U.S. Securities and Exchange Commission
Litigation Release No. 18765 / June 28, 2004
Accounting and Auditing Enforcement Release No. 2046 / June 28, 2004
Securities and Exchange Commission v. Measurement Specialties, Inc., and Kirk J. Dischino, 04 Civ. 3000 (KSH)(D.N.J.)
SEC CHARGES MEASUREMENT SPECIALTIES, INC., AND ITS FOMER CFO, KIRK DISCHINO, WITH SECURITIES FRAUD
On June 28, 2004, the Commission filed a civil injunctive action in United States District Court for the District of New Jersey charging Measurement Specialties, Inc. (MSI), a New Jersey-based manufacturing company, with accounting fraud, and its former chief financial officer, Kirk J. Dischino, with accounting fraud and insider trading. Both defendants have agreed to settle the Commission's charges, without admitting or denying the allegations. MSI has agreed to pay a penalty of $1 million. Dischino has agreed to pay disgorgement and penalty totaling in excess of $450,000, and agreed to be suspended from appearing or practicing before the Commission as an accountant.
The Commission's complaint alleges that Dischino orchestrated and carried out two separate accounting frauds at MSI. First, the complaint alleges that, from June 2000 through September 2001, at Dischino's direction, MSI materially overstated its earnings by capitalizing overhead expenses into inventory in a manner that was inconsistent with generally accepted accounting principles (GAAP) and that Dischino knew or was reckless in not knowing would mislead investors about MSI's earnings and the value of its inventory. In a manner clearly inconsistent with GAAP and over the repeated objections by MSI operating division heads and internal accounting personnel, Dischino shifted certain manufacturing and overhead costs to inventory, through accounting adjustments he termed "production credits." As a result of the production credit adjustments, MSI materially overstated its earnings and its inventory in its financial statements covering the periods ending June 30, 2000 through September 30, 2001. For the fiscal year ended March 31, 2001, largely as a resulted of the production credit adjustments, MSI overstated its pre-tax income by 435%, and for the quarters ended June 30, 2000 and June 30, 2001, the use of the production credit converted an actual loss to a reported gain. The false and misleading financial statements were contained in the company's periodic public filings and a registration statement for an offering of MSI stock that occurred on August 1, 2001 and raised $31.2 million.
Second, the complaint alleges that, from at least October 2001 until February 2002, Dischino concealed MSI's default under its loan agreements. In connection with the preparation of the company's quarterly report for the period ended September 30, 2001 - which did not disclose the default -- Dischino allegedly falsely represented to MSI's senior management, directors, and outside auditors that the lenders had waived the default. To substantiate his claim, Dischino allegedly fabricated a written waiver by the lenders, which he provided to MSI's auditors. The complaint further alleges that Dischino engaged in insider trading by selling MSI stock in December 2001 while he was aware of the true facts of MSI's overstated earnings and inventory, and its default, thereby avoiding losses of $215,734.
On October 28, 2002, MSI restated its previously reported financial results for the each of the reporting periods from the quarter ended June 30, 2000 through the quarter ended December 31, 2001, to correct for Dischino's erroneous inventory accounting, and other errors. The restatement reduced the value of MSI's inventory by $12.2 million, or 28%. The complaint alleges that MSI should have restated its financial results for those periods earlier, rather than simply taking a charge for the quarter ended December 31, 2001, which it announced on May 31, 2002. The complaint does not charge MSI with any violations as a consequence of its quarterly report for the December 31, 2001 quarter.
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 MSI's violations of, numerous reporting, record-keeping and internal control provisions. Specifically, the complaint alleges that: (1) MSI violated Section 17(a) of the Securities Act of 1933 ("Securities Act"), and Sections 10(b), 13(a), 13(b)(2)(A) and 13(b)(2)(B) of the Securities Exchange Act of 1934 ("Exchange Act"), and Rules 10b-5, 12b-20, 13a-1, and 13a-11 and 13a-13 thereunder; and (2) Dischino violated Section 17(a) of the Securities Act and Sections 10(b) and 13(b)(5) of the Exchange Act, and Rules 10b-5, 13b2-1 and 13b2-2 thereunder, and pursuant to Section 20(a) of the Exchange Act, as a control person, Dischino is liable for MSI's violations of Sections 13(a), 13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act and Rules 12b-20, 13a-1, 13a-11 and 13a-13 thereunder.
Without admitting or denying the Commission's allegations, MSI and Dischino have agreed to settle the charges by consenting to permanent injunctions against further violations of the relevant antifraud, reporting, books-and-records, and internal controls provisions of the federal securities laws. In addition, MSI has agreed to pay a civil penalty in the amount of $1 million, along with nominal disgorgement of $1. Dischino has also agreed to pay disgorgement of $215,734, plus prejudgment interest of $21,932, and a civil penalty of $215,734. In addition, Dischino has also agreed to consent to the entry of an administrative order suspending him from appearing or practicing before the Commission as an accountant.
As alleged in the complaint:
The Commission acknowledges the assistance of the United States Attorney's Office for the District of New Jersey, and Special Agents of the Federal Bureau of Investigations and the United States Postal Inspection Service in the investigation of this matter.