U.S. SECURITIES AND EXCHANGE COMMISSION
Litigation Release No. 19159 / March 29, 2005
Accounting and Auditing Enforcement
Release No. 2219 / March 29, 2005
SEC v. Anuradha D. Saad, Richard P. Adelson, David J. Cammarata, Peter Torres, Robert McKie, Karin Gardner and Kenneth Jugan, 05 CV 03308 (LTS) (SDNY)
SEC CHARGES 7 FORMER IMPATH EXECUTIVES WITH FINANCIAL FRAUD
On March 29, 2005, the Commission filed a civil injunctive action in the United States District Court for the Southern District of New York charging seven former executives of IMPATH, Inc. ("Impath") with securities fraud and related violations. One defendant has agreed to settle the Commission's charges by paying a total of over $250,000 in disgorgement and civil penalties and consenting to permanent injunctive relief.
The SEC's complaint alleges that from 1999 until 2003, the defendants engaged in fraudulent accounting practices and undisclosed self-dealing in violation of the applicable proxy rules. As a result of the accounting fraud, Impath falsely reported multimillion dollar profits when it had actually suffered huge losses. To meet financial projections and boost Impath's stock price, the defendants made, or directed others to make, phony accounting entries that artificially increased revenue and improperly reduced operating expenses.
Formerly based in New York City, Impath was a public company that provided diagnostic and other laboratory services used in the treatment of cancer and its stock was traded on the Nasdaq National Market. Impath filed for bankruptcy in September 2003 and is in the process of being liquidated.
Individuals Sued: The Commission's complaint names the following defendants, who worked at Impath during the relevant period:
- Anuradha D. Saad, age 48, former CEO and Chairman of the Board
- Richard P. Adelson, age 39, former COO and President
- David J. Cammarata, age 40, former CFO
- Peter Torres, age 35, former Senior Vice President of Corporate Finance
- Robert McKie, age 40, former Vice President, Finance and Operations at Impath Predictive Oncology, Inc. ("Predictive Oncology")
- Karin Gardner, age 33, former Controller
- Kenneth Jugan, age 43, former National Billing Director
Conduct: The complaint alleges that the defendants engaged in a fraudulent scheme to inflate Impath's financial results, including revenue and net income, without any regard for generally accepted accounting principles or their financial reporting obligations. Saad, Adelson and Cammarata directed the fraud, while Torres, McKie, Gardner and Jugan implemented the accounting schemes.
Torres, Gardner and Jugan were senior members of Impath's corporate finance department and implemented the fraud by making, and directing members of their staff to make, the improper journal entries needed to carry out the scheme. Each quarter, Torres conferred with Saad, Adelson or Cammarata about the gap between actual and projected results, and they told Torres how much phony revenue they wanted the finance department to record. McKie was in charge of Predictive Oncology, one of Impath's subsidiaries, and together with other defendants, he fraudulently capitalized his unit's operating expenses to inflate net income and recognized revenue on a large transaction that never occurred. Each defendant also engaged in misconduct designed to deceive Impath's outside auditor and conceal the fraud.
As a result of this misconduct, Impath filed annual and quarterly reports with the Commission that included, among other misrepresentations and omissions, materially false and misleading financial statements. Saad, Adelson, Cammarata and Torres each signed one or more of the periodic reports with full knowledge that those reports and the corresponding press releases announcing quarterly earnings materially misrepresented Impath's financial results.
While the accounting fraud was occurring, Saad, Adelson and Cammarata also engaged in undisclosed self-dealing. Not only did they exercise stock options and sell Impath stock during the fraud, they used over $850,000 in corporate funds to pay for option exercises without obtaining board approval or making the required proxy statement disclosures. Saad also used corporate funds to pay for other personal expenses without the requisite approval or disclosure, including vacations, country club dues and artwork.
Statutory Violations: The Commission's complaint alleges that by engaging in this conduct, the defendants violated the antifraud provisions of the federal securities laws and are secondarily liable for Impath's violations of reporting, record-keeping, internal control and proxy solicitation provisions. Specifically, the complaint alleges that each defendant violated Sections 10(b) and 13(b)(5) of the Securities Exchange Act of 1934 ("Exchange Act") and Rules 10b-5 and 13b2-1. In addition, each defendant is alleged to be liable for Impath's violations of Sections 13(a) and 13(b)(2) of the Exchange Act and Rules 12b-20, 13a-1 and 13a-13. Saad, Adelson, Cammarata and Torres are alleged to have also violated Section 17(a) of the Securities Act of 1933 ("Securities Act"), and to have made, or directed others to make, false statements to Impath's accountants in violation of Exchange Act Rule 13b2-2. Saad, Adelson and Cammarata are also alleged to be liable for Impath's violations of Section 14(a) of the Exchange Act and Rules 14a-3 and 14a-9. Finally, the complaint alleges that Saad also violated Exchange Act Rule 13a-14.
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 Saad, Adelson, Cammarata and Torres from acting as an officer or director of any public company.
Settlement: McKie, without admitting or denying the allegations in the Complaint, has agreed to: (i) a permanent injunction against future violations of the relevant antifraud, reporting, books and records and internal controls provisions of the federal securities laws; (ii) disgorgement of the $100,000 in performance bonuses he received as result of the conduct alleged in the Complaint, plus prejudgment interest; and (iii) a civil penalty in the amount of $150,000.
The Commission's claims against the other defendants are pending.
The Commission acknowledges the assistance and cooperation of the United States Attorney's Office for the Southern District of New York and the Federal Bureau of Investigation in this matter.
SEC Complaint in this matter