UNITED STATES OF AMERICA
SECURITIES AND EXCHANGE COMMISSION
SECURITIES EXCHANGE ACT OF 1934
Release No. 50096 / July 27, 2004
ACCOUNTING AND AUDITING ENFORCEMENT
Release No. 2062 / July 27, 2004
Admin. Proc. File No. 3-11562
In the Matter of
Leslie Wasser, CPA,
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, MAKING FINDINGS, AND IMPOSING REMEDIAL SANCTIONS AND A CEASE-AND-DESIST ORDER
The Securities and Exchange Commission ("Commission") deems it appropriate that public administrative and cease-and-desist proceedings be, and hereby are, instituted against Leslie Wasser, CPA ("Wasser" or "Respondent") pursuant to Section 21C of the Securities Exchange Act of 1934 ("Exchange Act") and Rule 102(e)(1)(iii) of the Commission's Rules of Practice.1
In anticipation of the institution of these proceedings, Wasser 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, and without admitting or denying the findings herein, except as to the Commission's jurisdiction over Respondent and the subject matter of these proceedings, which Wasser admits, Wasser consents to the entry of this 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, Making Findings, and Imposing Remedial Sanctions and a Cease-and-Desist Order ("Order"), as set forth below.
On the basis of this Order and Respondent's Offer, the Commission finds2 that:
Wasser at all relevant times was the secretary, chief financial officer and a director of Vicon Fiber Optics Corporation ("Vicon"). Wasser is, and during the relevant period was, a certified public accountant licensed in the State of New York.
1. Scheme to Inflate Vicon's Inventories
- Vicon is a Delaware corporation headquartered in Pelham Manor, New York. Vicon began operations in 1969. Vicon manufactures and sells fiber optic illuminating systems and components for use in conjunction with dental equipment and instruments utilizing fiber optic elements. Vicon's common stock was quoted on the Over-the-Counter Bulletin Board during the relevant period.
- Wasser participated in a scheme to inflate Vicon's inventories as reported in Vicon's Form 10-K for the fiscal year ended December 31, 1999 ("1999 Form 10-K"), which Vicon provided to auditors and filed with the Commission. Wasser conspired with other members of Vicon's management who prepared fictitious inventory reports, false shipping documents, and forged faxes reflecting fiber optic glass sprays valued at $100,000. These documents created the false appearance that the raw material had been shipped to Vicon's offsite facility in China to undergo manufacturing processes that increased its value to approximately $190,000. The inflated inventories made it appear as if Vicon had incurred a lower cost of goods sold expense, which in turn decreased the 1999 fiscal year reported loss. This caused the company to report a 1999 net loss of $628,890, when it should have actually reported a net loss of $803,067. Thus, Vicon's 1999 net loss was understated in its annual report by 22%. Wasser knowingly incorporated the fictitious inventory amounts into Vicon's financial statements as reported in its 1999 Form 10-K.
- Wasser provided falsified financial statements and documentation to Vicon's independent auditor, which, based on the false information supplied by Wasser, rendered an audit report containing an unqualified opinion on Vicon's 1999 financial statements.
- In June 2000, Wasser participated in a scheme to reverse the inflated inventory by reporting the inventory as defective and scrapped. Wasser conspired with other members of Vicon's management who prepared fictitious inventory reports and correspondence reflecting $190,000 of defective and scrapped inventory. Wasser knowingly included a description of the purportedly defective and scrapped inventory in Vicon's Form 10-Q for the period ended June 30, 2000, which was filed with the Commission.
- Wasser also assisted in overstating the inventory in Vicon's 1998 Form 10-K. Wasser, along with other members of Vicon's management, increased Vicon's inventory amounts to present a better profit picture to assist the company in raising venture capital. Wasser knowingly overvalued various inventory pieces, many of which were obsolete and therefore had little or no value to Vicon. The company's inventory at December 31, 1998 was overvalued by $103,000. Wasser included this overvalued inventory in Vicon's 1998 Form 10-K which was filed with the Commission. The bottom-line effect of this overvaluation was that Vicon's 1998 net income was overstated by 19%.
- Section 10(b) of the Exchange Act and Rule 10b-5 thereunder proscribe, among other things, misstatements and omissions of material fact made in connection with the purchase or sale of securities. Information is material if there is a substantial likelihood that its disclosure would be viewed by a reasonable investor as having significantly altered the total mix of information available. Basic Inc. v. Levinson, 485 U.S. 224, 331-32 (1988). Information concerning the financial condition of a company is presumptively material. SEC v. Murphy, 626 F.2d 633, 653 (9th Cir. 1980); SEC v. Blavin, 557 F. Supp. 1304, 1313 (E.D. Mich. 1983), aff'd, 760 F.2d 706 (6th Cir. 1985) (materiality of information relating to financial condition, solvency and profitability not subject to serious challenge).
- Material errors in annual and quarterly reports satisfy the "in connection with" requirement of Section 10(b) of the Exchange Act because they are clearly documents that a reasonable investor would rely on in deciding whether to purchase securities. SEC v. Benson, 657 F. Supp. 1122, 1131 (S.D.N.Y. 1987).
- Violations of Section 10(b) of the Exchange Act and Rule 10b-5 thereunder require a showing of scienter. Aaron v. SEC, 446 U.S. 680, 696 (1980). The Supreme Court has defined scienter as the "intent to deceive, manipulate, or defraud." Ernst & Ernst v. Hochfelder, 425 U.S. 185, 193 (1976). Reckless conduct also satisfies the scienter requirement of Section 10(b) of the Exchange Act and Rule 10b-5 thereunder. IIT v. Cornfeld, 619 F.2d 909, 923 (2d Cir. 1980); Rolf v. Blyth Eastman Dillon & Co., 570 F.2d 38, 46 (2d Cir.), cert. denied, 439 U.S. 1039 (1978).
