United States of America
In the matter of
PictureTel Corp. and
Les B. Strauss,
Order Instituting proceedings, making Findings, and imposing Cease-and-Desist Order
The Securities and Exchange Commission (the "Commission") deems it appropriate that cease-and-desist proceedings be, and hereby are, instituted against PictureTel Corp. ("PictureTel") and Les B. Strauss ("Strauss") pursuant to Section 21C of the Securities Exchange Act of 1934 ("Exchange Act").
In anticipation of the institution of these proceedings, PictureTel and Strauss have submitted Offers of Settlement ("Offers") that 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, and without admitting or denying the findings, except those findings pertaining to the jurisdiction of the Commission over PictureTel and Strauss and over the subject matter of these proceedings, which PictureTel and Strauss admit, PictureTel and Strauss consent to the issuance of this Order Instituting Proceedings, Making Findings, and Imposing Cease-and-Desist Order (the "Order"), the entry of the findings and the cease-and-desist order set forth below.
On the basis of this Order and the Offers of Settlement submitted by Respondents PictureTel and Strauss, the Commission makes the following findings:1
A. Respondents and Related Parties
PictureTel is a Delaware corporation, headquartered in Andover, Massachusetts, that designs, manufactures and markets videoconferencing systems. At all relevant times in 1996 and 1997, PictureTel's shares were traded on the NASDAQ national market system. Until October 19, 2001, PictureTel's shares were registered with the Commission pursuant to Section 12(g) of the Exchange Act. On October 18, 2001, PictureTel was acquired by Polycom Inc. It is currently operating as a separate operating unit within the video division of Polycom and retains the PictureTel name.
Strauss, 58, of Wellington, Florida, joined PictureTel in 1990. At all relevant times, he served as PictureTel's chief financial officer. He retired in May 1997. He is currently a self-employed consultant and is a director of various private companies. Strauss is not a CPA.
2. Related Parties
David T. Dodge, 44, of Northbrook, Illinois, was the general manager of El Camino Resources Ltd.'s ("El Camino") vendor leasing division during the time period at issue here. Dodge was primarily responsible for managing El Camino's relationship with PictureTel.
El Camino is a privately-held company headquartered in Woodland Hills, California, which served as PictureTel's leasing agent. At all times relevant to this matter, El Camino's leasing division, located in Chicago, accounted for approximately 5% of El Camino's revenues. Transactions with PictureTel represented approximately 80-90% of El Camino's leasing business during 1996-97. El Camino is currently being liquidated.
This matter involves PictureTel's overstatements of revenue and income and understatements of losses in public announcements and in financial statements filed with its quarterly and annual reports for the periods ended September 28, 1996 through June 29, 1997. In January 1998, PictureTel restated its financial results because its revenues had been overstated by $17.8 million. The restatement revealed that between September 1996 and June 1997,PictureTel overstated revenue by 1% to 6% and overstated net income (or understated losses) by 12% to 40%. During 1996, as a result of the misstatements, the company reported record earnings and exceeded analysts' expectations. In 1997, the misstatements served to disguise the fact that PictureTel's performance was below expectations during the first quarter of 1997 and to minimize the extent of the company's losses during the second quarter of 1997.
PictureTel's financial misstatements were due in significant part to improper revenue and sales practices effected by PictureTel's former Vice President of Finance, Worldwide Sales and Service ("Sales Controller").2 PictureTel improperly recorded approximately $12 million of revenue from transactions that the Sales Controller negotiated and approved. By recording those transactions as revenue, PictureTel did not follow generally accepted accounting principles ("GAAP"). In many of the transactions, the Sales Controller negotiated undisclosed side agreements that relieved PictureTel's direct customer of any obligation to pay for the goods unless they were sold through to end users. The restated figures also involved reversals of more than $4 million of revenue resulting from improper bill and hold transactions.
