UNITED STATES OF AMERICA
SECURITIES AND EXCHANGE COMMISSION
SECURITIES EXCHANGE ACT OF 1934
Release No. 41924 / September 28, 1999
ACCOUNTING AND AUDITING ENFORCEMENT
Release No. 1161 / September 28, 1999
File No. 3-10035
In the Matter of: )
) ORDER INSTITUTING
) CEASE-AND-DESIST PROCEEDINGS
STEVEN R. ZEMAITIS ) PURSUANT TO SECTION 21C OF THE
and JULIE FREISINGER ) SECURITIES EXCHANGE ACT OF
Respondents. ) 1934, MAKING FINDINGS AND
) ORDERING RESPONDENTS
) TO CEASE AND DESIST
The Securities and Exchange Commission (Commission) deems it appropriate that
cease-and-desist proceedings be instituted pursuant to Section 21C of the
Securities Exchange Act of 1934 (Exchange Act), against Respondents Steven R.
Zemaitis (Zemaitis) and Julie Freisinger (Freisinger).
In anticipation of the institution of these cease-and-desist proceedings,
Respondents have each submitted offers of settlement (Offers) which the
Commission has determined to accept. Solely for the purposes of this proceeding
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 which is admitted and the
findings contained in Paragraph III.A. below, which are admitted by Zemaitis,
and the findings contained in Paragraph III.B. below, which are admitted by
Freisinger, Respondents consent to the entry of this Order Instituting
Cease-and-Desist Proceedings Pursuant to Section 21C of the Securities Exchange
Act, Making Findings and Ordering Respondents to Cease and Desist (Order).
Accordingly, IT IS ORDERED that proceedings pursuant to Section 21C of
the Exchange be, and hereby are, instituted.
On the basis of this Order and the Offers submitted by the Respondents, the
Commission makes the following findings:
A. Zemaitis, 31, is a resident of Plano, Texas. During the relevant period,
he was a Financial Analyst with First Merchants Acceptance Corp. ("First
B. Freisinger, 37, is a resident of Cantonment, Florida. During the relevant
time period, Freisinger was employed by First Merchants. First Merchants is a
Delaware corporation which has its headquarters in Deerfield, Illinois.
C. During the periods of Respondents' employment, First Merchants engaged in
the business of financing the purchase of used automobiles. On April 16, 1997,
First Merchants issued a press release in which it announced that it had
overstated its earnings in 1996. The press release further related that the
overstated earnings were due to improper accounting for First Merchants'
delinquent and non-performing loans. On July 11, 1997, First Merchants sought
protection under Chapter 11 of the Bankruptcy Code by filing a petition to
D. From in or about May 1996 to at least April 1997, the President and Chief
Executive Officer of First Merchants, its Vice President of Strategic Planning,
and Respondents engaged in an elaborate scheme to improperly account for First
Merchants' delinquent and non-performing loans to manipulate First Merchants'
allowance for credit losses. Among other things, in or about May 1996,
Freisinger, at the direction of the Vice President of Strategic Planning, was
told not to write down the full balance of customer accounts whose automobiles
which she knew could not be located and instead treated these accounts as if the
automobiles were repossessed. In addition, in or about August 1996, Freisinger
was directed by the Vice President of Strategic Planning to make approximately
100 customer accounts appear current by writing checks payable to First
Merchants from another First Merchants account and to adjust the customer
balances due so that the amount owed would remain unchanged. Moreover, in or
about September 1996 to at least January 1997, Respondents were directed by the
President and Chief Executive Officer and the Vice President of Strategic
Planning to figure out a way to alter the payment due dates for over 7,000 First
Merchants customer accounts to make these accounts appear current in order to
reach a certain pre-determined charge-off percentage. Specifically, the
President and Chief Executive Officer and Vice President of Strategic Planning
would pre-determine a charge-off percentage they wanted to report for First
Merchants. Zemaitis performed various spread sheet analyses on different account
categories to determine what adjustments could be made to achieve the
pre-determined charge-off percentage. The President and Chief Executive Officer
and Vice President of Strategic Planning used these analyses to decide which
accounts or categories of accounts would be charged off and then directed
Freisinger to make the required adjustments.
E. Respondents' activities resulted in the material misstatement of First
Merchants' allowance for credit losses in its books, records and accounts.
F. In addition, their fraudulent scheme caused First Merchants materially to
overstate its financial condition in these periodic reports filed with the
Commission in 1996 and 1997. Specifically, First Merchants understated its
allowance for credit losses by $43.4 million or 252.6% and overstated its net
income by $76.7 million or 729% in financial statements that were included in a
press release, dated February 4, 1997, which was filed as a Form 8-K (1997 Form
8-K) with the Commission on February 15, 1997 and in its 1996 Form 10-K filed
with the Commission on March 31, 1997 (1996 Form 10-K).
G. During the period from in or about May 1996 to April 1997, Respondents
committed violations of Section 10(b) of the Exchange Act and Rule 10b-5
promulgated thereunder in that Respondents, in connection with the purchase or
sale of the securities of First Merchants, directly or indirectly, by the use of
the means or instrumentalities of interstate commerce, or of the mails, or of
the facilities of a national securities exchange: employed devices, schemes or
artifices to defraud; made untrue statements of material fact or omitted to
state material facts necessary in order to make the statements made, in light of
the circumstances under which they were made, not misleading; or engaged in
acts, practices or course of business which operated as a fraud or deceit. As a
part of the aforesaid conduct, Respondents engaged in the acts and practices
described in Paragraphs III.D. through III.F.
H. In its books, records and accounts and in its 1996 Form 10-K and the 1997
Form 8-K, Respondents caused First Merchants to make untrue statements of
material fact and omit to state material facts which were necessary in order to
make the statements made, in light of the circumstances under which they were
made, not misleading, in violation of Sections 13(a) and 13(b)(2) of the
Exchange Act and Rules 12b-20, 13a-1 and 13a-11 thereunder. As a part of the
aforesaid conduct, Respondents engaged in the acts and practices described in
Paragraphs III.D. through III.F.
I. During the period from in or about May 1996 to April 1997, Respondents
violated Rule 13b2-1 of the Exchange Act in that Respondents falsified books,
records or accounts which were subject to Section (13)(b)(2) of the Exchange
Act. As a part of the aforesaid conduct, Respondents engaged in the acts and
practices described in Paragraphs III.D. through III.F.
J. During the period from in or about May 1996 to April 1997, Respondents
committed violations of Section 13(b)(5) of the Exchange Act in that Respondents
knowingly failed to implement a system of internal accounting controls or
knowingly falsified books, records, or accounts described in Section 13(b)(2) of
the Exchange Act. As a part of the aforesaid conduct, Respondents engaged in the
acts and practices described in Paragraphs III.D. through III.F.
Accordingly, IT IS HEREBY ORDERED, that pursuant to Section 21C of the
Exchange Act, that :
Respondents Zemaitis and Freisinger shall cease and desist from committing or
causing any violation and any future violation of Sections 10(b) and 13(b)(5) of
the Exchange Act and Rules 10b-5 and 13b2-1 promulgated thereunder and from
causing any violations of Section 13(a) and 13(b)(2) of the Exchange Act and
Rules 12b-20, 13a-1 and 13a-11 promulgated thereunder.
By the Commission
Jonathan G. Katz