SECURITIES ACT OF 1933
Release No. 8481 / September 8, 2004
SECURITIES EXCHANGE ACT OF 1934
Release No. 50329 / September 8, 2004
ACCOUNTING AND AUDITING ENFORCEMENT
Release No. 2093 / September 8, 2004
ADMINISTRATIVE PROCEEDING File No. 3-11635
In the Matter of JOHN GORMAN Respondent. |
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ORDER INSTITUTING CEASE-AND-DESIST PROCEEDINGS, MAKING FINDINGS AND IMPOSING A CEASE-AND-DESIST ORDER PURSUANT TO SECTION 8A OF THE SECURITIES ACT OF 1933 AND SECTION 21C OF THE SECURITIES EXCHANGE ACT OF 1934 |
I.
The Securities and Exchange Commission ("Commission") deems it appropriate that cease-and-desist proceedings be, and hereby are, instituted pursuant to Section 8A of the Securities Act of 1933 ("Securities Act") and Section 21C of the Securities Exchange Act of 1934 ("Exchange Act") against John Gorman ("Gorman") and Patrick Gentile ("Gentile") (collectively, "Respondents").
II.
In anticipation of the institution of these proceedings, Respondents have submitted Offers of Settlement (the "Offers"), 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 to which the Commission is a party, and without admitting or denying the findings herein, except as to the Commission's jurisdiction over them and the subject matter of these proceedings, which are admitted, Respondents consent to the entry of this Order Instituting Cease-and-Desist Proceedings, Making Findings and Imposing a Cease-and-Desist Order Pursuant to Section 8A of the Securities Act of 1933 and Section 21C of the Securities Exchange Act of 1934 ("Order"), as set forth below.
III.
On the basis of this Order and Respondents' Offers, the Commission finds1 that:
Respondents
1. John Gorman, age 59, is a resident of East Windsor, New Jersey. He retired from American Banknote Corporation ("ABN") in August 1999. He served as Executive Vice President and Chief Financial Officer ("CFO") of ABN until mid-1998, at which point he became the general manager of American Bank Note Company, a wholly-owned ABN subsidiary. During relevant times in 1998, Gorman also held a position as Executive Vice President of American Banknote Holographics, Inc. ("ABNH"), a wholly-owned ABN subsidiary. At all times relevant to the Order, Gorman was a Certified Public Accountant ("CPA"), whose license from the state of Pennsylvania expired in 1986.
2. Patrick Gentile, age 45, is a resident of Darien, Connecticut. Gentile served as the Corporate Controller of ABN from 1990 to July 1998, and from 1995 to July 1998, also served as a Vice President of ABN. From July 1998 to October 2001, Gentile served as ABN's Chief Accounting Officer and Senior Vice President. From October 2001 to the present, Gentile has been an Executive Vice President and the CFO of ABN. During relevant times in 1998, Gentile also held a position as Senior Vice President - Finance for ABNH. At all times relevant to the Order, Gentile was a CPA, licensed by the state of New York.
Relevant Entities
3. ABN is a holding company incorporated in Delaware with its principal executive offices located in Englewood Cliffs, New Jersey. During the relevant time period, ABN, through its subsidiaries, provided, among other things, stored-value telephone cards and magnetic-strip transaction cards, printed business forms, checks, and counterfeit-resistant documents of value such as money orders, passports, foreign currency, and stock and bond certificates. During the relevant time period, ABN's stock was registered with the Commission pursuant to Section 12(b) of the Exchange Act and traded on the New York Stock Exchange ("NYSE"). ABN filed for Chapter 11 bankruptcy on December 8, 1999, and emerged from bankruptcy on October 1, 2002. ABN's common stock currently trades on the OTC Bulletin Board. On July 31, 2001, a Final Judgment was entered as to ABN pursuant to which ABN consented to an order permanently restraining and enjoining it from violating the antifraud, periodic reporting, record keeping and internal controls provisions of the federal securities laws. The Complaint alleged ABN engaged in fraudulent revenue recognition practices in its fiscal years 1996, 1997 and 1998 by, among other things, improperly recognizing revenue on consignment sales, unusable work in process, product that was not completed by the end of the fiscal year, product that was never shipped and product that was returned.