- Information about current and past earnings is highly likely to be material because it is often used to predict what future earnings might be. In re Burlington Coat Factory Sec Litig., 114 F.3d 1410, 1421 n. 9 (3d Cir. 1997). Wasser's inclusion of fictitious inventory reports had a material impact on Vicon's financial statements. Vicon's annual reports were significantly altered by the inclusion of fictitious inventory. Vicon's 1999 loss was understated by 22% and its 1998 net income was overstated by 19%. An inaccurate financial statement in Vicon's annual report is exactly the type of information that a reasonable investor would have considered as altering the "total mix" of information available. See TSC Indus., Inc., 426 U.S. at 449.
- In 1998, Wasser intentionally overvalued Vicon's inventory in order to inflate artificially Vicon's net profits as reported in its Form 10-K. In 1999, Wasser prepared a financial statement that contained inventory items that did not exist. Finally, Wasser prepared Vicon's second quarter 2000 Form 10-Q, which falsely stated that the inventory had been scrapped when he knew it never existed. By knowingly engaging in this wrongful conduct, Wasser willfully violated Section 10(b) of the Exchange Act and Rule 10b-5 thereunder.
- Section 13(a) of the Exchange Act and Rules 12b-20, 13a-1, and 13a-13 thereunder require issuers to file with the Commission Form 10-K annual reports and Form 10-Q quarterly reports. The requirement that an issuer file reports under Section 13(a) embodies the requirement that such reports be true and correct. SEC v. Kalvex, Inc., 425 F. Supp. 310, 316 (S.D.N.Y. 1975); SEC v. IMC Int'l, Inc., 384 F. Supp. 889, 893 (N.D. Texas), aff'd, 505 F.2d 733 (5th Cir. 1974). No showing of scienter is necessary to establish a violation of Section 13(a) and Rule 13a-1. See SEC v. Wills, 472 F. Supp. 1250, 1268 (D.D.C. 1978).
- As Vicon's director and chief financial officer, Wasser was directly responsible for misrepresenting Vicon's inventory in its 1998 and 1999 Forms 10-K and its Form 10-Q for the second quarter of 2000. The fictitious inventory was material because it caused Vicon's net income to be misstated by 19% in 1998, and by 22% in 1999. Wasser prepared all of these false filings. Wasser therefore willfully aided and abetted and caused Vicon's violations of Section 13(a) of the Exchange Act and Rules 12b-20, 13a-1, and 13a-13 thereunder.
- Section 13(b)(2)(A) of the Exchange Act requires that every issuer of securities registered pursuant to Section 12 of the Exchange Act, such as Vicon, keep books and records which, in reasonable detail, accurately and fairly reflect its transactions and disposition of assets. Section 13(b)(2)(B) requires such issuers to devise and maintain a system of internal accounting controls sufficient to provide reasonable assurances that transactions are recorded as necessary to permit preparation of financial statements in conformity with generally accepted accounting principles.
- Vicon's books and records did not accurately and fairly reflect its transactions and disposition of assets. Vicon also failed to implement a reasonable system of internal accounting controls. Accordingly, Wasser by his conduct willfully aided and abetted and caused Vicon's violations of Sections 13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act
- Section 13(b)(5) of the Exchange Act 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). Rule 13b2-1 prohibits any person from falsifying or causing to be falsified any book or record subject to Section 13(b)(2)(A). Rule 13b2-2 of the Exchange Act makes it unlawful for an officer or director of an issuer to make or cause to be made a materially false or misleading statement, or omit or cause the omission of any material fact necessary to make the statements made not misleading in light of the circumstances, to an accountant in connection with an audit or examination of financial statements, or the preparation of any documents required to be filed with the Commission. See SEC v. Benson, 657 F. Supp. 1122, 1132 (S.D.N.Y. 1987).
- As Vicon's CFO, Wasser was responsible for implementing a reasonable system of internal accounting controls at Vicon. Wasser not only knowingly failed to implement such internal controls, he also participated in a scheme to falsify Vicon's accounting records. Wasser, while an officer and director of Vicon, also made material misrepresentations about Vicon's inventory and other financial information to Vicon's outside auditors in connection with their 1998 and 1999 audits. Wasser therefore willfully violated Section 13(b)(5) of the Exchange Act and Rules 13b2-1 and 13b2-2 thereunder.
- Based on the foregoing, the Commission finds that Wasser, a CPA and Vicon's former CFO, willfully violated Sections 10(b) and 13(b)(5) of the Exchange Act and Rules 10b-5, 13b2-1, and 13b2-2 thereunder and willfully aided and abetted and caused Vicon'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 cooperation afforded the Commission staff.
In view of the foregoing, the Commission deems it appropriate to impose the sanctions agreed to in Respondent Wasser's Offer.
Accordingly, it is hereby ORDERED, effective immediately, that:
A. Wasser shall cease and desist from committing or causing any violations and any future violations of Sections 10(b) and 13(b)(5) of the Exchange Act and Rules 10b-5, 13b2-1, and 13b2-2 thereunder and from causing any violations and any future 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.
B. Wasser is denied the privilege of appearing or practicing before the Commission as an accountant.
By the Commission.
Jonathan G. Katz
The Commission may deny, temporarily or permanently, the privilege of appearing or practicing before it to any person who is found . . . to have willfully violated, or willfully aided and abetted the violation of any provision of the Federal securities laws or the rules and regulations thereunder.