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U.S. Securities and Exchange Commission

UNITED STATES OF AMERICA
Before the
SECURITIES AND EXCHANGE COMMISSION

Securities Act of 1933
Release No. 8227 / April 30, 2003

Securities Exchange Act of 1934
Release No. 47771 / April 30, 2003

Accounting and Auditing Enforcement
Release No. 1769 / April 30, 2003

Administrative Proceeding
File No. 3-11099


In the Matter of

David M. Golden,

Respondent.


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ORDER INSTITUTING PROCEEDINGS PURSUANT TO SECTION 8A OF THE SECURITIES ACT OF 1933 AND SECTION 21C OF THE SECURITIES EXCHANGE ACT OF 1934, MAKING FINDINGS, AND IMPOSING A CEASE-AND-DESIST ORDER

I.

The Securities and Exchange Commission ("Commission") deems it appropriate that cease-and-desist proceedings pursuant to Section 8A of the Securities Act of 1933 ("Securities Act") and Section 21C of the Securities Exchange Act of 1934 ("Exchange Act") be, and hereby are, instituted against David Golden ("Golden" or "Respondent").

II.

In anticipation of the institution of these proceedings, Golden has submitted an Offer of Settlement ("Offer"), which the Commission has determined to accept. Solely for the purpose of these proceedings and any other proceedings brought by or on behalf of the Commission or in which the Commission is a party, and without admitting or denying the findings, except as to the Commission's jurisdiction over the Respondent and the subject matter of this proceeding, which Respondent admits, Respondent consents to the entry of this Order Instituting Proceedings Pursuant to Section 8A of the Securities Act of 1933 and Section 21C of the Securities Exchange Act of 1934, Making Findings, and Imposing a Cease-and-Desist Order ("Order"), as set forth below.

III.

On the basis of this Order and Golden's Offer, the Commission finds1 that:

Respondent and Relevant Entity

1. Candie's is a Delaware corporation with headquarters in Valhalla, NY. Candie's primary business is designing, marketing, and distributing moderately priced women's shoes, handbags and other accessories. During the period from 1997 to 1999, Candie's filed periodic reports with the Commission pursuant to Section 12(g) of the Exchange Act and its stock was traded on the Nasdaq National Market.

2. Golden, age 49, resides in Melville, NY. Golden was Candie's Chief Financial Officer ("CFO") from March 1998 until Candie's terminated his employment on June 10, 1999. Golden is a certified public accountant licensed in New York.

Background

3. This matter involves accounting fraud at Candie's. From August 1997 until the Spring of 1999, Candie's senior management employed fraudulent accounting practices designed to improve Candie's publicly reported financial condition. As will be discussed below, among other practices, Candie's prematurely recognized revenue through the use of improper bill and holds. Candie's also artificially inflated revenue by entering into sham sales transactions with a barter company. During the course of the fraud, Candie's had inadequate internal accounting controls, and the company failed to maintain accurate books and records. Candie's Chief Operating Officer ("COO"), and others, including Golden, provided false information to Candie's auditors.

Candie's Engaged in an Improper Bill and Hold Scheme

4. Candie's COO directed employees to engage in a practice known as bill and hold. At the end of certain quarters, Candie's prematurely recorded revenue from various purchase orders calling for future delivery of shoes, by recording these orders as final sales prior to shipping the shoes to customers. Generally Accepted Accounting Principles ("GAAP") do not permit revenue recognition for sales unless risk and title has passed to the customer, which was typically when Candie's shipped shoes to the customer. Candie's revenue recognition policy, as disclosed in its Commission filings, calls for recognition of revenue upon shipment of goods with risk and title passing.

Despite the prohibitions of GAAP and its own policy, from at least January 1998 through July 1998, Candie's prematurely recognized over $4.4 million in revenue through the improper use of bill and hold and other irregular shipping practices. Specifically, Candie's Form 10-K for fiscal year 1998 dated May 1, 1998, contained financial statements that reflected $1.8 million in improper revenue, and $775,000 in improper income, from the bill and hold practice and other irregular shipping procedures that violated GAAP. The improper income from bill and hold allowed Candie's to convert a fourth quarter loss to a gain. Candie's Form 10-Q for the first quarter of fiscal year 1999 dated June 11, 1998, contained financial statements reflecting $991,000 in improper revenue solely from the bill and hold practice. Candie's Form 10-Q for the second quarter of fiscal year 1999 dated September 14, 1998, contained financial statements reflecting $1.7 million in improper revenue solely from the bill and hold practice. These overstatements of revenue and income were material.

