UNITED STATES OF AMERICA
|In the Matter of
BONNIE K. METZ,
|ORDER INSTITUTING A PUBLIC CEASE-AND-DESIST PROCEEDING PURSUANT TO SECTION 21C OF THE SECURITIES EXCHANGE ACT OF 1934, MAKING FINDINGS, AND IMPOSING A CEASE-AND-DESIST ORDER|
The Securities and Exchange Commission ("Commission") deems it appropriate that a public cease-and-desist proceeding be and hereby is instituted pursuant to Section 21C of the Securities Exchange Act of 1934 ("Exchange Act") against Respondent Bonnie K. Metz ("Metz").
In anticipation of the institution of this proceeding, Metz has submitted an Offer of Settlement ("Offer"), which the Commission has determined to accept. Solely for the purpose 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 contained herein, except that Metz admits the jurisdiction of the Commission over her and over the subject matter of this proceeding, Metz consents to the entry of this Order Instituting a Public Cease-and-Desist Proceeding Pursuant to Section 21C of the Securities Exchange Act of 1934, Making Findings, and Imposing a Cease-and-Desist Order ("Order") as set forth below.
Accordingly, IT IS HEREBY ORDERED that a proceeding pursuant to Section 21C of the Exchange Act be, and hereby is, instituted.
On the basis of this Order and the Offer of Settlement submitted by Metz, the Commission finds that:1
Bonnie K. Metz ("Metz"), age 50, a resident of Balboa, California, was the Vice-President-Managing Director of the Hong Kong office of Craig Consumer Electronics, Inc. ("Craig") from 1995 to September of 1997, Craig's director of international trade from 1994 to 1995, and its operations director from 1989 to 1993.
B. RELATED PARTY
Craig Consumer Electronics, Inc. was incorporated in Delaware in 1989. Its principal place of business before it ceased operations was in Cerritos, California. Craig's common stock is registered with the Commission pursuant to Section 12(g) of the Exchange Act and during the relevant time period was traded on Nasdaq. On August 1, 1997, Craig filed a petition for relief under Chapter 11 of the Bankruptcy Code.
Craig marketed consumer electronic products under its trademark, "Craig." Its business was highly seasonal with a majority of its sales occurring in the third and fourth quarters.2 As such, it required substantial working capital to acquire inventory in advance of its sales. To meet its cash requirements, Craig relied principally on a line of credit from a bank; the line of credit was secured by accounts receivable and inventory.
The credit agreement contained limitations on the credit that would be provided and secured by inventory. For example, the credit agreement permitted Craig to borrow against only a percentage of its new goods, a lesser percentage against its refurbished goods, and not at all against its defective goods.
By at least shortly before Craig's initial public offering in May 1996, the company realized that it could not obtain sufficient credit to maintain its business if it accurately reported certain sales and inventory levels to its bank. In part, the items falsely reported to the bank were also falsely recorded in Craig's books and records.
1. Inventory Transfers and the South American Sale
Under Craig's credit agreement with its bank, it could not borrow against accounts receivable resulting from foreign sales. Moreover, Craig's internal accounting system would not permit a customer to be invoiced for sales of defective product. Craig circumvented both limitations in a sale of nearly $1.03 million worth of defective product to a customer in South America. First, Craig billed the shipment to an entity in Brooklyn, New York. Then Craig, with Metz's knowledge, improperly transferred the known defective inventory within its accounting system to a "new" inventory category. Metz, knowing that the product was defective and that Craig's accounting system could not bill for sales of defective goods, then created schedules that showed the inventory being moved from a defective to a "new" category. To these schedules, Metz attached copies of invoices showing that the inventory was billed. She also authorized the return of the defective goods to the United States.
