UNITED STATES OF AMERICA
SECURITIES ACT OF 1933
ACCOUNTING AND AUDITING ENFORCEMENT
The Securities and Exchange Commission ("Commission") deems it appropriate that public administrative proceedings be, and hereby are, instituted with respect to David C. Fannin ("Respondent") pursuant to Section 8A of the Securities Act of 1933 ("Securities Act").
In anticipation of the institution of these administrative proceedings, Respondent has submitted an Offer of Settlement ("Offer") that the Commission has determined to accept. Solely for the purpose of these proceedings, and any other proceeding brought by or on behalf of the Commission, or to which the Commission is a party, without admitting or denying the findings as set forth below, except as to jurisdiction of the Commission over Respondent and over the subject matter of these proceedings, which Respondent admits, Respondent consents to the entry of this Order Instituting Public Administrative Proceedings, Pursuant to Section 8A of the Securities Act of 1933, Making Findings and Imposing a Cease-and-Desist Order ("Order") set forth below.
The Commission makes the following findings:1
David C. Fannin was Executive Vice President, General Counsel, and Secretary of Sunbeam Corporation ("Sunbeam" or "Company") from January 1994 until August 1998. He was also a member of Sunbeam's Operating Committee.
From the last quarter of 1996 through the first quarter of 1998, Sunbeam engaged in a program of earnings management that resulted in the misrepresentation of its results of operations and the inflation of its stock price.2 Respondent, the Company's Executive Vice President, General Counsel, and Secretary, contributed to Sunbeam's disclosure failures by drafting, together with others, press releases in early 1998 that provided a false and misleading picture of the Company's results of operations.
The March 19 Press Release
In late 1997 and early 1998, members of Sunbeam senior management, including Respondent, received information indicating that the Company's reported sales revenue was heavily dependent upon pulling forward sales from later fiscal periods. This undisclosed approach to earnings management3 would predictably lead to a future earnings shortfall when customers could no longer be induced, through price discounts and other concessions, to accept additional inventory. In the first quarter of 1998 the company faced a looming earnings shortfall, as reports to members of senior management showed customers holding as much as 80 weeks of inventory of specific products. Moreover, members of senior management, including Respondent, were informed of projected earnings shortfalls for the quarter.
Against this background, members of Sunbeam management negotiated to purchase Coleman, First Alert, and Signature Brands. To conclude these acquisitions, however, Sunbeam needed to raise $700 million through a private offering of Zero Coupon Bond and arrange a $1.7 billion revolving credit facility. Indications of problems with Sunbeam's financial condition and results of operations would have jeopardized these transactions.
During this period, members of Sunbeam senior management caused to be issued several press releases that omitted any mention of the Company's acceleration of sales revenue and, therefore, presented a misleading picture of the Company's true situation. First, on March 19, 1998, the Company issued a press release, prompted by concerns of the Company's underwriters about the Company's quarterly sales to date, stating:
Although this release, which Respondent participated in drafting, went beyond the Company's previous public disclosure, it nevertheless was materially misleading in that it implied that Sunbeam's lower sales stemmed from a generalized effort among retailers to reduce inventory levels, rather than from Sunbeam's 1997 acceleration of sales revenue. In addition, information available to Sunbeam management did not provide any basis for projecting net sales in excess of those achieved in the first quarter of 1997. The release also made no mention of expected deterioration in earnings stemming from certain non-recurring increases in the first-quarter 1998 costs. The March 19 press release was included in the final version of the offering memorandum for Sunbeam's $700 million zero coupon bond offering.
The April 3 Press Release
By the first week in April, Sunbeam could not longer plausibly contend that its results for the first quarter would reach the level it had predicted in its March 19 press release. On April 3, 1998, Sunbeam issued a release, which Respondent assisted in drafting, announcing that Sunbeam expected to show a loss for the quarter. The release attributed the earnings shortfall, in part, to a decline in sales resulting from customers "continuing to manage down their inventories." Thus Sunbeam again failed to disclose the first quarter repercussions of Sunbeam's 1997 acceleration of sales revenue. In this release, Sunbeam also failed to disclose that its earnings shortfall for the quarter would have been greater had it not pulled forward additional revenue in the first quarter of 1998. Moreover, the statement in the press release that Sunbeam believed "until the very end of the quarter" that it would exceed results from the first quarter of 1997 was without any basis in fact, given the reports of deteriorating sales provided to members of senior management, including Respondent, throughout the quarter.
The May 11, 1998, Earnings Release
On May 11, 1998, Sunbeam issued its first quarter 1998 earnings release. The release, which Respondent participated in drafting, disclosed a loss of 52¢ per share for the quarter, compared to earnings of 8¢ for the same quarter of the prior year. The release attributed the earnings shortfall to "lower price realization and unit volume declines." Again there was no mention of the negative effect on the first quarter's results of the Company's 1997 acceleration of sales revenue, or the positive effect of its first quarter 1998 acceleration of sales revenue and its implications for future period results of operations.4 Further, the Company predicted $1 earnings per share for the full year, and promised annual growth in revenues and operating margins of 10-12% and 15-18%, respectively. On the basis of information provided to him, Respondent knew or should have known that the above statements in the May 11 release were false and misleading.
Section 17(a)(3) of the Securities Act proscribes "any transaction, practice, or course of business, which operates or would operate as a fraud or deceit...", in the offer or sale of securities. A violation of this section may be established by a showing of negligence. Aaron v. SEC, 448 U.S. 680, 697 (1980); SEC v. Hughes Capital Corp., 124 F.3d 449, 453-54 (3d Cir. 1997). When Respondent participated in the drafting of press releases that misleadingly characterized the Company's results of operations, as described above, he violated Section 17(a)(3) of the Securities Act.
Based upon the foregoing, the Commission finds that Respondent violated Section 17(a)(3) of the Securities Act.
In view of the foregoing, the Commission deems it appropriate to accept the Respondent's Offer of Settlement.
Accordingly, IT IS HEREBY ORDERED, pursuant to Section 8A of the Securities Act, that David C. Fannin cease and desist from committing or causing any violations, and any future violations, of Section 17(a)(3) of the Securities Act.
By the Commission.
1 The findings herein are made pursuant to Respondent's Offer of Settlement and are not binding on any other person or entity in this or any other proceeding.
2 See In the Matter of Sunbeam Corporation, Securities Act Release No. 7976; Accounting and Auditing Enforcement Release No. 1393 (May 15, 2001); and SEC v. Albert J. Dunlap, et al., Litigation Release No. 17001 (May 15, 2001).
3 This practice is sometimes referred to as "channel stuffing" and denotes the pulling forward of revenue from future fiscal periods by inducing customers -- through price discounts, extended payment terms or other concessions -- to submit purchase orders in advance of when they would otherwise do so. Material undisclosed channel stuffing may cause a company's reported results of operations to be misleading.
4 In fact, Sunbeam's sales declined drastically in the following quarter. Sunbeam is presently in a reorganization proceeding under Chapter 11 of the U.S. Bankruptcy Code.