UNITED STATES OF AMERICA
In the Matter of
WILLIAM H. WARNER and
ROBERT J. QUIGLEY,
|ORDER INSTITUTING PUBLIC PROCEEDINGS 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 public administrative proceedings be, and they hereby are, instituted pursuant to Section 21C of the Securities Exchange Act of 1934 ("Exchange Act") against William H. Warner ("Warner") and Robert J. Quigley ("Quigley").
In anticipation of the institution of these administrative proceedings, Warner and Quigley (collectively, "Respondents") have each submitted an Offer of Settlement, 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, and without admitting or denying the Commission's findings contained herein, except for the jurisdiction of the Commission over them and over the subject matter of these proceedings, which each Respondent admits, the Respondents, by their Offers, consent to the entry of this order, and the findings and the imposition of the cease-and-desist Order set forth below.
The Commission makes the following findings:1
Respondents Warner and Quigley violated the reporting, record-keeping and internal control provisions of the Exchange Act by causing International Thoroughbred Breeders, Inc. ("ITB" or "the company") to improperly disclose and account for certain related party transactions involving the company's former chief executive officer.
William H. Warner ("Warner") has been the chief financial officer and treasurer of ITB from 1983 until the present. Warner is a certified public accountant licensed in New Jersey.
Robert J. Quigley ("Quigley") has been a director of ITB from 1980 until the present. He was president of ITB during the relevant period.
C. OTHER RELEVANT ENTITIES AND INDIVIDUALS
International Thoroughbred Breeders, Inc. is a Delaware corporation headquartered in New Jersey. During the relevant period, ITB owned and operated two racetracks in New Jersey. ITB's common stock is registered with the Commission pursuant to Section 12(g) of the Exchange Act and was traded on the American Stock Exchange until August 1998, when it was delisted. During the relevant period, ITB filed periodic reports with the SEC pursuant to Section 13(a) of the Exchange Act. ITB's fiscal year ends June 30.
Nunzio DeSantis ("DeSantis") was a board member and chief executive officer of ITB from January 1997 until his resignation from the company in January 1999. During that same period, DeSantis was chairman of the board, president and chief executive officer of Autolend Group, Inc. ("Autolend"), a sub-prime lender headquartered in Albuquerque, New Mexico.2
D. RESPONDENTS CAUSED ITB TO IMPROPERLY DISCLOSE AND ACCOUNT FOR CERTAIN RELATED PARTY TRANSACTIONS
1. ITB's December 31, 1996 Form 10-Q
Immediately after taking control of ITB in January 1997, DeSantis instructed Warner to issue a $150,000 check to his other company, Autolend, which DeSantis knew was then experiencing financial difficulties. The purpose of this payment was represented to Warner as reimbursement to Autolend for financing charges incurred on ITB's behalf in December 1996. Warner failed to record an expense for the $150,000 Autolend payment on ITB's books and records for the quarter ended December 31, 1996, as required by generally accepted accounting principles. As a result, ITB's loss for the quarter ended December 31, 1996 was materially understated by $150,000 or approximately 5 percent. Warner also failed to disclose the related-party nature of the Autolend payment, as required by Item 404 of Regulation S-K [17 C.F.R. § 229.404]. On or about February 13, 1997, Warner and Quigley signed ITB's Form 10-Q for the quarter ended December 31, 1996. That document, which was filed with the Commission on or about February 15, 1997, was materially false and misleading because it failed to disclose and properly account for the Autolend payment.
2. ITB's March 31, 1997 Form 10-Q
In February 1997, DeSantis instructed Warner to begin paying salaries and operating expenses for Southwest Jet. A corporate airline charter service, Southwest Jet had no assets of its own and operated an airplane partially owned by DeSantis. Louis DeSantis, DeSantis' twenty-three year old son, operated Southwest Jet. Around the same time, DeSantis instructed Warner to place an individual who turned out to be DeSantis' personal cook on the ITB payroll. ITB's payments on behalf of Southwest Jet and DeSantis' cook totaled approximately $160,000 as of March 31, 1997. These related party payments constituted approximately 10 percent of ITB's net loss for the quarter and contributed to a cash-flow crisis. Warner failed to disclose the related-party nature of ITB's payments on behalf of Southwest Jet and DeSantis' cook, as required by Item 404 of Regulation S-K [17 C.F.R. § 229.404]. Warner instead accounted for them as part of general and administrative expenses.
In March 1997, Warner made certain disclosures concerning related party transactions to Quigley and the compensation committee. On or about May 19, 1997, Warner and Quigley signed a management representation letter to ITB's outside accountants that misrepresented that all material transactions had been properly accounted for and that all related party transactions had been properly disclosed. On or about May 20, 1997, Warner and Quigley signed ITB's Form 10-Q for the quarter ended March 31, 1997. That document, which was filed with the Commission on or about May 20, 1997, was materially false and misleading because it failed to disclose the related-party nature of the company's payments on behalf of Southwest Jet and DeSantis' cook.
