UNITED STATES OF AMERICA
In the Matter of
J.P. Bolduc, Brian J. Smith, C.P.A.,
| ORDER MAKING FINDINGS AND |
ORDER AGAINST RICHARD N.
The Securities and Exchange Commission ("Commission") deems it appropriate to accept the Offer of Settlement ("Offer") submitted by Richard N. Sukenik, C.P.A. ("Sukenik"), 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 this public administrative and cease-and-desist proceedings instituted by the Commission against him on December 22, 1998, pursuant to Section 21C of the Securities Exchange Act of 1934 ("Exchange Act") and Rule 102(e) of the Commission's Rules of Practice.
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, and without admitting or denying any of the findings contained herein, except as to the jurisdiction of the Commission over him and over the subject matter of these proceedings, which is admitted, Sukenik consents to the entry by the Commission of this Order.
On the basis of this Order and Sukenik's Offer, the Commission finds that:1
1. Sukenik was a vice president and the controller and principal accounting officer of W.R. Grace & Co. ("Grace") from December 1991 until his retirement on April 1, 1996.
2. Grace was a New York corporation with its principal executive offices in Boca Raton, Florida from at least 1991 through 1996. Grace's primary businesses were packaging, specialty chemicals and health care services. During the relevant time period, Grace had a December 31 fiscal year end.
3. Between at least 1991 and 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 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 the relevant period, Grace engaged in fraudulent conduct by deferring income earned by NMC primarily to smooth the earnings of the Health Care Group. Grace deferred reporting income by increasing or establishing "excess reserves" that were 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.2
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 internal forecasts, due to changes in Medicare reimbursement procedures. During the first half of 1991, 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 senior 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 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's 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, with the knowledge of Sukenik, also directed NMC to release some of the excess reserves, which had the effect of increasing 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.
10. During the relevant period, Grace also discussed the creation and use of the excess reserves with Price Waterhouse LLP ("PW"), Grace's independent auditors. (PW merged with Coopers & Lybrand L.L.P. on July 1, 1998 to form PricewaterhouseCoopers LLP). Also during the relevant period, PW performed audits of Grace's consolidated financial statements and issued audit reports containing unqualified opinions thereon.3
11. Sukenik, who became controller in late 1991, learned of the excess reserves in late 1991 or early 1992 in connection with the preparation of Grace's 1991 Form 10-K. He subsequently learned of the purpose of the excess reserves. As principal accounting officer, he signed Grace's periodic reports filed with the Commission beginning with the 1991 Form 10-K through the third quarter of fiscal year 1995. Sukenik's actions and omissions were a cause of Grace filing periodic reports that contained material misstatements and omissions. Sukenik's actions and omissions also were a cause of Grace failing to make and keep books and records which accurately reflected its transactions and failing to maintain a system of internal accounting controls sufficient to provide reasonable assurances that transactions were recorded as necessary to permit the preparation of financial statements in conformity with GAAP.
12. Based upon the aforesaid conduct, Sukenik was a cause of Grace's violations of Sections 10(b), 13(a), 13(b)(2) and 13(b)(5) of the Exchange Act and Rules 10b-5, 12b-20, 13a-1, 13a-13 and 13b2-1 thereunder.
Sukenik has submitted an Offer of Settlement in which, without admitting or denying the findings herein, he consents to the Commission's entry of this Order, which: (1) makes findings, as set forth above; and (2) orders Sukenik to cease and desist from committing or causing any violations, or future violations, of certain provisions of the federal securities laws, as set forth below. As set forth in Sukenik's Offer of Settlement, Sukenik undertakes 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 Order.
On the basis of the foregoing, the Commission deems it appropriate to accept Sukenik's Offer.
Accordingly, IT IS ORDERED that:
By the Commission.
Jonathan G. Katz
|1||The findings herein are made pursuant to Sukenik's Offer of Settlement and are not binding on any other person or entity in this or any other proceeding.|
|2||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.|
|3||On June 30, 1999, the Commission, on consent, ordered two PW partners who were involved in the audits of Grace's consolidated financial statements during the relevant period to cease and desist from causing any violation and any future violation of Sections 13(a) and 13(b) of the Exchange Act and Rules 12b-20, 13a-1 and 13a-13 thereunder. See In the Matter of Eugene Gaughan, C.P.A., Securities Exchange Act Release No. 41580; Accounting and Auditing Enforcement Release No. 1141 (June 30, 1999); In the Matter of Thomas Scanlon, C.P.A., Securities Exchange Act Release No. 41581; Accounting and Auditing Enforcement Release No. 1142 (June 30, 1999).|
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