United States of America
In the Matter of
|ORDER INSTITUTING PUBLIC
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 hereby are, instituted pursuant to Section 21C of the Securities Exchange Act of 1934 ("Exchange Act") against Keith Spero ("Spero" or "Respondent").
In anticipation of the institution of these administrative proceedings, Spero 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, without admitting or denying the findings set forth below, except as to jurisdiction of the Commission over him 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, Making Findings, and Imposing a Cease-and-Desist Order ("Order") set forth below.
Accordingly, it is ordered that proceedings pursuant to Section 21C of the Exchange Act be, and hereby are, instituted.
The Commission makes the following findings:1
Spero, age 48, was a Vice-President for Distribution at USA Detergents, Inc. from 1996 to 1998. In 1998, he became General Manager and an Executive Vice-President. He resides in Basking Ridge, New Jersey.
USA Detergents, at all times relevant, was a Delaware corporation with its principal executive offices in North Brunswick, New Jersey. The company was a manufacturer and marketer of laundry and household cleaning products. Its common stock was registered with the Commission pursuant to Section 12(g) of the Exchange Act and traded on the NASDAQ National Market System. On May 21, 2001, Church & Dwight Co., Inc. announced that its wholly owned subsidiary, US Acquisition Corp., had completed a $7.00 per share cash tender offer for the outstanding shares of USA Detergents common stock. As a result of that acquisition, USA Detergents is no longer a Section 12 registrant.
During the last half of 1996, in anticipation that they could not otherwise achieve their budget or meet analysts' expectations for the company's financial results, management at USA Detergents resorted to fraudulent methods to increase the company's net income and earnings. At year-end, when the gap between expectations and actual results was at it widest, management undertook a series of steps to inflate income artificially: it improperly amortized marketing expenses, failed to book invoices, claimed rebates that should not have been recorded, capitalized labor costs, and recognized revenue from certain transactions.
USA Detergents' senior management inflated the company's income for the fourth quarter of 1996 by, among other things, directing that the company recognize revenue in 1996 on shipments that, in fact, were made after the year-end and on sham shipments in which goods were merely transported to a warehouse and stored. As the year-end approached, certain members of senior management became increasingly concerned about meeting the company's 1996 sales goals. Senior management discussed various ways to meet the goals, including shipping merchandise on New Year's Day 1997 and recognizing the resulting revenue in 1996. When it became apparent that the company, in fact, would not meet its 1996 goals, certain senior managers insisted that the company remain open on January 1, 1997, to ship merchandise and told Spero to ship on that date. At management's direction, Spero caused the bills of lading for the shipments to be backdated to December 31, 1996. The subsequently prepared invoices used the backdated dates from the bills of lading, and the company recognized the revenue from the sales on its books for 1996.
At year-end 1996, USA Detergents also improperly recognized revenue on sham shipments of its goods. In one such instance, Spero was directed to ship $800,000 worth of merchandise even though no firm order had been received. Having no firm order, Spero was uncertain where to ship the goods. On instructions from senior managers, Spero made arrangements for the goods to be shipped to a warehouse controlled by certain members of USA Detergents' senior management. In 1997, the goods were, in fact, returned to the company. Nevertheless, the company included the "sale" in its revenue for 1996. The company also recognized revenue on goods it shipped to a company warehouse. A customer had in fact ordered those goods, but for delivery in 1997. Nevertheless, certain senior managers instructed that the goods be shipped before year-end. Spero arranged for the goods to be shipped to a warehouse that USA Detergents maintained for excess inventory. When the Chief Financial Officer learned where the goods were being stored, he ordered them moved so that the company's public auditors would not discover them while taking inventory. Spero then had the goods moved to a third-party warehouse located out of state. The company recognized revenue on the "sale" of the goods in the fourth quarter of 1996. Ultimately, the merchandise was shipped to the customer in 1997.
In March of 1997, USA Detergents filed with the Commission its annual report on Form 10-K for its fiscal year 1996. The filing was false and misleading because it included financial statements that misrepresented the company's financial condition and results of operations, overstating its income and its earnings.
Section 10(b) of the Exchange Act and Exchange Act Rule 10b-5 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).
USA Detergents materially misstated and misrepresented its financial condition in its annual report on Form 10-K for fiscal year 1996 by overstating income and earnings. By recognizing revenue from backdated shipments actually made after the 1996 year-end and from sham shipments to warehouses, USA Detergents overstated its income for the fourth quarter of 1996. The company also failed to disclose that post-period shipments were being included in its 1996 sales, in contravention of the company's stated policy for booking revenue from sales. Because an investor would consider the information regarding these shipments important to making an investment decision, the misrepresentations were material. See Basic Inc. v. Levinson, 485 U.S. 224, 231-32 (1988).
By directing the backdating of bills of lading and by directing sham shipments to warehouses, Spero was a cause of the company's violations of Section 10(b) of the Exchange Act and Exchange Act Rule 10b-5.
Section 13(a) of the Exchange Act and Rule 13a-1 thereunder require issuers with securities registered under Section 12 of the Exchange Act to file annual 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).
USA Detergents' annual report on Form 10-K for its fiscal year 1996 was false and misleading inasmuch as it included financial statements that misrepresented the company's financial condition and results of operations, overstating its income and its earnings. Based on the conduct described above, Spero was a cause of the company's violations of Section 13(a) of the Exchange Act and Rules 12b-20 and 13a-1 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, in relevant part, provides that no person shall knowingly falsify any such book, record, or account. Rule 13b2-1 also prohibits the falsification of any book, record, or account subject to Section 13(b)(2)(A). Exchange Act Rule 13b2-2 prohibits an officer or director of an issuer from (a) making or causing to be made a materially false or misleading statement or (b) omitting or causing to be omitted a statement of a material fact necessary to make the statements made, in light of the circumstances under which they were made, not misleading to an accountant in connection with a required audit or the preparation or filing of a required document or report.
During the course of the scheme, the company's books and records reflecting shipments and revenue were intentionally falsified. By directing the backdating of bills of lading and directing sham shipments to warehouses, Spero knowingly falsified USA Detergents' books, records, and accounts. Based on the conduct described above, Spero violated Section 13(b)(5) of the Exchange Act and Exchange Act Rule 13b2-1 and was a cause of the company's violations of Section 13(b)(2)(A) of the Exchange Act. Based on the above conduct, Spero was also a cause of management's violations of Exchange Act Rule 13b2-2.
Based on the foregoing, the Commission finds that Spero committed violations of Section 13(b)(5) of the Exchange Act and Exchange Act Rule 13b2-1 and was a cause of USA Detergents' violations of Sections 10(b), 13(a), and 13(b)(2)(A) of the Exchange Act and Exchange Act Rules 10b-5, 12b-20, and 13a-1, and of violations of Exchange Act Rule 13b2-2 by the management of USA Detergents.
In view of the foregoing, the Commission deems it appropriate to accept Respondent's Offer.
Accordingly, IT IS HEREBY ORDERED that
Pursuant to Section 21C of the Exchange Act, Respondent cease and desist from committing or causing any violation and any future violation of Section 13(b)(5) of the Exchange Act and Exchange Act Rule 13b2-1, and from causing any violation and any future violation of Sections 10(b), 13(a), and 13(b)(2)(A) of the Exchange Act and Exchange Act Rules 10b-5, 12b-20, 13a-1, and 13b2-2.
By the Commission.
Jonathan G. Katz
1 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.
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