A. RESPONDENTS CAUSED ITB'S VIOLATIONS OF THE REPORTING PROVISIONS OF THE EXCHANGE ACT
Section 13(a) of the Exchange Act and Rule 13a-13 thereunder require issuers of registered securities to file with the Commission factually accurate quarterly reports. Exchange Act Rule 12b-20 requires that periodic reports contain all information necessary to ensure that statements made in such reports are not materially misleading. Financial statements incorporated in Commission filings must comply with Regulation S-X, which in turn requires conformity with generally accepted accounting principles. No showing of scienter is necessary to establish civil violations of Section 13(a) or the rules promulgated thereunder. See SEC v. McNulty, 137 F.3d 732, 740-41 (2d Cir. 1998); cf. Savoy Indus., 587 F.2d at 1167. ITB violated Section 13(a) of the Exchange Act and Rules 13a-13 and 12b-20 thereunder by filing quarterly reports for the quarters ended December 31, 1996 and March 31, 1997 that failed to properly account for and/or disclose certain related party transactions.
Section 21C of the Exchange Act authorizes the Commission to issue a cease-and-desist order on a showing that respondent was a cause of a securities law violation. Section 21C(a) provides in relevant part:
If the Commission finds, after notice and opportunity for hearing, that any person is violating, has violated, or is about to violate any provision of this title, or any rule or regulation thereunder, the Commission may publish its findings and enter an order requiring such person, and any other person that is, was, or would be a cause of the violation, due to an act or omission the person knew or should have known would contribute to such violation, to cease and desist from committing or causing such violation and any future violation of the same provision, rule, or regulation.
Warner and Quigley caused ITB's reporting violations within the meaning of Section 21C of the Exchange Act. Warner was aware of the relevant related party transactions, but failed to ensure that they were properly accounted for and/or disclosed in the two Forms 10-Q he prepared and signed. By March 1997, Quigley was aware of the related party transactions, yet he signed the March 31 Form 10-Q without ensuring that they were properly disclosed.
B. RESPONDENTS VIOLATED THE RECORD-KEEPING AND INTERNAL CONTROLS PROVISIONS OF THE EXCHANGE ACT
Section 13(b)(2)(A) of the Exchange Act requires a reporting company to make and keep books, records and accounts, which, in reasonable detail, accurately and fairly reflect its transactions and disposition of assets. Section 13(b)(2)(B) of the Exchange Act requires every reporting company to devise and maintain an adequate system of internal accounting controls. No showing of scienter is necessary to establish civil violations of Sections 13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act. See SEC v. World-Wide Coin Investments, Ltd., 567 F. Supp. 724, 745-752 (N.D. Ga. 1983). ITB violated Sections 13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act by maintaining books, records and accounts which failed to accurately and fairly reflect certain related party transactions and by maintaining an inadequate system of internal controls over those transactions. Warner caused ITB's record-keeping and internal control violations within the meaning of Section 21C of the Exchange Act as a result of his failure to properly record the related party transactions as discussed above.
Rule 13b2-1 of the Exchange Act prohibits any person from directly or indirectly falsifying a book, record or account subject to Section 13(b)(2)(A). Rule 13b2-2 of the Exchange Act prohibits any director or officer of an issuer from directly or indirectly making a materially false or misleading statement to an accountant in connection with any audit or examination of financial statements. Warner violated Rule 13b2-1 by causing ITB's books, records and accounts to be in violation of Section 13(b)(2)(A) by improperly accounting for the related party transactions discussed above. Warner and Quigley violated Rule 13b2-2 by signing the false and misleading management representation letter to ITB's outside accountants.
Based on the foregoing, the Commission finds that:
A. Warner caused ITB's violations of Sections 13(a), 13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act and Rules 12b-20 and 13a-13 thereunder, and violated Rules 13b2-1 and 13b2-2 directly; and
B. Quigley caused ITB's violations of Section 13(a) of the Exchange Act and Rules 12b-20 and 13a-13 thereunder, and violated Rule 13b2-2 directly.
Accordingly, IT IS HEREBY ORDERED, pursuant to Section 21C of the Exchange Act, that:
A. Warner cease and desist from causing any violation or future violation of Sections 13(a), 13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act and Rules 12b-20 and 13a-13 thereunder and from committing or causing any violation and any future violation of Rules 13b2-1 and 13b2-2; and
B. Quigley cease and desist from causing any violation or future violation of Section 13(a) of the Exchange Act and Rules 12b-20 and 13a-13 thereunder and from committing or causing any violation and any future violation of Rule 13b2-2.
By the Commission
Jonathan G. Katz
|1||The findings herein are not binding on anyone other than Warner and Quigley.|
|2||The Commission filed a related civil injunctive action against DeSantis and ITB.|
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