UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Litigation Release No. 15417 / July 23, 1997
Accounting and Auditing Enforcement
Release No. 939 / July 23, 1997
Securities and Exchange Commission vs. Policy Management Systems
Corporation, George Larry Wilson, Robert L. Gresham, James P. Brown, David
T. Bailey and Bernard C. Mazon, Civil Action No. 3:97-2193-10 (D.S.C. July
22, 1997)
The Securities and Exchange Commission announced today that it had sued
Policy Management Systems Corporation of Columbia, South Carolina ("PMSC")
and five of its current and former officers. PMSC is engaged in the
business of developing and licensing software used by insurance companies
and its securities are listed and trade on the New York Stock Exchange.
The SEC alleged in its complaint that from January 1991 through March 1993
PMSC and various of its employees engaged in a number of improper
accounting practices which materially misstated PMSC s results of
operations. These practices included the use of side letters to modify the
terms of contracts, an undisclosed billing arrangement with one customer,
undisclosed prebilling arrangements with other customers, and various
practices which had the effect of holding the books open beyond the end of
several reporting periods. The SEC also alleged that at the end of several
reporting periods PMSC and certain of its employees recorded revenue from
contracts which had not yet been finalized with customers. According to
the SEC complaint, these practices, which did not comply with generally
accepted accounting principles or PMSC's own publicly stated accounting
policies, caused the revenues in PMSC's quarterly and annual financial
statements for 1991, 1992 and the first quarter of 1993 to be misstated by
amounts ranging up to $3.9 million.
The individual defendants sued by the SEC are George Larry Wilson, the
chief executive officer of PMSC, Robert L. Gresham, PMSC's former chief
financial officer, James P. Brown, the company's former general counsel,
David T. Bailey, an executive vice president of PMSC, and Bernard C. Mazon,
formerly an executive vice president of the company.
The complaint alleged that the chief executive officer and the chief
financial officer signed the annual and quarterly reports PMSC filed with
the Commission for the periods from January 1, 1991 through March 31, 1993
and provided the annual management representation letter to PMSC s auditors
for 1992. According to the complaint, the CEO, CFO and general counsel
controlled PMSC s revenue recognition policies and knew or should have
known that in certain instances revenue was recognized from contracts which
had not been finalized and were not executed until after the end of the
period. In one specific instance, the complaint alleged that in 1993 a
customer had notified the general counsel of its intent to cancel a
$980,000 contract which had been included as revenue in
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the period ended September 30, 1992, pursuant to a cancellation right
contained in a side letter given to conclude negotiations for the contract
after the close of that period. The complaint further alleged that the
chief financial officer learned of this side letter by February, 1993, but
PMSC continued to recognize the revenue from the contract in its 1992
financial statements. The complaint also alleged that another side letter
was given to conclude a $1.8 million contract in January, 1993. According
to the complaint, in February, 1993, the general counsel stated to PMSC s
auditors that two contracts PMSC had included as revenue in the period
ended December 31, 1992, had been completed in December, 1992, despite the
fact that the contracts had not been finally negotiated and signed until
January, 1993. The complaint further alleged that the defendant executive
vice presidents each negotiated contracts with customers where material
terms were not agreed until after the close of the period, and each gave
customers undisclosed side letters to conclude contracts, although each was
aware of PMSC's revenue recognition policies.
The SEC s complaint charged that each of the individual defendants violated
Section 13(b)(5) of the Securities Exchange Act of 1934 ( Exchange Act )
and Rules 13b2-1 and 13b2-2 thereunder. The complaint also alleged that
PMSC, and as controlling persons, the chief executive officer, chief
financial officer and general counsel violated Sections 13(a) and
13(b)(2)(A) and (B) of the Exchange Act and Rules 12b-20, 13a-1 and 13a-13
thereunder.
Simultaneously with the filing of the complaint, PMSC and the five
individual defendants consented, without admitting or denying the
allegations in the complaint, to the entry of final judgments ordering PMSC
to pay a $1 million civil penalty and each individual defendant to pay a
$20,000 civil penalty. The judgments also enjoin PMSC, Wilson, Gresham and
Brown from future violations of the periodic reporting, books and records,
and internal controls provisions of the Exchange Act and enjoin Bailey and
Mazon from future violations of the internal control provisions.
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