These financial improprieties went undetected as a result of Strauss' failure to ensure that the company maintained effective internal controls. Beginning in early 1996, Strauss effected organizational and other changes at PictureTel that significantly weakened the company's internal accounting controls. For example, in February 1996, Strauss realigned reporting responsibilities and caused PictureTel's credit and collections department to report to the Sales Controller. Formerly, this department had reported to the head of the treasury department. In addition, by September 1996, Strauss also gave the Sales Controller increased authority to develop business by negotiating the terms of sales transactions, while continuing to allow the Sales Controller to have the authority to recognize revenue. Strauss further weakened PictureTel's internal controls during 1996 and 1997 by increasingly detaching himself from the day-to-day financial operations of the company and delegating significant authority to others without ensuring that the delegated responsibilities were properly performed. Strauss's organizational changes eliminated the separation between sales and finance functions that had previously acted as an internal control at PictureTel. The change also vested conflicting responsibilities in the Sales Controller by giving him unchecked authority for extending credit terms, negotiating the terms of sales transactions and determining when revenue would be recognized on a sale. Accordingly, PictureTel committed and caused violations of Section 13(a), 13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act and Rules12b-20, 13a-1 and 13a-13 thereunder. Strauss violated Section 13(b)(5) ofthe Exchange Act and Rule 13b2-1 thereunder, and he caused PictureTel's violations of Sections 13(a), 13(b)(2)(A), and 13(b)(2)(B) of the Exchange Act and Rules 12b-20, 13a-1 and 13a-13 thereunder.
1. PictureTel's Improper Revenue Recognition
The majority of financial improprieties that resulted in PictureTel's misstatements of revenue and income resulted from transactions negotiated by the Sales Controller with David Dodge, the general manager of PictureTel's leasing agent, El Camino.3 A number of these transactions between PictureTel and El Camino were improperly recognized as revenue by the Sales Controller. In its standard transactions with PictureTel, El Camino provided financing to PictureTel customers by purchasing PictureTel products and then leasing them to end users. However, during the second half of 1996 and the first half of 1997, the Sales Controller and Dodge negotiated more than $10 million dollars in sales transactions from which PictureTel improperly recognized revenue. During their negotiations, Dodge and the Sales Controller agreed that El Camino would not be obligated to pay PictureTel unless a third party leased or purchased the products from El Camino. PictureTel recorded these transactions as sales and recognized revenue from them. This was improper because the transactions did not comply with GAAP for revenue recognition because there were no firm commitments, by anyone, to pay for the equipment.4 The Sales Controller knew that these transactions did not comply with GAAP because he negotiated the terms of the purported sales at issue and was also responsible for enforcing PictureTel's revenue recognition policies.
Representative examples of transactions that resulted in improper recognition of revenue by PictureTel include the following:
The Demo Program
In the summer of 1996, the Sales Controller, on behalf of PictureTel, negotiated a Demonstration Program agreement ("Demo Program Agreement") with Dodge pursuant to which PictureTel purported to sell El Camino used videoconferencing equipment for resale to third parties. The lease-and-sale arrangement was a common type of transaction between PictureTel and El Camino. However, instead of using the standard master lease agreement that governed most of PictureTel's transactions with El Camino, Dodge and the Sales Controller entered into a non-standard agreement that did not obligate El Camino to pay for the goods. Rather, the Agreement required PictureTel to provide El Camino with a guaranteed 17.5 percent profit on the transaction, either by directly paying El Camino or by repurchasing the equipment if it was not sold to a third party. PictureTel recorded $2.3 million of revenue from the transaction for the third quarter of 1996 and an additional $444,000 for the fourth quarter of 1996. Recognition of this revenue was inappropriate because neither El Camino nor any other party was obligated to pay for the demonstration equipment. As a result, the transactions should not have been treated as sales and revenue from the transactions should not have been recognized under GAAP.
The Department of Justice Transaction
During the fourth quarter of 1996, PictureTel was negotiating a sale of $1.2 million of videoconferencing equipment to the Department of Justice ("DOJ"). On December 31, 1996, the last day of the quarter and the fiscal year, the Sales Controller, on behalf of PictureTel, obtained a purchase order from El Camino for the purchase of $1.2 million of videoconferencing equipment purportedly for lease to the DOJ, thereby causing PictureTel to improperly recognize $1.2 million in revenue from this transaction for the year ended December 31, 1996.5 However, the purchase order did not represent a bona fide order for goods, but rather was a fictitious purchase order that enabled PictureTel to record revenue. Prior to December 31, 1996, El Camino had never been involved in the negotiations for the DOJ's purchase of equipment from PictureTel. In fact, the DOJ's general procurement contract did not permit lease financing of the goods.
