United States of America
In the Matter of
JOHN K. BRADLEY,
|ORDER INSTITUTING PUBLIC|
PROCEEDINGS PURSUANT TO
SECTION 21C OF THE SECURITIES
EXCHANGE ACT OF 1934, MAKING
FINDINGS, AND IMPOSING A
The Securities and Exchange Commission ("Commission") deems it appropriate that public administrative proceedings be, and they hereby are, instituted against John K. Bradley ("Respondent" or "Bradley") pursuant to Section 21C of the Securities Exchange Act of 1934 ("Exchange Act").
In anticipation of the institution of these public administrative proceedings, Bradley 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 to which the Commission is a party, prior to a hearing pursuant to the Commission's Rules of Practice, 17 C.F.R. § 201.100 et seq., and without admitting or denying the findings herein, except as to the Commission's jurisdiction over him and the subject matter of these proceedings, which Bradley admits, Bradley consents to the entry of this Order Instituting Public Proceedings Pursuant to Section 21C of the Securities Exchange Act of 1934, Making Findings, and Imposing a Cease-and-Desist Order ("Order").
On the basis of this Order and Bradley's Offer, the Commission makes the findings set forth below:1
Bradley, age 40, was, at all relevant times, the Manager of Credit and Collections of Physician Computer Network, Inc. ("PCN").
PCN was, at all relevant times, a New Jersey corporation with its principle executive offices located in Morris Plains, New Jersey. PCN was engaged in the business of developing and distributing practice management and clinical data software for physician practice groups. At all relevant times, PCN's common stock was registered with the Commission pursuant to Section 12(g) of the Exchange Act, and traded on the NASDAQ National Market. PCN's stock was suspended from trading in April 1998 and delisted in May 1998. In March 2000, PCN's assets were acquired in accordance with a plan of reorganization filed by PCN in Chapter 11 bankruptcy proceedings. PCN no longer operates as a public company.
This case involves a scheme to manipulate PCN's reported financial results. During fiscal years 1996 and 1997, PCN's senior management fraudulently inflated the company's reported earnings by materially understating its operating expenses and overstating its revenues. They did this by, among other things, recognizing revenue from fictitious sales to the company's resellers, improperly capitalizing software development costs and operating expenses, manipulating depreciation expense, prematurely recognizing revenue for customer support and maintenance contracts, and recognizing revenue for out-of-period sales. To avoid detection of the scheme, PCN's senior management provided false documents and information to the company's independent auditors.
In March 1998, after PCN's auditors discovered the accounting irregularities, PCN announced that it would restate its financial results for each of the first three quarters of 1997. The price of PCN's stock dropped approximately 70% as a result of this announcement, falling from $4.25 per share on March 2, 1998 to $1.28 per share at the close of trading on March 3, 1998. In April 1998, PCN announced that it would delay the release of its 1997 results and also restate its 1996 results.
In August 1999, PCN restated its results for 1996 and for the first time issued consolidated financial statements for 1997. According to the restatement of its 1996 results, PCN overstated its 1996 net income by $31.2 million, or 205%. Though PCN never reported restated 1997 quarterly financial results, as a result of overstating revenue and understating operating expenses, PCN overstated its quarterly 1997 net income by an estimated $7.8 million (173%) in the first quarter, $8.6 million (195%) in the second quarter, and $9.7 million (150%) in the third quarter.
As a result of the foregoing, PCN filed with the Commission materially false and misleading financial statements in its annual report on Form 10-K for the fiscal year ended December 31, 1996, and in its quarterly reports on Form 10-Q for the first three quarters of fiscal year 1997.
In connection with PCN's recognition of customer support and maintenance revenue in 1996 and 1997, Bradley, at the direction of Thomas F. Wraback ("Wraback"), PCN's former Chief Financial Officer, prepared two incomplete year-end deferred revenue reports. Bradley excluded entries from the final year-end deferred revenue reports and prepared incomplete reports, which purported to support the falsified deferred revenue entries on PCN's general ledger in 1996 and 1997. Wraback then provided the incomplete deferred revenue reports to PCN's auditors. Bradley knew these incomplete reports would be provided to PCN's auditors. By virtue of this conduct, Bradley committed or caused violations of certain reporting, recordkeeping, and internal controls provisions of the federal securities laws.
During the relevant time, PCN had several extended contracts with its customers to provide software and hardware support and maintenance. PCN's policy was to account for these contracts as deferred revenue, which was amortized into income each month as the company satisfied a portion of its obligations under the contracts. However, in 1996, PCN recognized revenue from certain customer support and maintenance contracts before it had satisfied its contractual obligations, in contravention of GAAP. These actions caused PCN's 1996 revenue to be overstated by approximately $2.5 million.