4. ABNH is a Delaware corporation with its principal executive offices located in Elmsford, New York. ABNH is engaged in the origination, production, and marketing of mass-produced secure holograms. Until July 1998, ABNH was a wholly-owned subsidiary of ABN. On or about July 15, 1998, ABNH became a public company and, thereafter, ABNH's stock was registered pursuant to Section 12(b) of the Exchange Act and traded on the NYSE. In August 1999, ABNH's stock was suspended from trading. ABNH's common stock started to trade again on the OTC Bulletin Board, where it currently trades, in March 2000. On July 18, 2001, the Commission instituted and simultaneously settled an administrative proceeding against ABNH pursuant to which ABNH consented to an order requiring it to cease and desist from, among other things, committing or causing any violations, and any future violations, of the antifraud, periodic reporting, record keeping and internal control provisions of the federal securities laws based upon the fraudulent revenue recognition practices mentioned above.
Facts
Summary
5. This proceeding involves violations of the federal securities laws arising from improper revenue recognition at ABN and its then wholly-owned subsidiary ABNH.
6. Gorman and Gentile overstated ABN's fiscal year 1996 revenue and net income by causing ABNH improperly to record revenue on two "bill and hold" transactions. Gorman and Gentile knew, or should have known, that ABN reported this overstated revenue and income on the financial statements that were included in the company's Annual Report on Form 10-K for its fiscal years ended December 31, 1996, and December 31, 1997. Gorman and Gentile supervised the preparation of, reviewed, and approved these filings, and Gorman signed them.
7. On or about July 15, 1998, ABNH became a public company through an initial public offering ("IPO"). ABNH raised approximately $107 million (pricing shares at $8 ½ per share) through a Registration Statement on Form S-1 filed with the Commission in which the company registered 13,636,000 shares of common stock for sale to the public. ABN, which received the proceeds of the offering, used most of the proceeds to reduce its debt. Gorman and Gentile participated in the preparation and review of ABNH's registration statement, and each of them knew that the registration statement filed with the Commission, or relied upon in determining the price at which ABNH shares would be offered and purchased, included financial statements for ABNH for fiscal years ended December 31, 1996 and December 31, 1997. As a result, Gorman and Gentile knew, or should have known, that the Registration Statement on Form S-1 that ABNH filed in connection with its IPO contained materially false and misleading financial information for fiscal year 1996 because the financial statements included improperly recognized revenue and net income resulting from two "bill and hold" transactions.
8. In January 1999, ABNH announced that it would restate its financial results for each of the first three quarters of fiscal year 1998, and that its annual financial statements as of December 31, 1996, and December 31, 1997, should no longer be relied upon. The prices of the securities of both ABNH and ABN dropped substantially as a result of these announcements.
9. ABNH's restated financial numbers for fiscal year 1996, reported in December 1999, resulted in a material decrease in ABNH's quarterly and annual revenue and net income, which also resulted in material changes to ABN's operating results for that year. As a result of the conduct described above, ABNH improperly recognized approximately $635,250 of revenue, resulting in approximately a $254,290, or 5.86%, overstatement of ABNH's net income, and a 6.61% overstatement of ABN's net income, and ABN's and ABNH's public investors were misled into believing that ABN's net income, and ABNH's revenue and net income, for fiscal year 1996 were materially better than they were.
Gorman and Gentile Cause ABNH To Improperly Recognize Revenue on Two "Bill and Hold" Sales
10. During the time that ABNH was a wholly-owned subsidiary of ABN, ABNH's operations contributed materially to ABN's net income.
11. Under Generally Accepted Accounting Principles ("GAAP"), revenue from products is typically not recognized until the seller has substantially fulfilled the terms of the arrangement, which usually occurs upon delivery of the goods or product or performance of services, unless it is a "bill and hold" transaction or meets some other exception to the general rule.2
12. "Bill and hold" sales, by which a sale is made but the goods are retained by the seller at the customer's request, may be recognized as revenue by the seller before delivery to the buyer if certain stringent conditions set forth in the Commission's Accounting and Auditing and Enforcement Release ("AAER") Number 1083 are met. If these conditions are not met, the seller may not recognize the sales as revenue until the goods are shipped to the customer.
13. In mid to late January 1997, ABNH closed its books and sent preliminary results to ABN's independent auditors, Deloitte & Touche LLP ("Deloitte"). Shortly thereafter, Gorman and Gentile learned that ABNH failed to meet its fourth quarter budget and forecasts for revenue.
