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U.S. Securities and Exchange Commission

UNITED STATES OF AMERICA
before the
SECURITIES AND EXCHANGE COMMISSION

SECURITIES EXCHANGE ACT OF 1934
Release No. 46206 / July 15, 2002

ACCOUNTING AND AUDITING ENFORCEMENT
Release No. 1594 / July 15, 2002

ADMINISTRATIVE PROCEEDING
File No. 3-9793


In the Matter of

Jean-Paul Bolduc, Brian J. Smith, C.P.A.,
Richard N. Sukenik, C.P.A., Philip J.
Ryan III, Constantine L. Hampers,
A. Miles Nogelo, and Robert W.
Armstrong III, C.P.A.,

Respondents.


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ORDER DISMISSING PUBLIC CEASE-AND-DESIST PROCEEDINGS AND PROVIDING FOR CERTAIN CONDITIONAL RELIEF AS TO RESPONDENT PHILIP J. RYAN III
I. The Securities and Exchange Commission ("Commission") deems it appropriate and in the public interest to accept the Offer of Settlement ("Offer") submitted by Philip J. Ryan, III ("Ryan" or "Respondent") pursuant to Rule 240(a) of the Rules of Practice of the Commission, 17 C.F.R. 201.240(a), for the purpose of settlement of public cease-and-desist proceedings instituted against him by the Commission on December 22, 1998 pursuant to an Order Instituting Public Administrative and Cease-and-Desist Proceedings pursuant to Section 21C of the Securities Exchange Act of 1934 and Rule 102(e) of the Commission's Rules of Practice ("OIP"). II. Solely for the purpose of this proceeding, Ryan admits the jurisdiction of the Commission over him and over the subject matter of these proceedings, and consents to the entry by the Commission of this Order, which: (1) dismisses, without prejudice, the public cease-and-desist proceedings against Ryan; and (2) as set forth in paragraph III., below, provides certain conditions under which the Commission may re-institute cease-and-desist proceedings and impose a cease-and-desist order against Ryan. In his Offer, Ryan has also undertaken to

I.

The Securities and Exchange Commission ("Commission") deems it appropriate and in the public interest to accept the Offer of Settlement ("Offer") submitted by Philip J. Ryan, III ("Ryan" or "Respondent") pursuant to Rule 240(a) of the Rules of Practice of the Commission, 17 C.F.R. § 201.240(a), for the purpose of settlement of public cease-and-desist proceedings instituted against him by the Commission on December 22, 1998 pursuant to an Order Instituting Public Administrative and Cease-and-Desist Proceedings pursuant to Section 21C of the Securities Exchange Act of 1934 and Rule 102(e) of the Commission's Rules of Practice ("OIP").

II.

Solely for the purpose of this proceeding, Ryan admits the jurisdiction of the Commission over him and over the subject matter of these proceedings, and consents to the entry by the Commission of this Order, which: (1) dismisses, without prejudice, the public cease-and-desist proceedings against Ryan; and (2) as set forth in paragraph III., below, provides certain conditions under which the Commission may re-institute cease-and-desist proceedings and impose a cease-and-desist order against Ryan. In his Offer, Ryan has also undertaken to cooperate with the Commission staff in preparing for and presenting any civil litigation or administrative proceedings concerning any transaction that is the subject of the OIP.

III.

A. Notwithstanding the dismissal of these proceedings set forth in paragraph IV., below, if Ryan engages within the next three years in conduct other than that alleged in the OIP, and such conduct forms the basis for any of the following events (the "triggering events"):

  1. Ryan is found by a court of competent jurisdiction, by the Commission, by any other state or federal regulatory agency, or by any self-regulatory organization, to have violated any federal or state securities law;

  2. Ryan has settled any claim brought by the Commission, by any other state or federal regulatory agency, or by any self-regulatory organization involving any violation of any federal or state securities law;

  3. Ryan is disciplined by any state accountancy licensing board or other accounting regulatory body; or

  4. Ryan is subject to a final order pursuant to Rule 102(e) of the Commission's Rules of Practice;

and the triggering event occurs within five years of the entry of the Order, then Ryan consents, without admitting or denying any of the Commission's findings, to the entry of an Order Re-Instituting Public Cease-And-Desist Proceedings, Making Findings And Imposing Cease-And Desist Order Against Philip J. Ryan, III ("Re-Institution Order"), which will contain the findings and impose the cease-and-desist order set forth in Exhibit A hereto and are incorporated by reference. In addition, if any proceeding is initiated within five years that could result in any of the triggering events, then the five-year time period is tolled until those proceedings are concluded with respect to Ryan. Ryan undertakes promptly to inform the Commission if he receives actual notice of any such proceeding or triggering event.

