UNITED STATES OF AMERICA
In the Matter of
MARY SATTLER POLVERARI,
ORDER INSTITUTING PUBLIC
PURSUANT TO SECTION 21C OF THE
SECURITIES EXCHANGE ACT OF 1934,
AND RULE 102(e) OF THE COMMISSION'S
RULES OF PRACTICE, MAKING FINDINGS,
AND IMPOSING SANCTIONS AND
The Securities and Exchange Commission ("Commission") deems it appropriate to institute public administrative proceedings pursuant to Section 21C of the Securities Exchange Act of 1934 ("Exchange Act") and Rule 102(e) of the Commission's Rules of Practice1 against Mary Sattler Polverari ("Polverari" or "Respondent"), a certified public accountant.
In anticipation of the institution of these administrative proceedings, Polverari 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, 2 without admitting or denying the findings set forth below, except as to jurisdiction of the Commission over her 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 21C of the Securities Exchange Act of 1934 and Rule 102(e) of the Commission's Rules of Practice, Making Findings, and Imposing Sanctions and Cease-and-Desist Order ("Order") set forth below.
Accordingly, it is ordered that proceedings pursuant to Section 21C of the Exchange Act and Rule 102(e) of the Commission's Rules of Practice be, and hereby are, instituted.
The Commission makes the following findings:3
Mary Sattler Polverari, C.P.A., age 29, was hired as Supervisor of Financial Reporting at CUC International Inc. ("CUC") in December 1995 and worked in the company's financial reporting operations at corporate headquarters in Stamford, Connecticut.4 In the Fall of 1997, Polverari was promoted to Manager of Financial Reporting. Polverari continued to hold that title after CUC became Cendant Corporation ("Cendant") in December 1997. Polverari is licensed as a certified public accountant in New York and resides in Brewster, New York.
B. OTHER RELEVANT ENTITIES
HFS Incorporated ("HFS") was a Delaware corporation that had its headquarters in Parsippany, New Jersey, and was principally a controller of franchise brand names in the hotel, real estate brokerage, and car rental businesses. Its securities were registered pursuant to Section 12(b) of the Exchange Act and traded on the New York Stock Exchange ("NYSE").
CUC was a Delaware corporation that had its headquarters in Stamford, Connecticut, and was principally engaged in membership-based consumer services, such as auto, dining, shopping, and travel "clubs." CUC's securities also were registered pursuant to Section 12(b) and traded on the NYSE.
Cendant Corporation, a Delaware corporation with its headquarters in New York City, was created through the December 17, 1997, merger of HFS and CUC. Cendant provides certain membership-based and Internet-related consumer services and controls franchise brand names in the hotel, residential real estate brokerage, car rental, and tax preparation businesses. For corporate law purposes, Cendant is CUC. Pursuant to the Agreement and Plan of Merger between CUC and HFS, on December 17, 1997, HFS was merged with and into CUC, with CUC continuing as the surviving corporation and changing its name to Cendant Corporation. As of March 1, 2000, Cendant's common stock, Income PRIDES, and Growth PRIDES were registered pursuant to Section 12(b) of the Exchange Act and traded on the NYSE. Cendant's 6.45% Trust Originated Preferred Securities, 7 3/4% Notes due 2003, and 3% Convertible Subordinate Notes due 2002 were registered pursuant to Section 12(g) of the Exchange Act.
C. THE SCHEME
Beginning in at least 1985, certain members of CUC's senior management implemented a scheme designed to ensure that CUC always met the financial results anticipated by Wall Street analysts. The CUC managers utilized a variety of means to achieve their goals. In part, CUC management met it goals by manipulating recognition of the company's membership sales revenue. Management also improperly utilized two liability accounts related to membership sales, consistently maintaining inadequate balances in the accounts and on occasion reversing the accounts directly into operating income. In addition, the CUC managers intentionally overstated merger and purchase reserves and subsequently reversed those reserves directly into operating expenses and revenues. Finally, management improperly wrote off assets -- including assets that were unimpaired -- and improperly charged the write-offs against its merger reserves. By manipulating the timing of the write-offs and by improperly determining the nature of the charges incurred, management used the write-offs to inflate operating income at CUC.