Bill and Hold Transactions
Between July 1996 and June 1997, PictureTel also prematurely recognized $4.6 million of revenue from 88 bill and hold transactions. Seventy-five of these transactions, or 85%, were from amajor telecommunications company. The Sales Controller approved letters from the telecommunications customer requesting bill and hold treatment for the 75 transactions which did not meet GAAP criteria for revenue recognition.6 In each instance, revenue recognition was improper because the customer did not assume the risk of loss as storage and insurance cost obligations remained with PictureTel. Nonetheless, PictureTel improperly recognized millions of dollars in revenue from the transactions.
The Dealer Transaction
At the end of the first quarter of 1997, the Sales Controller approved a major sale of equipment to a PictureTel dealer ("Dealer") in Texas that intended to resell the goods to third parties. On March 27, 1997, the Dealer faxed a $2.2 million purchase order to PictureTel, which represented PictureTel's largest order for the quarter. On the purchase order, one of the Dealer's principals wrote that the Dealer's obligation to pay was contingent on "acceptance" by El Camino. He made this handwritten notation because the Dealer could not afford to pay for the equipment on its own and the Dealer did not have an agreement from El Camino to finance the purchase or, alternatively, a firm commitment from any third party end user to pay for the goods. Nonetheless, the Sales Controller caused PictureTel to recognize $2.2 million in revenue from the transaction in its 1997 first quarter financial statements.
2. Strauss and PictureTel's Lack of Internal Controls
PictureTel's improper financial reporting occurred during this period because the company had insufficient internal controls in place. As PictureTel's chief financial officer, Strauss was responsible for ensuring that the company had the necessary accounting controls in place. He failed to properly exercise this responsibility and created an internal reporting structure that allowed PictureTel's accounting improprieties to occur.
Beginning in early 1996 and continuing through mid-1997, Strauss made organizational changes that caused PictureTel to have inadequate internal controls. In early 1996, Strauss caused the credit and collections department to report to the Sales Controller, rather than to the head of the treasury department. This organizational change eliminated an important check-and-balance that had previously existed at the company as a result of the separation between sales and finance functions. Strauss alsolessened the effectiveness of PictureTel's internal controls during this period by ceasing to function as an effectual CFO. In the latter half of 1996, he began delegating more and more responsibility to others. By September 1996, Strauss had assigned the Sales Controller additional responsibilities, including responsibility for negotiating and approving sales contracts and for developing relationships with new customers, while at the same time continuing to delegate responsibility for revenue recognition to the Sales Controller. Around the same time, Strauss privately told PictureTel's CEO that he intended to retire. Strauss became more and more removed from the day-to-day activities at PictureTel and spent more time working out of his home in Vermont. He rarely met with the controllers who reported to him, including the Sales Controller. Strauss stopped conducting quarterly closing meetings with his staff and no longer closely reviewed sales transactions, as he had previously done. Supervisory control procedures such as simply monitoring the Sales Controller's deal-making efforts or holding quarterly closing meetings may well have prevented the recording of several of the reversed transactions. As a result of Strauss's actions, PictureTel failed to have adequate internal controls.
