SECURITIES EXCHANGE ACT OF 1934
Release No. 42432 / February 16, 2000
ACCOUNTING AND AUDITING ENFORCEMENT
Release No. 1230 / February 16, 2000
File No. 3-10042
|In the Matter of
JAMES D. MONTGOMERY II,
ORDER MAKING FINDINGS
AND IMPOSING A CEASE-
On September 28, 1999, the Securities and Exchange Commission ("Commission") deemed it appropriate that public administrative cease-and-desist proceedings be instituted pursuant to Section 21C of the Securities Exchange Act of 1934 ("Exchange Act") against James D. Montgomery II ("Montgomery").
Following the institution of those proceedings, Montgomery submitted an Offer of Settlement ("Offer"), which 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 in which the Commission is a party, Montgomery consents to the entry of this Order Making Findings and Imposing A Cease-and-Desist Order ("Order") without admitting or denying the findings set forth herein, except as to the jurisdiction of the Commission over him and over the subject matter of these proceedings, which are admitted.
The Commission has determined that it is appropriate to accept Montgomery's Offer and accordingly is issuing this Order.
On the basis of this Order and the Offer, the Commission finds1 the following:
A. Computone Corporation ("Computone") is a company headquartered in Alpharetta, Georgia that designs, manufactures and sells computer hardware and software products. Computone's common stock is registered pursuant to Section 12(g) of the Exchange Act.
B. Computone filed with the Commission its July 7, 1995 Form 10-Q on September 14, 1995.
C. Montgomery, of Auburn, Georgia, served as Computone's director of original equipment manufacturer sales from early 1994 through August 1995.
D. In June 1995, Montgomery was told that Computone's chief executive officer wanted Montgomery to make a sale to a customer of Computone in order for Computone to meet its quarterly revenue target. On or about June 29, 1995, Montgomery persuaded a customer to place an order, but the customer insisted on placing a contingent purchase order with a number of conditions.
E. On or about July 7, 1995 (last day of the quarter), Montgomery was told that the contingent nature of the order precluded Computone from recognizing the sale and including it in revenue in Computone's Fiscal Year ("FY") 1996 first quarter and that Computone desired to record and recognize this revenue.
F. Senior management of Computone directed Montgomery to alter the customer's purchase order to eliminate certain of the customer's conditions and to modify others so that Computone could recognize the sale. Montgomery made these changes knowing that the customer was unaware of the alterations.
G. On or about July 7, 1995, Montgomery attempted to persuade the customer to sign and return a letter which he believed would support the altered purchase order. Montgomery intended to give the signed letter to Computone's accounting department in order to support Computone's recognition of revenue from this transaction. The customer refused to sign the letter.
H. In part as the result of Montgomery's conduct, Computone recognized this transaction as a sale, which caused it to understate materially its FY 1996 first quarter reported loss from continuing operations by approximately $544,400. In part, this caused Computone to report a loss of $641,000 from continuing operations during this quarter rather than a loss of approximately $1,352,380.
I. Montgomery also misled Computone's auditors, in connection with their audit of Computone's FY 1996 financial statements, regarding this transaction. On or about July 2, 1996, Montgomery falsely told the auditors that he had no specific knowledge about this transaction. On or about July 17, 1996, Montgomery misled the auditors when he told them that he had never seen the altered purchase order, when at the time, Montgomery possessed various altered versions of the original purchase order.
J. Montgomery caused Computone to violate Section 10(b) of the Exchange Act and Rule 10b-5 thereunder by, directly and indirectly, using the means and instrumentalities of interstate commerce and of the mails in connection with the purchase and sale of securities: (1) to employ devices, schemes, and artifices to defraud, (2) to make untrue statements of material facts and to omit to state material facts necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading, and (3) to engage in acts, practices, and a course of business which operated as a fraud and deceit upon persons, in connection with the purchase and sale of such securities, as more particularly described in paragraphs II. D through I above.
K. Montgomery caused Computone to violate Section 13(a) of the Exchange Act and Rule 13a-13 thereunder by causing Computone to file quarterly reports with the Commission which were not in accordance with the rules and regulations prescribed by the Commission, as more particularly described in paragraphs II. D through I above.
L. Montgomery caused Computone to violate Section 13(b)(2)(A) of the Exchange Act by causing Computone to fail to make and keep books, records, and accounts, which, in reasonable detail, accurately and fairly reflected the transactions and dispositions of the assets of Computone, as more particularly described in paragraphs II. D through I above.
M. Montgomery caused Computone to violate Section 13(b)(2)(B) of the Exchange Act by causing Computone to fail to devise and maintain a system of internal accounting controls sufficient to provide reasonable assurances that: (1) transactions were executed in accordance with management's general or specific authorization, (2) transactions were recorded as necessary (i) to permit preparation of financial statements in conformity with GAAP or any other criteria applicable to such statements, and (ii) to maintain accountability for assets, (3) access to assets was permitted only in accordance with management's general or specific authorization, and (4) the recorded accountability for assets was compared with the existing assets at reasonable intervals and appropriate action was taken with respect to any differences, as more particularly described in paragraphs II. D through I above.
N. Montgomery committed violations of Section 13(b)(5) of the Exchange Act by knowingly circumventing or knowingly failing to implement a system of internal accounting controls or knowingly falsifying Computone's books, records, or accounts described by Section 13(b)(2) of the Exchange Act, as more particularly described in paragraphs II. D through I above.
O. Montgomery committed violations of and caused Computone to violate Rule 13b2-1 of the Exchange Act by directly or indirectly, falsifying or causing to be falsified, Computone's books, records or accounts subject to Section 13(b)(2)(A) of the Exchange Act, as more particularly described in paragraphs II. D through I above.
In view of the foregoing, it is in the public interest to impose the sanction specified in the Offer.
Accordingly, it is hereby ordered that Montgomery 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 thereunder and from causing violations of Sections 13(a), 13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act and Rule 13a-13 thereunder.
For the Commission, by its Secretary, pursuant to delegated authority.
Jonathan G. Katz
1 The findings herein are made pursuant to the Offer of Settlement of Montgomery and are not binding on any other person or entity named as a respondent in this or any other proceeding.