CUC senior management supervised the scheme over the course of each fiscal year. Beginning in at least 1988, management regularly made certain aggregate changes to CUC's reported quarterly financial results. Accordingly, at the end of each of the company's first three fiscal quarters, senior managers directed mid-level financial reporting managers at CUC corporate headquarters to add whatever amounts were needed in order to bring CUC's quarterly income up to analysts' expectations. Thus, for each of the first three quarters of a CUC fiscal year, the managers artificially inflated revenues and decreased operating expenses. In conjunction with these income statement changes, the managers also cosmetically altered certain CUC balance sheet items.
At the end of each fiscal year, the CUC managers implementing the scheme inflated the company's annual results as recorded on its books and records, so that the books and records would be consistent with the financial results already released and so that CUC's reported annual income would, in fact, meet the expectations of Wall Street analysts. As the scheme progressed over the course of several years, larger and larger year-end adjustments were required. The scheme added more than $500 million to pre-tax operating income during the fiscal years ended January 31, 1996; January 31, 1997; and December 31, 1997. 5
D. POLVERARI'S INVOLVEMENT
1. The Quarterly Top-Side Adjustments
Polverari's principal responsibilities at CUC involved creating consolidating financial reports for all CUC business units, doing balance sheet and income statement consolidations, and performing intercompany account reconciliations. Each month, each of the CUC business units would submit a reporting package to the financial reporting personnel in Stamford, Connecticut. As part of her duties, Polverari took those reporting packages and, using an electronic spreadsheet, compiled a monthly consolidating report showing the financial results for every business unit. At the end of each of the company's first three fiscal quarters each year, Polverari would follow similar procedures to generate a quarterly consolidating report.6 After generating a quarterly consolidating report, Polverari would give it to her supervisors.
The process never ended there. Instead, Polverari would receive back from her supervisors written or oral instructions detailing aggregate adjustments that Polverari was to make to various line items in the quarterly consolidating report. Typically, the instructions included adjustments increasing revenue by a certain amount and decreasing particular expense line items by certain amounts. The adjustments were made almost entirely in that column of the spreadsheet devoted to the results of CUC's largest division, the Comp-U-Card division. The changes always had the effect of increasing CUC earnings and were never accompanied by support. The adjustments were entirely top-side adjustments. That is, the adjustments were simply entered into Polverari's spreadsheet at Stamford -- no journal entries were created, no entries were made to CUC's general ledger, and the adjustments were not carried down to the books and records of Comp-U-Card or any of the company's other divisions.7
At each of those quarters, Polverari made the adjustments detailed in her instructions. She then printed a revised quarterly consolidating report and again gave it to her supervisors. The revised report usually resulted in a second wave of instructions from her supervisors. The additional instructions fine-tuned the report, directing Polverari to make additional, usually smaller, adjustments to various line items. In addition to the instructions affecting profit-and-loss line items, Polverari would receive similar, unsupported instructions to make adjustments to various line items in the quarterly consolidated balance sheet.
Polverari was never given any accounting rationale for the quarterly top-side adjustments she was instructed to make. Instead, her supervisors told her that CUC's chief financial officer had generated the adjustments to inflate CUC's quarterly results so that the results would meet the earnings expectations of Wall Street analysts. The supervisors also told her that some of the adjustments were created by the chief financial officer simply to make cosmetic adjustments in the income statement and balance sheet. For example, she was told that the chief financial officer had specific percentage targets for each major expense category, which required that each of the categories be set at approximately the same percentage of revenues as that particular category had held in the previous quarter. Polverari was also told that the chief financial officer made the balance sheet adjustments to ensure that items such as receivables and cash were at levels he thought desirable.