In addition to the conduct above, Strauss continued to delegate unchecked authority to the Sales Controller even after receiving warnings about the Sales Controller's conduct. Beginning in the fall of 1996, PictureTel's chief accounting officer became concerned about the Demo Program transaction and concluded that revenue should have been recognized during the fourth quarter of 1996 rather than the third. On December 13, 1996, the chief accounting officer provided a memo summarizing his conclusions to Strauss. Strauss took no action to address the matter with the Sales Controller. During the fall of 1996, Strauss was also informed that the Sales Controller had signed a non-standard sales contract with a customer and had not provided it to the legal department for review and approval, as required by company policy. Strauss verbally reprimanded the Sales Controller but took no further action to discipline him or impose checks on him. In January 1997, a PictureTel attorney met with Strauss and raised additional concerns about revenue recognition practices. Strauss still took no additional action to ensure that the Sales Controller was properly performing the duties that had been delegated to him. In early February 1997, PictureTel's outside auditors informed Strauss that the Sales Controller's responsibility for both revenue recognition and credit and collections presented a potential internal controls weakness. Nonetheless, Strauss took no measures to address the auditors' concerns. Similarly, in April 1997, during its review of PictureTel's first quarter revenue, the outside auditors advised Strauss of their concerns regarding the transaction with the Dealer. Strauss was aware of the contingency on the Dealer's purchase order and a purported escrow arrangement that the Sales Controller had claimed he negotiated to ensure payment. In reliance upon and without verifying the Sales Controller's representations (either on his own or through his accounting staff), Strauss acquiesced in the Sales Controller's conclusion that the $2.2 million sale to the Dealer was good revenue and that there was a high likelihood of payment.
3. PictureTel's Reported Financial Results
As a result of PictureTel's improper revenue recognition, the company exceeded Wall Street analysts' expectations on multiple occasions between the third quarter of 1996 and the second quarter of 1997. The company made multiple public announcements and filings with the Commission that were misstated. The improper revenue transactions were also recorded on the company's books and records.
Specifically, on October 16, 1996, PictureTel issued a press release reporting revenues of $121.3 million, net income of $8.9 million, and earnings per share of $0.25 for the third quarter of 1996. The revenue, net income and earnings results each established new quarterly records for the company and exceeded analysts' expectations by $0.02 per share. However, without the improperly recorded revenue, PictureTel would have reported earnings per share of $0.17, an amount $0.06 per share below analysts' expectations. On November 12, 1996, the Company filed a Form 10-Q for the third quarter that contained the same financial information.
On February 12, 1997, PictureTel announced record revenues for the year ended December 31, 1996 of $482.5 million, a 39% increase over the prior year. The company also reported earnings per share of $0.96. Net income for 1996 rose 77% to a record $34.8 million. On March 31,1997 the Company filed its annual report on Form 10-K which reported the same revenue and income figures as the February earnings release. Without the improperly recorded revenue, PictureTel would have reported earnings per share of $.85 for FY96.
On April 16, 1997, PictureTel announced that it had earned revenues of $118.2 million and net income of $3.1 million for the quarter ended March 29, 1997. In the first quarter of 1997, PictureTel earned $0.09 per share as compared to analyst estimates of $0.20 per share. Without the improperly recorded revenue, the company would have reported earnings per share of only $0.07.
By April 1997, increased competition began to take its toll on PictureTel and its second quarter financial results were significantly below both the company's plan and analysts' expectations. On July 15, 1997, PictureTel announced that "unexpectedly soft demand" had resulted in operating losses and a revenue performance more than $20 million under budget. PictureTel's reported revenue and net loss for the quarter were, respectively, $112.2 million and $3 million. It lost $0.09 per share as compared to analyst estimates of net income of $0.09 per share. Without the improperly recorded revenue, PictureTel would have reported a loss per share of $0.12 for the second quarter of 1997, an amount $0.21 per share below analysts' expectations.
4. PictureTel's Restatements
In August 1997, Strauss' successor in the CFO position began investigating the reasons for the large accounts receivable balances owed by certain customers, including El Camino. After further investigation, the new CFO contacted PictureTel's outside auditors and related his concerns. During the next four weeks, the outside auditors and PictureTel investigated and analyzed numerous transactions dating back to the third quarter of 1996, and on September 19, 1997, PictureTel announced that it would restate revenues. In January 1998, PictureTel restated its financial results revealing that revenues and profits had been overstated, and losses understated, by $17.8 million for these fiscal periods.
