 3, 2004, the Commission filed a civil injunctive action in the United States District Court for the Eastern District of New York charging Symbol Technologies, Inc. ("Symbol"), with securities fraud and related violations. The SEC also charged eleven former Symbol executives in connection with their roles in the fraud. Symbol has agreed to settle the Commission's charges by paying a $37 million penalty and consenting to injunctive relief. The entire amount of the penalty will be distributed to injured investors. One individual defendant, James Dean, has consented to injunctive relief.
The SEC's complaint alleges that from at least 1998 until early 2003, Symbol and the other defendants engaged in numerous fraudulent accounting practices and other misconduct that had a cumulative net impact of over $230 million on Symbol's reported revenue and over $530 million on its pre-tax earnings. Based in Holtsville, New York, Symbol supplies mobile information systems using bar code scanners and related technology and its stock is publicly traded on the New York Stock Exchange.
SEC Complaint
Individuals Sued: In addition to Symbol, the Commission's complaint names the following individual defendants who worked at Symbol during the relevant period:
Tomo Razmilovic, age 62, former President and CEO
Kenneth Jaeggi, age 58, former CFO
Leonard Goldner, age 56, former General Counsel
Brian Burke, age 57, former Senior Vice President of Worldwide Operations and the former Chief Accounting Officer
Michael DeGennaro, age 39, former Senior Vice President of Finance
Frank Borghese, age 49, former Senior Vice President of Worldwide Sales and Service
Christopher DeSantis, age 38, former Vice President of Sales Finance
James Heuschneider, age 47, former Director of Customer Service Finance
Gregory Mortenson, age 38, former Senior Director of Finance
James Dean, age 34, former Manager and Director of Operations Finance
Robert Donlon, age 37, former Director of Sales Operations
Conduct: The complaint alleges that Symbol and other defendants engaged in a fraudulent scheme to inflate revenue, earnings and other measures of financial performance in order to create the false appearance that Symbol had met or exceeded its financial projections. Razmilovic and others fostered a "numbers driven" corporate culture obsessed with meeting Wall Street estimates.
With no regard for generally accepted accounting principles or their financial reporting obligations, defendants used the following fraudulent schemes to align Symbol's reported financial results with market expectations:
(a) a "Tango sheet" process through which baseless accounting entries were made to conform the raw quarterly results to management's projections;
(b) the fabrication and misuse of restructuring and other non-recurring charges to artificially reduce operating expenses, create "cookie jar" reserves and further manage earnings;
(c) channel stuffing and other revenue recognition schemes, involving both product sales and customer services; and
(d) the manipulation of inventory levels and accounts receivable data to conceal the adverse side effects of the revenue recognition schemes.
Razmilovic, Jaeggi, Burke, DeGennaro and Borghese directed the fraud, while DeSantis, Heuschneider, Mortenson, Dean and Donlon implemented the schemes.
While the accounting fraud was occurring, Goldner manipulated stock option exercise dates to enable select senior executives, including himself, to profit unfairly at the company's expense. Rather than use the actual exercise date as defined by the option plans, Goldner instituted, without board approval or public disclosure, a practice of using a more advantageous date chosen from a 30-day "look-back" period so as to reduce the cost of the exercise to the executive. To create the false appearance that these exercises occurred on the selected dates, Goldner had his staff backdate transactional documents and use the phony exercise dates in the forms on which the executives reported their acquisitions to the Commission and the public.
In addition to committing securities fraud, some of the defendants interfered with two internal investigations into Symbol's accounting practices and delayed the Commission's investigation. After the Commission began its investigation, Jaeggi directed subordinates to discard copies of "Tango sheets" and other incriminating documents. During the same relevant period, DeGennaro rigged the revenue recognition data provided to the forensic accountants involved in the first internal inquiry, instructed subordinates to withhold information from subsequent internal investigators, and directed employees to sanitize key portions of schedules that they provided to the investigators.
Statutory Violations: The Commission's complaint alleges that by engaging in this conduct, the defendants violated antifraud provisions of the federal securities laws, and also violated, or are secondarily liable for Symbol's violations of, numerous reporting, record-keeping, internal control and proxy solicitation provisions. Specifically, the complaint alleges that Symbol violated Section 17(a) of the Securities Act of 1933 ("Securities Act") and Sections 10(b), 13(a), 13(b)(2) and 14(a) of the Securities Exchange Act of 1934 ("Exchange Act") and Rules 10b-5, 12b-20, 13a-1, 13a-13, 14a-3 and 14a-9. Each individual defendant is alleged to have violated Sections 10(b) and 13(b)(5) of the Exchange Act and Rules 10b-5 and 13b2-1. Razmilovic, Jaeggi, Goldner and Burke are also alleged to have violated Section 17(a) of the Securities Act, and Goldner is alleged to have also violated Section 16(a) of the Exchange Act and Rule 16a-3. In addition, the complaint alleges that Razmilovic, Jaeggi, Burke and DeGennaro made, or directed others to make, false statements to Symbol's accountants in violation of Exchange Act Rule 13b2-2.
Relief Sought: The complaint seeks final judgments enjoining violations of these provisions of the federal securities laws; ordering all defendants to pay disgorgement and civil money penalties; and barring defendants Razmilovic, Jaeggi, Goldner, Burke, DeGennaro and Borghese from acting as an officer or director of any public company.
Settlements
Symbol, without admitting or denying the allegations in the Complaint, has agreed to the following relief:
A permanent injunction against future violations of the relevant antifraud, reporting, books and records and internal controls provisions of the federal securities laws.
A civil penalty of $37 million and nominal disgorgement of $1, all of which will be distributed to injured investors.
Various remedial measures, including the appointment of an independent examiner to review Symbol's accounting practices and internal control systems and assess the status of remedial actions undertaken or planned by the company in those and other areas.
Dean has also agreed, without admitting or denying the allegations, to the imposition of the injunctive relief sought by the Commission.
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The Commission's claims for disgorgement and civil penalties against Dean, and all of its claims against the other individual defendants, remain pending.
This is the third enforcement action the Commission has brought as a result of its investigation into Symbol's financial reporting. On March 25, 2003, the Commission charged Robert Asti, a former sales executive at Symbol. See LR-18050 (March 25, 2003). On June 19, 2003, the Commission charged Robert Korkuc, a former chief accounting officer at Symbol. See LR-18194 (June 19, 2003). The Commission's investigation is continuing.
The Commission acknowledges the assistance and cooperation of the United States Attorney's Office for the Eastern District of New York and the U.S. Postal Inspection Service in this matter.