For each of the first three quarters of a CUC fiscal year, once all the instructed adjustments had been made, Polverari used the spreadsheet to generate quarterly consolidated financial statements for CUC. Those financial statements were set forth in the summary format used in CUC's quarterly Reports on Form 10-Q and in its quarterly earnings press releases. As a result of the unsupported quarterly top-side adjustments Polverari had entered, therefore, for each of those quarters, CUC's reported quarterly results matched the consensus quarterly expectations of analysts on Wall Street. The adjustments also resulted, however, in CUC's quarterly Reports on Form 10-Q and its quarterly earnings press releases being largely works of fiction. A gap existed between CUC's reported quarterly results and its actual results of operations. That gap grew from quarter to quarter and from one fiscal year to the next. The quarterly top-side alterations aggregated $31 million for CUC's fiscal year ended January 31, 1996; an additional $87 million for its fiscal year ended January 31, 1997; and another $176 million for Cendant's fiscal year ended December 31, 1997. 8
2. The 1998 Entries to Retained Earnings Accounts
At each fiscal year-end, CUC management had to make certain that journal entries were made raising CUC's income to the annual earnings levels Wall Street analysts expected. Moreover, since most of the artificial CUC income created during the year had simply been added top-side at the quarters, and did not appear on CUC's books, corrective measures were needed prior to the company being audited by its outside auditors. In connection with Cendant's fiscal year ended December 31, 1997, Polverari played a role in these year-end adjustments as well.
In January 1998, Cendant managers formerly associated with CUC directed approximately $115 million in unsupported post-closing journal entries reversing the company's merger reserves. 9 The managers directed that more than $50 million of these reversals were to be off-set by credits to intercompany payable accounts with various Cendant Membership Services subsidiaries. (After the December 1997 merger, the former CUC business units were known as Cendant Membership Services or CMS.) Ultimately, the entire $50 million of intercompany payables was used to inflate Cendant's reported income for the fiscal year ended December 31, 1997.10 Polverari was instructed by the Cendant Membership Services controller to increase revenues of three CMS subsidiaries by a total of $34 million by making top-side adjustments in her spreadsheet, thereby increasing income in the consolidated financial reports. Polverari made top-side adjustments decreasing the intercompany payables by $34 million and increasing the revenues of the CMS subsidiaries. Then, on April 6, 1998, after Cendant's annual report incorporating its annual financial statements had been filed, Polverari sent a series of memoranda to financial reporting officers of the affected subsidiaries. The memoranda, among other things, directed the financial reporting officers to make post-closing entries debiting their respective intercompany receivable accounts with CMS corporate and crediting their retained earnings accounts. Polverari directed the subsidiaries to give the entries March 1998 effective dates and stated that the entries that "would normally be charged to the P&L can be charged directly to Retained Earnings to avoid opening last year's books."
E. FALSE FILINGS AND STATEMENTS
Between Polverari's arrival at CUC in December 1995 and the discovery of the fraudulent scheme by Cendant management in April 1998, CUC and Cendant filed with the Commission false and misleading periodic reports and other filings. Those reports and filings included, directly or by incorporation, financial statements that misrepresented the companies' financial conditions and results of operations, massively overstating their income and their earnings.
A. VIOLATIONS OF THE ANTIFRAUD PROVISIONS
Section 10(b) of the Exchange Act and Rule 10b-5 thereunder prohibit a person, in connection with the purchase or sale of a security, from making an untrue statement of a material fact or from omitting to state a material fact necessary to make statements made, in light of the circumstances under which they were made, not misleading. To violate Section 10(b) or Rule 10b-5, a defendant must act with scienter, Aaron v. SEC, 446 U.S. 680, 695, 701-02 (1980), which the Supreme Court has defined as "a mental state embracing intent to deceive, manipulate, or defraud," Ernst & Ernst v. Hochfelder, 425 U.S. 185, 193 n.12 (1976). Between Polverari's arrival at CUC in December 1995 and the discovery of the fraudulent scheme by Cendant management in April 1998, CUC and Cendant violated the antifraud provisions by filing with the Commission and releasing to the public periodic reports and filings that were materially misstated and that misrepresented the companies' financial conditions and results of operations.11
Although Polverari was aware that certain CUC practices were improper, she nevertheless helped in carrying out those practices. Those who assist such practices "cannot escape culpability by asserting that they acted as `good soldiers' and, thereby, rely upon the fact that the violative conduct was condoned, or even ordered, by their corporate superiors." In the Matter of Benny Aguirre, Exchange Act Release No. 24535 (June 2, 1987), quoted in In the Matter of Collins Indus., Inc., Exchange Act Release No. 34934 (Nov. 3, 1994); see In the Matter of Thomas C. Runge, Exchange Act Release No. 23061 (Mar. 26, 1986); see also SEC v. Kalvex Inc., 425 F. Supp. 310, 315 (S.D.N.Y. 1975) ("just `following orders' " does not excuse such actions (citing SEC v. Pearson, 426 F.2d 1339 (10th Cir. 1970))). Based on the conduct described above, Polverari caused, and willfully aided and abetted, the companies' violations of Section 10(b) of the Exchange Act and Rule 10b-5 thereunder.