B. If any of the triggering events occurs, the Division of Enforcement ("Division"), with prior notice to Ryan, may petition the Commission to enter the Re-Institution Order containing the findings and imposing the cease-and-desist order set forth in Exhibit A hereto and Ryan hereby waives any right to contest the Division's petition or the entry of the Re-Institution Order, which may be entered by the Commission at its sole discretion.

C. 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 any of the Commission's findings, Ryan consents to the entry by the Commission of the Re-Institution Order containing the findings and imposing the cease-and-desist order set forth in Exhibit A hereto, should such order be entered upon the occurrence of a triggering event as set forth in paragraph III.A. herein.

IV.

On the basis of the foregoing, the Commission deems it appropriate to accept Respondent's Offer.

ACCORDINGLY, IT IS ORDERED that the cease-and-desist proceedings against Ryan pursuant to Section 21C of the Exchange Act are hereby dismissed without prejudice.

By the Commission.

Jonathan G. Katz
Secretary

EXHIBIT A

FINDINGS AND CEASE-AND-DESIST ORDER TO BE INCLUDED IN THE ORDER RE-INSTITUTING PUBLIC CEASE-AND-DESIST PROCEEDINGS, MAKING FINDINGS AND IMPOSING CEASE-AND DESIST ORDER AGAINST PHILIP J. RYAN, III ("RE-INSTITUTION ORDER"), IF ENTERED PURSUANT TO RYAN'S OFFER OF SETTLEMENT IN ADMINISTRATIVE PROCEEDING FILE NO. 3-9793

BACKGROUND

1. Respondent was assistant controller in charge of the financial reporting department of W.R. Grace & Co. ("Grace") from August 1991 through January 1996.

2. Grace was a New York corporation with its principal executive offices in Boca Raton, Florida during at least 1991 through 1996. Grace's primary businesses were packaging, specialty chemicals and health care services. Grace had a December 31 fiscal year end.

3. Between at least fiscal years 1991 to 1995 (the "relevant period"), National Medical Care Inc. ("NMC") was Grace's main health care subsidiary, with its headquarters in Waltham, Massachusetts. NMC provided kidney dialysis and home health services and manufactured specialized medical products. During the relevant period, NMC comprised the bulk of Grace's Health Care Group, which group was, until the first quarter of 1995, one of Grace's core businesses and was reported as a segment in Grace's consolidated financial statements. The Health Care Group contributed a significant portion of the consolidated pretax earnings of Grace during the majority of the relevant period.

EXCESS RESERVES AT NMC

4. As described in greater detail below, during relevant period, Grace engaged in fraudulent conduct by deferring income earned by NMC from 1991 through 1995, primarily to smooth the earnings of the Health Care Group. Grace deferred reporting income by increasing or establishing reserves not in conformity with generally accepted accounting principles ("GAAP"). Grace used the reserves to manipulate the reported quarterly and annual earnings of the Health Care Group and Grace.1 As a result of this activity, Grace made materially false filings with the Commission and publicly disseminated materially false statements. Grace also failed to make and keep books and records which accurately reflected its transactions, and failed to maintain a system of internal accounting controls sufficient to provide assurances that transactions were recorded as necessary to permit the proper preparation of financial statements in conformity with GAAP.

Creation of the Excess Reserves

5. Beginning in 1990 or 1991, NMC experienced a significant and unanticipated increase in revenues and earnings, in excess of Grace's forecasts, due to changes in Medicare reimbursement. During the first half of 1991, former members of NMC senior management deferred some of the unanticipated income by increasing or establishing reserves (an expense), often referred to as "excess reserves." Thus, rather than report its actual earnings, NMC, at the direction of certain former members of Grace management, underreported its earnings for 1991 and 1992.