14. Gorman and Gentile, with the knowledge and/or participation of other former senior officers of ABN and ABNH, then caused ABNH, on or about January 30, 1997, improperly to record revenue on two "bill and hold" sales for December 1996 to two customers in the total amount of $635,250.
15. Accruing the revenue for 1996 for the two "bill and hold" transactions was improper because as Gorman and Gentile knew, or should have known, ABNH and the customers had not entered into these sales on or before December 31, 1996. In addition, Gorman and Gentile knew, or should have known, that the two transactions did not meet the conditions set forth for recognizing revenue for "bill and hold" sales under AAER Number 108 and, therefore, did not comply with GAAP. For example, ABNH, not the customers, had requested that the transaction occur on a "bill and hold" basis. Also, the holograms had not been segregated from ABNH's inventory and identified as belonging to the customers as of December 31, 1996.
16. Gorman and Gentile, as ABN's CFO and Corporate Controller, respectively, supervised the preparation of and reviewed ABN's financial statements, approved all relevant annual reports, and supervised ABN's accounting department. Their responsibilities for the accounting department included establishing and implementing policies and procedures for ABN and its subsidiaries. Gorman and Gentile supervised the preparation of and approved ABN's Annual Report on Form 10-K for its fiscal year ended December 31, 1996, and Gorman signed this filing. This filing was materially false and misleading because it overstated ABN's net income, which included ABNH's net income, for fiscal year 1996.
17. Gorman and Gentile also supervised the preparation of and approved ABN's Annual Report on Form 10-K for its fiscal year ended December 31, 1997, and Gorman signed this filing. This filing was materially false and misleading because it overstated ABN's net income, which included ABNH's net income, for fiscal year 1996, which was also reported in this filing.
Gorman and Gentile Cause ABNH to File a Registration Statement that Contained Materially False and Misleading Financial Information in Connection with ABNH's IPO
18. On or about July 15, 1998, ABNH became a public company through an IPO that raised approximately $107 million. ABN, which sold all of its shares in the offering, received all of the proceeds of the offering and used most of them to pay down its debt. The ABNH public offering took place pursuant to a Registration Statement ABNH filed on Form S-1 with the Commission, which included financial statements for ABNH for the fiscal years ended December 31, 1996, and December 31, 1997.
19. Gorman and Gentile participated in the preparation and review of ABNH's registration statement. Gorman and Gentile knew that the registration statement filed with the Commission, and disseminated to investors in conjunction with the offering, included financial statements for ABNH for its fiscal years 1996 and 1997. Gorman and Gentile knew, or should have known, that the Registration Statement on Form S-1 contained materially false and misleading financial information for ABNH's fiscal year 1996 because the financial statements in that filing reported revenue and net income for two improper "bill and hold" transactions.
Legal Analysis
Applicable Law
20. Section 17(a)(2) of the Securities Act provides that it is unlawful in the offer or sale of any security to obtain money or property by means of any untrue statement of a material fact or any omission to state a material fact necessary in order to make the statements made, in light of the circumstances under which they were made, not misleading. Section 17(a)(3) of the Securities Act provides that it is unlawful in the offer or sale of any security to engage in any transaction, practice, or course of business which operates, or would operate as a fraud or deceit upon the purchaser.
21. Section 13(a) of the Exchange Act requires all issuers with securities registered under Section 12 of the Exchange Act to file such periodic reports as the Commission shall prescribe by its rules and regulations. Exchange Act Rule 13a-1 requires issuers to file annual reports. Exchange Act Rule 12b-20 requires that periodic reports contain such further information as is necessary to make the required statements, in light of the circumstances under which they are made, not misleading.
22. Section 13(b)(2)(A) of the Exchange Act requires that reporting companies registered pursuant to Section 12 of the Exchange Act make and keep books, records, and accounts, which, in reasonable detail, accurately and fairly reflect its transactions and disposition of assets.
23. Section 13(b)(2)(B) of the Exchange Act requires reporting companies to devise and maintain a system of internal accounting controls sufficient to provide reasonable assurances that transactions are recorded as necessary to permit preparation of financial statements in conformity with GAAP.