B. VIOLATIONS OF THE EXCHANGE ACT REPORTING AND RECORD-KEEPING PROVISIONS
Section 13(a) of the Exchange Act and Rules 13a-1 and 13a-13 thereunder require issuers with securities registered under Section 12 of the Exchange Act to file annual and quarterly reports with the Commission and to keep this information current. The obligation to file such reports embodies the requirement that they be true and correct. See, e.g., SEC v. Savoy Indus., Inc., 587 F.2d 1149, 1165 (D.C. Cir. 1978), cert. denied, 440 U.S. 913 (1979). Exchange Act Rule 12b-20 further requires the inclusion of any additional material information that is necessary to make required statements, in light of the circumstances under which they were made, not misleading. Information regarding the financial condition of a company is presumptively material. SEC v. Blavin, 760 F.2d 706, 711 (6th Cir. 1985).
As discussed above, between December 1995 and the discovery of the fraudulent scheme by Cendant management in April 1998, CUC and Cendant filed false and misleading periodic reports with the Commission that misrepresented their financial results, overstating operating income and earnings and failing to disclose that the financial results were falsely represented. Based on the conduct described above, Polverari caused, and willfully aided and abetted, the companies' violations of Section 13(a) of the Exchange Act and Rules 13a-1, 13a-13, and 12b-20 thereunder.
Section 13(b)(2)(A) of the Exchange Act requires Section 12 registrants to make and keep books, records, and accounts that accurately and fairly reflect the transactions and dispositions of their assets. Section 13(b)(5) of the Exchange Act provides that no person shall knowingly falsify any such book, record, or account or circumvent internal controls. Rule 13b2-1 also prohibits the falsification of any book, record, or account subject to Section 13(b)(2)(A).
As a result of the conduct described above, between December 1995 and the discovery of the fraudulent scheme by Cendant management in April 1998, the companies' books and records reflecting the transactions and dispositions of their assets were not merely inaccurate, they were intentionally falsified. Based on the conduct described above, Polverari willfully violated Section 13(b)(5) of the Exchange Act and Rule 13b2-1 thereunder, and caused, and willfully aided and abetted, the companies' violations of Section 13(b)(2)(A) of the Exchange Act.
Based on the foregoing, the Commission finds that Polverari (a) willfully violated Section 13(b)(5) of the Exchange Act and Rule 13b2-1 promulgated thereunder; and (b) caused, and willfully aided and abetted, CUC's and Cendant's violations of Sections 10(b), 13(a), and 13(b)(2)(A) of the Exchange Act, and Rules 10b-5, 12b-20, 13a-1, and 13a-13 promulgated thereunder.
In view of the foregoing, the Commission deems it appropriate to accept Polverari's Offer and to impose the sanctions agreed to therein. In determining to accept the Offer, the Commission considered remedial acts undertaken by Polverari and cooperation afforded the Commission and other authorities.
Accordingly, IT IS HEREBY ORDERED that
A. pursuant to Section 21C of the Exchange Act, Respondent cease and desist from violating, and from causing future violations of, Sections 10(b), 13(a), 13(b)(2)(A), and 13(b)(5) of the Exchange Act, and Rules 10b-5, 12b-20, 13a-1, 13a-13, and 13b2-1 promulgated thereunder; and