The following chart compares PictureTel's initial and restated financial results:
| PictureTel Corp. Restatement8
Revenue Summary (thousands)
|Net Income Summary (thousands)|
1. PictureTel Violated Section 13(a) of the Exchange Act and Rules 12b-20, 13a-1 and 13a-13 thereunder.
Section 13(a) of the Exchange Act and Rules 13a-1 and 13a-13 require issuers of registered securities to file annual and quarterly reports with the Commission. It is implicit in this requirement that the information provided be accurate. See SEC v. Kalvex, Inc., 425 F. Supp. 310, 316 (S.D.N.Y. 1975) (filing misleading periodic reports violates the federal securities laws); SEC v. IMC International, Inc., 384 F. Supp. 889, 893 (N.D. Tex. 1974) (Exchange Act reporting provisions are satisfied only by filing complete, accurate reports). Regulation S-X similarly requires that financial statements filed with the Commission pursuant to Section 13(a) of the Exchange Act be prepared in accordance with GAAP. See Peritus Software Services, Inc., Exchange Act Rel. No. 42673, 2000 SEC LEXIS 724 (April 13, 2000) (settled proceedings). Otherwise, such statements will be presumed to be misleading or inaccurate. In addition, Exchange Act Rule 12b-20 requires that these periodic reports contain all information necessary to ensure that statements made in them are not materially misleading. No showing of scienter is necessary to establish a violation of Section 13(a) or Rule 12b-20. See SEC v. Savoy Industries, Inc., 587 F.2d 1149, 1167 (D.C. Cir. 1978); SEC v. Wills, 472 F. Supp.1250, 1268 (D.D.C. 1978).
PictureTel filed Forms 10-K and 10-Q for the year ended December 31, 1996 and the quarters ended September 28, 1996, March 29, 1997, and June 29, 1997 that materially misstated the company's revenues by 1% to 6% and net income by 12% to 40%. PictureTel improperly reported record profits for the last half of 1996. In addition, its reported results for the first two quarters of 1997, including its earnings per share, appeared much better than they actually were. The misstatements were quantitatively material because they significantly overstated net income. They were qualitatively material because they allowed PictureTel to falsely report results that exceeded analysts' expectations during the relevant periods in 1996 and in 1997. Accordingly, PictureTel committed or caused violations of Section 13(a) of the Exchange Act and Rules12b-20, 13a-1 and 13a-13 thereunder.
2. PictureTel Violated Sections 13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act
Section 13(b)(2)(A) of the Exchange Act states in pertinent part that every reporting company must make and keep books, records and accounts that accurately and fairly reflect the issuer's transactions. Section 13(b)(2)(B) requires the issuer to establish and maintain a system of internal accounting controls which provides reasonable assurances that its transactions are recorded and financial statements are prepared in conformity with GAAP. These provisions have been interpreted to require an issuer to employ and supervise reliable personnel, to ensure that transactions are executed asauthorized, and to segregate accounting functions, and design procedures to prevent errors and irregularities. SEC v. World-Wide Coin Investments, Ltd., 567 F. Supp. 724, 750 (N.D. Ga. 1983). Sections 13(b)(2)(A) and 13(b)(2)(B) do not require a showing of scienter. Id. at 751.
PictureTel violated Section 13(b)(2)(A) of the Exchange Act by failing, as an issuer, to maintain accurate records of its revenues and net income due to the overstatements of its revenues and net income as well as understatements of losses. PictureTel's inaccurate records were not isolated or unique instances because they were improperly maintained for four reporting periods between September 28, 1996 and June 29, 1997. In addition, PictureTel violated Section 13(b)(2)(B) of the Exchange Act by failing to implement procedures reasonably designed to prevent accounting irregularities. Among other things, it failed adequately to segregate sales and accounting functions, failed to ensure that proper reviews and checks were in place to ensure that financial improprieties did not occur, and failed to ensure that its transactions were reported in accordance with its own policies and with GAAP.
Many of PictureTel's internal controls and record keeping violations resulted from Strauss's failures to carry out his responsibilities as CFO. Strauss removed important separations between corporate departments, delegated too much authority to others, and reduced the time and effort he spent supervising the finance and reporting function of PictureTel. As CFO, Strauss's actions and failures to act are properly imputed to PictureTel. In re Sunbeam Litigation, 89 F. Supp. 2d 1326, 1340 (S.D. Fla. 1999) (conduct of corporate officers may be imputed to corporation). See also SEC v. Manor Nursing, 458 F.2d 1092, 1089 n.3 (2d Cir. 1972). Accordingly, as a result of the conduct of its former employees and others, PictureTel failed to maintain books, records, and accounts which, in reasonable detail, accurately and fairly reflected its transactions and dispositions of assets and failed to maintain a system of internal accounting controls sufficient to permit the preparation of financial statements in conformity with GAAP. PictureTel thereby committed or caused violations of Sections 13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act.