5. Candie's began prematurely to recognize revenue through the bill and hold practice in January 1998, before Golden began working at Candie's. Soon after Golden joined Candie's in March 1998, he became aware of the improper bill and hold practice. Golden then questioned senior management and others about the practice, and attempted to stop the practice, but did not prevent Candie's from continuing to utilize the practice during the second quarter of fiscal year 1999. Despite his knowledge of the bill and hold practice, Golden permitted Candie's to record prematurely revenue in the first and second quarters of fiscal year 1999 on its books and records. Moreover, Golden signed the Form 10-K for fiscal year 1998 and Forms 10-Q for the first and second quarters of fiscal year 1999 that contained the financial statements improperly recognizing revenue and income from the bill and hold practice.

Candie's Entered Into Fraudulent Barter Transactions

6. Candie's improperly recognized revenue from two transactions with a barter company. Specifically, in August 1997, Candie's vice president of finance negotiated and signed an agreement with the barter company that provided Candie's would sell 160,000 pairs of shoes to the barter company for $10 per pair to be paid in a combination of cash and advertising credits. Candie's then purportedly shipped 133,000 pairs of the shoes to the barter company and recorded $1.3 million in revenue from the sale of these shoes on its books and records on October 31, 1997, the last day of the fiscal quarter. Candie's, however, should not have recognized this revenue because, among other reasons, it did not ship the shoes to the barter company until July 1999, and it was only then that Candie's was permitted under GAAP to recognize any revenue generated by the transaction. Candie's Form 10-Q for the third quarter of fiscal year 1998, dated November 24, 1997, contained financial statements that materially overstated revenue by $1.3 million (a six percent overstatement) and income by $335,000 (a forty-one percent overstatement) from this transaction.

Similarly, in October 1998, Candie's COO negotiated and signed an agreement with the barter company that increased the value of shoes that Candie's had purportedly already sold to the barter company as part of the August 1997 agreement by $600,000. The October 1998 agreement also described the purported sale of an additional 62,000 pairs of shoes to the barter company. Candie's then recorded $1.8 million in revenue from this transaction on its books and records on October 31, 1998, the last day of the fiscal quarter. Once again, Candie's should not have recognized this revenue because, among other reasons, the 62,000 pairs of shoes described in the agreement were not shipped to the barter company. Candie's Form 10-Q for the third quarter of fiscal year 1999 dated December 15, 1998, contained financial statements that materially overstated revenue by $1.8 million from this transaction (a six percent overstatement) and income by $1.2 million. The improper revenue allowed Candie's to convert a loss for the third quarter to a gain. The overstatements of revenue and income from the August 1997 and October 1998 agreements with the barter company were material.

7. Golden knew that Candie's falsely inflated its revenue by $1.8 million in the third quarter of fiscal year 1999 through the October 1998 barter transaction and had recorded this false revenue on its books and records. Despite this knowledge, Golden signed Candie's Form 10-Q for the third quarter of fiscal year 1999 which contained financial statements reflecting $1.8 million in improper revenue from this barter transaction.

8. During the course of its audit in April 1999, Candie's auditors questioned both the August 1997 and October 1998 transactions with the barter company. Candie's COO, and other employees including Golden, knowingly provided Candie's auditors with false information indicating that Candie's had shipped shoes to the barter company in October 1997 and October 1998 when, in fact, Candie's had not shipped the shoes at those times.

Candie's Improperly Recorded Revenue and Income Generated By These Schemes

9. As a result of these fraudulent accounting practices, and as discussed above, Candie's materially inflated its reported financial results for the quarter ended October 31, 1997, the fiscal year ended January 31, 1998, and for the quarters ended April 30, 1998, July 31, 1998, and October 31, 1998. Candie's reported these false results in a Form 10-Q filed in connection with the third quarter of fiscal year 1998, and Forms 10-Q for the first three quarters of fiscal year 1999, and in its Form 10-K for fiscal year 1998, which Candie's officers and directors, including Golden, signed. Candie's also reported these false results in press releases issued in connection with each of these reporting periods. These press releases were dated November 24, 1997, April 21, 1998, May 28, 1998, August 25, 1998 and December 2, 1998.

Cooperation By Golden

10. In determining to accept Golden's Offer, the Commission considered his cooperation afforded the Commission staff, including that he came forward to report the violation.

Golden Committed Violations of Section 17(a) of the

Securities Act, Section 10(b) of the Exchange Act, and Rule 10b-5 thereunder

11. Section 17(a) of the Securities Act prohibits fraud in the offer or sale of securities. Section 10(b) of the Exchange Act and Rule 10b-5 thereunder prohibit fraud in connection with the purchase or sale of securities. To establish a violation of Section 17(a) of the Securities Act and Section 10(b) of the Exchange Act and Rule 10b-5 thereunder, the evidence must show:

(1) misrepresentations or omissions of material fact or other fraudulent conduct; (2) "in" the offer or sale, or "in connection with" the purchase or sale, of securities; and (3) that the defendants acted with scienter. See SEC v. Chester Holdings, Ltd., 41 F. Supp. 2d 505, 519 (D.N.J. 1999).