To conceal PCN's premature recognition of customer support and maintenance revenue, Wraback directed Bradley to prepare an incomplete 1996 deferred revenue report for the company's auditors in connection with PCN's 1996 audit. As instructed, Bradley excluded entries from the final year-end deferred revenue report and prepared an incomplete report, which purported to support the falsified deferred revenue entries on PCN's general ledger. Wraback provided the incomplete report to PCN's auditors to support the premature recognition of customer support and maintenance revenue in 1996. Bradley knew the incomplete report would be provided to PCN's auditors. Bradley also knew, or should have known, that by preparing the incomplete deferred revenue report he would contribute to PCN's financial statements being materially false and misleading.
PCN also improperly recognized revenue in 1997 from certain customer support and maintenance contracts before it had satisfied its contractual obligations, in contravention of GAAP. These improper accounting activities caused PCN's revenue to be overstated by approximately $2.0 million in the first quarter of 1997 and approximately $1.5 million in the second quarter of 1997.
To conceal the misconduct, Wraback directed Bradley to prepare an incomplete 1997 deferred revenue report for the company's auditors in connection with PCN's 1997 audit. As instructed, Bradley again excluded entries from the final year-end deferred revenue report and prepared an incomplete report, which purported to support the falsified deferred revenue entries on PCN's general ledger. Wraback then provided the incomplete report to PCN's auditors to support PCN's improper recognition of customer support and maintenance revenue in 1997. Bradley knew the incomplete report would be provided to PCN's auditors. Bradley also knew, or should have known, that by preparing the incomplete deferred revenue report he would contribute to PCN's financial statements being materially false and misleading.
PCN's auditors raised questions about the inaccurate 1997 deferred revenue report. In response, Wraback directed Bradley to prepare a second deferred revenue report, which was presented to the company's auditors in early March 1998. Though it contained more information than the first report, this report was also incomplete. Finally, after further inquiry from the company's auditors, Bradley prepared a complete and accurate report, which was provided to PCN's auditors in mid-to-late March 1998.
Section 13(a) of the Exchange Act and Exchange Act Rules 13a-1 and 13a-13 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 that such reports contain any additional information necessary to ensure that the required statements in the reports are not, in light of the circumstances under which they are made, materially misleading. Information regarding the financial condition of a company is presumptively material. SEC v. Blavin, 760 F.2d 706, 711 (6th Cir. 1985). Financial statements in a Commission filing that do not comply with GAAP are presumed to be misleading. Regulation S-X, 17 C.F.R. 210.4-01(a)(1). As a result of the conduct described above, PCN violated 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 every Section 12 registrant 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 issuers to devise and maintain a system of internal accounting controls sufficient to provide reasonable assurance that, among other things, transactions are recorded as necessary to permit preparation of financial statements in conformity with GAAP. As a result of the conduct described above, PCN violated Sections 13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act.
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. By providing PCN's auditors with the two falsified deferred revenue reports created by Bradley, Wraback, a PCN officer, violated Exchange Act Rule 13b2-2.
Section 13(b)(5) of the Exchange Act and Rule 13b2-1 thereunder prohibit a person from, among other things, knowingly circumventing internal accounting controls and falsifying corporate books and records. By falsifying two deferred revenue reports, Bradley violated Section 13(b)(5) of the Exchange Act and Rule 13b2-1 thereunder.
Section 21C of the Exchange Act provides that the Commission may order any person who is violating, has violated, or is about to violate any provision of the Exchange Act, or any rule or regulation thereunder, and any 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. Bradley contributed to PCN's reporting, recordkeeping, and internal controls violations, and Wraback's lying to the auditors violation, when he prepared the false deferred revenue reports.
Based on the foregoing, the Commission finds that John K. Bradley violated Section 13(b)(5) of the Exchange Act and Rule 13b2-1 thereunder and was a cause of PCN'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-1 thereunder and Wraback's violation of Rule 13b2-2 under the Exchange Act.
Accordingly, IT IS HEREBY ORDERED, pursuant to Section 21C of the Exchange Act, that John K. Bradley cease and desist from committing or causing any violation, and any future violation, of Section 13(b)(5) of the Exchange Act and Rules 13b2-1 and 13b2-2 thereunder, and that Bradley cease and desist 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 and 13a-1 thereunder.
By the Commission.
Jonathan G. Katz
1 The findings herein are made pursuant to the Respondent's Offer and are not binding on any other person or entity in this or any other proceeding.
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