B. pursuant to Rule 102(e) of the Commission's Rules of Practice
1. Respondent be denied the privilege of appearing or practicing before the Commission as an accountant.
2. After three years from the date of the Order, Respondent may request that the Commission consider her reinstatement by submitting an application (attention: Office of the Chief Accountant) to resume appearing or practicing before the Commission as:
a. a preparer or reviewer, or a person responsible for the preparation or review, of any public company's financial statements that are filed with the Commission. Such an application must satisfy the Commission that Respondent's work in her practice before the Commission will be reviewed either by the independent audit committee of the public company for which she works or in some other acceptable manner, as long as she practices before the Commission in this capacity; and/or
b. an independent accountant. Such an application must satisfy the Commission that: (a) Respondent, or the firm with which she is associated, is a member of the SEC Practice Section of the American Institute of Certified Public Accountants Division for CPA Firms ("SEC Practice Section"); (b) Respondent, or the firm, has received an unqualified report relating to her, or the firm's, most recent peer review conducted in accordance with the guidelines adopted by the SEC Practice Section; and (c) As long as Respondent appears or practices before the Commission as an independent accountant she will remain either a member of the SEC Practice Section or associated with a member firm of the SEC Practice Section, and will comply with all applicable SEC Practice Section requirements, including all requirements for periodic peer reviews, concurring partner reviews, and continuing professional education.
3. The Commission's review of an application by Respondent to resume appearing or practicing before the Commission may include consideration of, in addition to the matters referenced above, any other matters relating to Respondent's character, integrity, professional conduct, or qualifications to appear or practice before the Commission.
By the Commission.
Jonathan G. Katz
1 Paragraph 1 of Rule 102(e)(1) provides, in relevant part, that:
The Commission may . . . deny, temporarily or permanently, the privilege of appearing or practicing before it in any way to any person who is found by the Commission after notice and opportunity for hearing in the matter: . . . (ii) [t]o be lacking in character or integrity or to have engaged in unethical or improper professional conduct; or (iii) [t]o have willfully violated, or willfully aided and abetted the violation of any provision of the Federal securities laws or the rules and regulations thereunder.
2 As part of the settlement of these proceedings, Respondent has also agreed to settle a civil action by consenting to a judgment ordering Respondent to pay a $25,000 civil money penalty based on the conduct described in this Order.
3 The Commission's findings herein are made pursuant to Respondent's Offer and are not binding upon any other person or entity in these or any other proceedings.
4 At the time of Respondent's conduct discussed herein, Respondent's name was Mary Sattler. Her name subsequently changed to Mary Sattler Polverari.
5 CUC's fiscal year ended on January 31. After the December 17, 1997, merger, Cendant adopted a fiscal year ending December 31.
6 At CUC, the monthly consolidating reports were considered far less important than the quarterly consolidating reports. Accordingly, Polverari did not enter the numbers for the Comp-U-Card division, CUC's largest division, into her spreadsheet every month -- on occasion she would skip that process and simply make sure that all Comp-U-Card results were entered into the spreadsheet in time for the quarterly consolidating report.
7 To make a specific adjustment, Polverari would go into the appropriate cell of the electronic spreadsheet and manually enter the adjustment she had been instructed to make. For example, if revenues were to be increased by $50 million, Polverari would go to the cell for Comp-U-Card membership fees revenue for the last month of the quarter and enter "+50,000." (The spreadsheet recorded amounts in thousands.) By making the adjustments in this way, rather than just entering new aggregate numbers into the affected cells, it was possible to go into the individual cells in the spreadsheet and determine what changes had been made and which specific cells had been altered.
8 Due to a variety of factors, such as changes in accounting methodology or comparability issues related to acquisitions or to dispositions of discontinued business operations, income impact figures used in this Order may not necessarily tie to figures set forth in CUC and Cendant financial statements included in filings with the Commission.
9 For purposes of this Order, "post-closing journal entries" means entries made after a reporting period had ended, with effective dates spread retroactively over prior weeks or months.
10 Actually, the entire $115 million in January 1998 merger reversals eventually was used, through various means, to inflate Cendant income for the fiscal year ended December 31, 1997.
11 A fact is material if there is a substantial likelihood that a reasonable investor would consider the information to be important. Basic Inc. v. Levinson, 485 U.S. 224, 231-32 (1988). Information regarding a company's income is among the most important information for making an investment decision.http://www.sec.gov/litigation/admin/34-42936.htm
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