6. At some point in mid-1991, as the reserves reached a level of between $10 and $20 million, certain former members of NMC senior management realized that the reserves were going to be significant by year end and contacted Grace management to determine how Grace wanted NMC to account for the excess reserves. Grace management directed that NMC keep the excess reserves and report Health Care Group earnings consistent with Grace's targeted levels (specifically a 24% growth rate for 1991) because Grace would not be credited by the investing public for growth rates beyond the targeted levels.

7. The final reported 1991 growth rate for the Health Care Group was 24%. Grace directed NMC to report a 27-28% growth rate for the Health Care Group's net income for 1992. The final reported 1992 growth rate was 27.5%.

Use of the Excess Reserves

8. During the relevant period, the excess reserves were primarily used for profit planning purposes, i.e., to bring the Health Care Group's quarterly reported results of operations in line with Grace's targets for the Health Care Group. In general, from 1991 through the first quarter of 1995, the reported Health Care Group growth rates remained relatively steady - from about 23% to 37% -- whereas the actual growth rates fluctuated from about an 8% decline in growth to a 61% increase.

9. However, at various times, Grace also directed NMC to release some of the excess reserves to increase Grace's earnings per share. For example, Grace requested NMC to report an additional $1.5 million in income for the fourth quarter of 1994 because Grace needed the additional income for its consolidated results of operations.

RESPONDENT'S CONDUCT

10. Respondent, as Grace's assistant controller, became aware of the purpose of the excess reserves late in 1991. He supervised the financial reporting department that prepared initial drafts of Grace's periodic reports with the Commission, including its consolidated financial statements and accompanying disclosures. Respondent, through his actions or omissions, caused Grace to file periodic reports that contained material misstatements and omissions. Respondent, through his actions or omissions, also caused Grace to fail to make and keep books and records which accurately reflected its transactions.

11. As a result of the above stated conduct, on December 22, 1998 the Commission issued an Order Instituting Public Administrative and Cease-and-Desist Proceedings Pursuant to Section 21C of the Securities Exchange Act of 1934 and Rule 102(e) of the Commission's Rules of Practice ("OIP") against Respondent and senior management of Grace and NMC. In re Bolduc, et al., Administrative Proceeding File No. 3-9793. Respondent was charged with causing false filings and books and records violations by his former employer, Grace. On August 31, 1999, that proceeding was stayed against Respondent and others pending a determination by the Commission of an interlocutory appeal brought by the Division of Enforcement ("Division"), the result of which did not have any impact on Respondent. Prior to the Commission's decision on the interlocutory appeal, the Division and Respondent executed the Stipulation providing for dismissal of that proceeding as to Respondent without prejudice and subject to the re-institution of the proceeding, entry of findings and a cease-and-desist Order upon the occurrence of any of the conditions set forth therein.

VIOLATIONS

12. Based upon the foregoing, Respondent caused Grace's violations of Sections 13(a) and 13(b)(2) of the Securities Exchange Act of 1934 ("Exchange Act") and Rules 12b-20, 13a-1, 13a-13 and 13b2-1 thereunder.

CEASE-AND-DESIST ORDER

In view of the foregoing, the Commission finds that it is appropriate to impose the cease-and-desist order specified in Ryan's Offer. Accordingly, IT IS HEREBY ORDERED, pursuant to Section 21C of the Exchange Act, that Ryan cease and desist from causing any violation and any future violation of Sections 13(a) and 13(b)(2) of the Exchange Act and Rules 12b-20, 13a-1, 13a-13 thereunder, and from committing or causing any violation and any future violation of Rule 13b2-1 under the Exchange Act.

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1 On June 30, 1999, Grace consented to the entry of an Order by the Commission (the "Grace Order") requiring Grace to cease-and-desist from committing or causing any violation and any future violation of Sections 10(b), 13(a) and 13(b) of the Exchange Act and Rules 10b-5, 12b-20, 13a-1 and 13a-13 thereunder. See In the Matter of W. R. Grace & Co., Securities Exchange Act Release No. 41578; Accounting and Auditing Enforcement Release No. 1140 (June 30, 1999). Pursuant to the Grace Order, Grace also undertook to establish a fund of $1 million for program(s) to further awareness and education relating to financial statements and generally accepted accounting principles.


http://www.sec.gov/litigation/admin/34-46206.htm


Modified: 07/16/2002