"Goods on the water" is inventory purchased by Craig that is in transit from Craig's vendors in Asia. Craig, with Metz's knowledge, reported goods on the water as collateral to its bank that either did not exist or to which it did not have legal title. Metz directed a Craig employee to inflate the goods on the water inventory reported to the bank by adding non-existent shipments. In addition, Metz created false bills of lading to support further overstatements of inventory reported to the bank. Metz scanned a bill of lading form into her computer and then changed the consignee on the fabricated bill of lading from Craig's supplier to Craig. By changing the consignee to Craig, Metz made it appear that Craig owned the goods, when actually the supplier owned the goods. As Metz created the false bills of lading, she removed the originals from the files, hid them, and replaced them with the ones she had fabricated. Metz replaced the original bills of lading with the fabricated ones so that Craig would have supporting documentation to provide to its bank if questioned.
D. LEGAL DISCUSSION
Section 13(b)(2)(A) of the Exchange Act requires every issuer that has securities registered pursuant to Section 12 of the Exchange Act, such as Craig, to "make and keep books, records, and accounts, which in reasonable detail, accurately and fairly reflect the transactions . . . of the issuer." No showing of scienter is required. SEC v. World Wide Coin Inv. Ltd., 567 F. Supp. 724, 749, 751 (N.D. Ga. 1983). Rule 13b2-1 under Section 13(b)(2)(A) of the Exchange Act provides that "no person shall, directly or indirectly, falsify or cause to be falsified, any book, record or account subject to Section 13(b)(2)(A)." Craig violated Section 13(b)(2)(A) of the Exchange Act by maintaining books and records containing false accounting entries and documents.
Metz violated Rule 13b2-1 and caused Craig's violations of Section 13(b)(2)(A) by falsifying or causing others to falsify Craig's corporate documents and/or accounting entries. Metz created schedules of transfers of known defective inventory to new inventory. These schedules supported the nearly $1.03 million fraudulent sales transaction, and did not accurately and fairly reflect the physical inventory of Craig. Such inventory transfers were made within Craig's accounting system. Further, Metz directed a Craig employee to include in Craig's reports to its bank inventory that did not exist. Moreover, Metz created false bills of lading to create the illusion that Craig held title to goods on the water that were actually owned by Craig's suppliers. Metz falsified and caused others to falsify Craig's books and records and caused the company's books and records to be inaccurate and to not fairly reflect Craig's transactions.
2. Record-Keeping and Internal Control Provisions: Section 13(b)(5) of the Exchange Act
Section 13(b)(5) of the Exchange Act provides, among other things, that no person shall knowingly circumvent a system of internal accounting controls maintained by a reporting issuer, or knowingly falsify any book, record or account maintained by such an issuer. A
corporate officer can violate Section 13(b)(5) by directing a subordinate to record false or improper entries on the corporation's books in circumvention of its system of internal controls. See In the Matter of Westwood One, Inc., William J. Battison and Gary J. Yusko, Exch. Act Rel. No. 34-33489 (Jan. 19, 1994).
Metz violated Section 13(b)(5) of the Exchange Act by knowingly circumventing Craig's internal accounting controls and knowingly falsifying the company's books and records as described above.
Accordingly, based on the foregoing, the Commission finds that Metz violated Section 13(b)(5) and caused violations of Section 13(b)(2)(A) of the Exchange Act and violated Rule 13b2-1 thereunder.
In view of the foregoing, the Commission deems it appropriate to accept the Offer of Settlement submitted by Metz.
Accordingly, IT IS HEREBY ORDERED that, pursuant to Section 21C of the Exchange Act, Metz shall, effective immediately, cease and desist from committing or causing any violation and any future violation of Section 13(b)(5) of the Exchange Act and Rule
13b2-1 thereunder, and causing any violation and any future violation of Section 13(b)(2)(A) of the Exchange Act.
By the Commission.
Jonathan G. Katz
1 The findings herein are made pursuant to the Offer of Settlement of Bonnie K. Metz and are not binding on any other person or entity in this or any other proceeding.
2 Craig maintained a December 31 fiscal year.
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