3. Strauss Violated Sections 13(b)(5) and Rule 13b2-1 of the Exchange Act
Section 13(b)(5) prohibits any person from knowingly circumventing or knowingly failing to implement a system of internal accounting controls, or knowingly falsifying any book, record or account described in Section 13(b)(2). By its terms, Section 13(b)(5) requires that a person act with scienter. This section enables the Commission to address conduct that undermines the integrity of the books and records and internal controls of an issuer.
Strauss committed or caused violations of Section 13(b)(5) by failing to implement a system of internal accounting controls because he made organizational changes which resulted in material control weaknesses at PictureTel. As the company's CFO, Strauss placed the Sales Controller in a positionresponsible for negotiating and developing new business, determining which transactions should be recognized as revenue, and approving credit and collections decisions. By virtue of this conduct, Strauss eliminated the segregation of duties which is fundamental to internal controls, and vested too much authority in the Sales Controller. See, e.g., Marsh & McClennan Companies, Inc., Exchange Act Rel. No. 24023 (January 22, 1987), 1987 SEC LEXIS 2743 at 16 (respondent issuer materially understated assets and liabilities in Forms 10-K and 10-Q and violated internal controls provisions of securities laws because, among other things, it failed to establish an "effective separation of functions" between the person who made investments in repurchase agreements and the person who recorded the transactions) (settled proceeding). See also Codification of Statements on Auditing Standards ("AU") §319 (control procedures which provide reasonable assurances that any person will not be in a position to both perpetrate and conceal errors or irregularities include the segregation of duties between persons assigned responsibility for authorizing transactions and recording transactions). By conflating responsibilities within the Sales Controller's control, Strauss established the opportunity for the Sales Controller to both perpetuate and conceal errors or irregularities.
Further, Strauss knew that the Sales Controller, on at least one occasion, failed to follow company policy requiring legal department review of non-standard sales contracts. He also knew that by early January 1997, PictureTel's chief accounting officer and a company attorney were concerned about the propriety of revenue recognition on two of the Sales Controller's transactions. Despite this knowledge, Strauss took no steps to ensure that PictureTel's internal accounting controls were sufficient to detect any errors or irregularities. Accordingly, Strauss committed or caused violations of Section 13(b)(5) of the Exchange Act. Further, as a result of the changes Strauss made to the finance department's organizational structure and his failure to ensure that the Sales Controller's activities were subject to appropriate control and review, the Sales Controller was able to record revenue for the DOJ transaction, a purported sale that was based upon fictitious paperwork and resulted in inaccurate books and records. Strauss's conduct enabled the Sales Controller to circumvent internal controls and utilize false documents to record revenue. Similarly, during the 1997 first quarter review, Strauss's passive reliance upon the Sales Controller's misrepresentations about the contingency on the Dealer's purchase order enabled the Sales Controller to further evade the company's internal controls and improperly record $2.2 million of revenue. Strauss thereby committed or caused violations of Rule 13b2-1. See, e.g., SEC v. Hiebert, Exchange Act Rel. No. 16729 (September 27, 2000), 2000 WL 1425452 (CFO violated antifraud provisions and Rule 13b2-1 by failing to adequately review documents supporting fictitious sale and failing to supervise accounting staff) (settled civil injunctive action); Paul Thomas Fink, Exchange Act Rel. No. 42199 (December 3, 1999), 1999 WL 1221656 (CFO violated antifraud provisions and Rule 13b2-1 by permitting the recording of undocumented and fictitious revenue) (settled proceeding).