Gorman's and Gentile's Violations
24. During 1998, Gorman and Gentile violated Sections 17(a)(2) and 17(a)(3) of the Securities Act by making statements in the offer or sale of securities which they knew, or should have known, were materially false and misleading. Gorman and Gentile participated in the preparation and review of ABNH's registration statement. Gorman and Gentile knew that the registration statement filed with the Commission, and disseminated to investors in conjunction with the offering, included financial statements for ABNH for its fiscal years 1996 and 1997. Gorman and Gentile knew, or should have known, that the Registration Statement that ABNH filed on Form S-1 in connection with its IPO contained materially false and misleading financial statements for fiscal year 1996 because the financial statements in that filing reported revenue and net income for the two improper "bill and hold" transactions.
25. From 1996 through 1998, ABN had securities registered with the Commission pursuant to Section 12(b) of the Exchange Act. As a result, ABN was required under Sections 13(a) and 13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act and Exchange Act Rules 12b-20 and 13a-1 to file annual and other reports and statements with the Commission which did not contain untrue statements of material facts or omissions of material facts, and to make and keep books, records, and accounts, which, in reasonable detail, accurately and fairly reflected the transactions and dispositions of ABN assets. ABN also was required to devise and maintain a system of internal accounting controls sufficient to provide reasonable assurances that transactions were recorded as necessary to permit preparation of financial statements in conformity with GAAP or any other criteria applicable to such statements.
26. As a result of the conduct described above, ABN violated Sections 13(a), 13(b)(2)(A), and 13(b)(2)(B) of the Exchange Act and Exchange Act Rules 12b-20 and 13a-1.
27. Gorman, as ABN's CFO, and Gentile, as ABN's Corporate Controller, supervised the preparation of, reviewed, and approved ABN's Annual Reports on Form 10-K for its fiscal years ended December 31, 1996, and December 31, 1997. Gorman and Gentile knew, or should have known, that ABN's net income, which included ABNH's net income, was materially overstated for ABN's fiscal year 1996 financial statements filed with the Commission in fiscal years 1996 and 1997. By reason of this and the foregoing, Gorman and Gentile caused ABN to file materially false or misleading annual reports during fiscal years 1996 and 1997. As a result, Gorman and Gentile caused ABN's violations of Section 13(a) of the Exchange Act, and Exchange Act Rules 12b-20 and 13a-1.
28. Gorman, as ABN's CFO, and Gentile, as ABN's Corporate Controller, were responsible for the accuracy of ABN's books and records and its accounting policies and procedures. As set forth above, ABN's books and records did not accurately and fairly reflect the transactions and disposition of its assets and its internal controls had been circumvented. By reason of this and the foregoing conduct, Gorman and Gentile caused ABN's violations of Sections 13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act.
Undertakings
Respondents have undertaken to:
Agree that in connection with this action and any related judicial or administrative proceeding or investigation commenced by the Commission or to which the Commission is a party, Respondents: (i) agree to appear and be interviewed by Commission staff at such times and places as the staff requests upon reasonable notice; (ii) will accept service by mail or facsimile transmission of notices or subpoenas for documents or testimony at depositions, hearings or trials, or in connection with any related investigation by Commission staff; (iii) appoint counsel for Gorman, Kevin Rover, Esq., and counsel for Gentile, Robert Romano, Esq., as agents to receive service of such notices and subpoenas; (iv) with respect to such notices and subpoenas, waive the territorial limits on service contained in Rule 45 of the Federal Rules of Civil Procedure and any applicable local rules, provided that the party requesting the testimony reimburses Respondents' travel, lodging and subsistence expenses at the then-prevailing U.S. Government per diem rates; and (v) consent to personal jurisdiction over Respondents in any United States District Court for purposes of enforcing any such subpoena.
In determining whether to accept the Offers, the Commission has considered these undertakings.
IV.
In view of the foregoing, the Commission deems it appropriate to impose the sanctions agreed to in the Offers.
Accordingly, it is hereby ORDERED that:
Pursuant to Section 8A of the Securities Act and Section 21C of the Exchange Act, Respondents Gorman and Gentile shall cease and desist from committing or causing any violations, and any future violations, of Sections 17(a)(2) and 17(a)(3) of the Securities Act and Respondents Gorman and Gentile shall further cease and desist from causing any violations, and any future violations, of Sections 13(a), 13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act and Exchange Act Rules 12b-20 and 13a-1.
By the Commission.
Secretary
Endnotes