12. Golden committed violations of Section 17(a) of the Securities Act and Section 10(b) of Exchange Act and Rule 10b-5 thereunder because he knew, or was reckless in not knowing, that the press releases and the Form 10-K and Forms 10-Q described above were materially misleading.

Golden Caused Violations of Section 13(a) of the
Exchange Act and Rules 12b-20, 13a-1, and 13a-13 thereunder

13. Issuers of securities registered under Section 12 of the Exchange Act must file accurate annual and quarterly reports with the Commission pursuant to Section 13(a) of the Exchange Act and Rules 13a-1 and 13a-13 thereunder. Rule 12b-20 requires that statements and reports contain all information necessary to ensure that statements made in them are not materially misleading. Implicit in these provisions is the requirement that the information reported be true, correct, and complete. No showing of scienter is necessary to establish an issuer's violation of the corporate reporting provisions. See SEC v. Wills, 472 F. Supp. 1250, 1268 (D.D.C. 1978).

14. Candie's committed violations of Section 13(a) of the Exchange Act and Rules 12b-20, 13a-1, and 13a-13 thereunder by filing the materially false Form 10-K and Forms 10-Q described above.

15. Golden caused Candie's violations of Section 13(a) of the Exchange Act and Rules 12b-20, 13a-1, and 13a-13 thereunder by overseeing the preparation of and signing the Form 10-K and Forms 10-Q described above.

Golden Committed Violations of, and Caused Violations of,
Section 13(b) of the Exchange Act and Rules 13b2-1 and 13b2-2 thereunder

16. Section 13(b)(2)(A) of the Exchange Act requires companies whose securities are registered pursuant to Section 12 of the Exchange Act to make and keep books, records, and accounts that accurately reflect the transactions and dispositions of their assets. Section 13(b)(2)(B) of the Exchange Act requires issuers to maintain a system of internal controls to record transactions, maintain accountability of its assets, and permit financial statements to be prepared in conformity with GAAP. Section 13(b)(5) of the Exchange Act requires that no person knowingly circumvent or knowingly fail to implement a system of internal accounting controls or knowingly falsify any book, record or account. Rule 13b2-1 prohibits any person from falsifying or causing the falsification of any book, record, or account subject to Section 13(b)(2)(A) of the Exchange Act. Rule 13b2-2 prohibits, among other things, any officer or director of an issuer from directly or indirectly making or causing to be made any false or misleading statement to an accountant in connection with any audit or the preparation of any public filing.

17. Candie's committed violations of Sections 13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act as a result of the actions described above. Candie's failed to maintain books and records that accurately reflected its sales transactions. For instance, Candie's prematurely recognized revenue from sales transactions subject to the bill and hold practice on its books and records. Candie's improperly recognized revenue on its books and records from sales transactions with the barter company. Candie's also failed to maintain a system of internal controls that permitted its financial statements to be prepared in conformity with GAAP.

18. Golden committed violations of Section 13(b)(5) of the Exchange Act and Rules 13b2-1 and 13b2-2 thereunder, and caused violations of Sections 13(b)(2)(A) and (B) of the Exchange Act as a result of the actions described above. For instance, Golden knowingly falsified Candie's books and records by permitting the company to prematurely recognize revenue through the bill and hold practice. Golden was also aware that Candie's internal accounting controls were inadequate to ensure that the company's financial statements were prepared in conformity with GAAP. Golden also provided Candie's auditors with misleading information, including supplying the auditors with false information indicating that Candie's had shipped shoes to the barter company in October 1997 and October 1998.

IV.

In view of the foregoing, the Commission deems it appropriate to impose the sanctions specified in Golden's Offer.

Accordingly, IT IS HEREBY ORDERED that Golden, pursuant to Section 8A of the Securities Act and Section 21C of the Exchange Act, cease and desist from committing or causing any violations and any future violations of Section 17(a) of the Securities Act, Sections 10(b) and 13(b)(5) of the Exchange Act, and Rules 10b-5, 13b2-1, and 13b2-2, and from causing any violations or any future violations of Sections 13(a) and 13(b)(2)(A) & (B) of the Exchange Act, and Rules 12b-20, 13a-1, and 13a-13 thereunder.

By the Commission.

Jonathan G. Katz
Secretary

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1 The findings herein are made pursuant to Golden's Offer and are not binding on any other person or entity in this or any other proceeding.

 

http://www.sec.gov/litigation/admin/33-8227.htm


Modified: 04/30/2003