4. Strauss Caused PictureTel's Violations of Sections 13(a), 13(b)(2)(A) and 13(b)(2)(B) and Rules 12b-20, 13a-1 and 13a-13
Strauss's conduct also caused PictureTel's violations of the books and records and issuer reporting provisions of the Exchange Act. Strauss also caused PictureTel to violate the internal controls provisions of the Exchange Act through his changes to the finance department which vested enormous, unchecked authority in the Sales Controller over revenue recognition and credit and collections. Further, despite his awareness of warning signs regarding the Sales Controller's conduct, Strauss took inadequate steps to investigate the Sales Controller's decisions regarding revenue recognition. In this way, Strauss caused PictureTel's violations of Sections 13(a), 13(b)(2)(A), and 13(b)(2)(B) of the Exchange Act and Rules 12b-20, 13a-1 and 13a-13 thereunder.
In determining to accept the Offer, the Commission considered remedial acts promptly undertaken by PictureTel and cooperation afforded the Commission staff by PictureTel.
In view of the foregoing, the Commission deems it appropriate to accept the Offers submitted by PictureTel and Strauss and to impose the cease-and-desist order agreed to in the Offers.
Accordingly, IT IS ORDERED, pursuant to Section 21C of the Exchange Act, that PictureTel cease and desist from committing or causing any violation and any future violation of Sections 13(a), 13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act and Rules 12b-20, 13a-1, and 13a-13 thereunder; and
IT IS FURTHER ORDERED, pursuant to Section 21C of the Exchange Act, that Strauss 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 from causing any violation and any future violation of Sections 13(a), 13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act and Rules 12b-20, 13a-1 and 13a-13 thereunder.
By the Commission.
Jonathan G. Katz
J:\OCCregional\NERO\Boston\PictureTel\AP Package materials\FINAL.2.PCTL.STRAUSS.combined.order.3.11.02.wpd
|1||The findings herein are made pursuant to PictureTel's and Strauss's Offers of Settlement and are not binding on any other person or entity in this or any other proceeding.|
|2||Simultaneously with the institution of these proceedings, the Commission is filing a civil injunctive action against the Sales Controller for his alleged violations of the antifraud provisions of the federal securities laws.|
|3||Simultaneously with the filing of this Order, the Commission is entering an order based on Dodge's offer of settlement finding that Dodge caused the Sales Controller's violations of the antifraud provisions of the Exchange Act and caused PictureTel's violations of the books and records provisions of the Exchange Act and ordering him to cease-and-desist from further violations of the federal securities laws.|
|4||PictureTel's revenue recognition policy required the company to recognize revenue from product sales upon shipment or upon completion of all significant obligations, whichever occurred later. This policy was in accordance with GAAP. Statement of Financial Accounting Concepts No. 5, Recognition and Measurement in Financial Statements of Business Enterprises requires that revenue be recognized when it is both realized and earned. Revenue is realized when products are exchanged for cash or claims to cash. Revenue is earned when the entity has substantially accomplished what it must do to be entitled to the benefits represented by the revenues.|
|5||On January 3, 1997, a procurement agent acting on behalf of the DOJ gave PictureTel its own purchase order for $1.2 million of videoconferencing equipment. This was a genuine order and reflected cash payment terms. In January 1997, PictureTel issued a credit memo to El Camino but, inappropriately, did not reverse the $1.2 million of revenue recorded in December 1996.|
|6||Bill and hold sales are subject to stringent accounting criteria in order to be recognized as revenue by the seller, including that the buyer, not the seller, must request that the transaction be on a bill and hold basis; the buyer must have a substantial business purpose for ordering the goods on a bill and hold basis; and the risks of ownership must pass to the buyer. Other relevant criteria include whether the seller has modified its normal billing and credit terms for the buyer and the seller's past practices on bill and hold transactions. See Stewart Parness, Exchange Act Rel. No. 23507 (August 5, 1986), 1986 SEC LEXIS 1051 (settled proceedings). See also Sunbeam Corp., Exchange Act Rel. No. 44305 (May 15, 2001), 2001 SEC LEXIS 931, at *17 (settled proceedings).|
|8||The company's reported numbers differ from those in the original filings because all numbers include an acquisition that was accounted for under the pooling-of-interests method.|
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