UNITED STATES OF AMERICA
In the Matter of
Jerry K. Lester,
ORDER INSTITUTING CEASE-AND-DESIST PROCEEDINGS, MAKING FINDINGS AND IMPOSING A CEASE-AND-DESIST ORDER PURSUANT TO SECTION 21C OF THE SECURITIES EXCHANGE ACT OF 1934
The Securities and Exchange Commission ("Commission") deems it appropriate that public cease-and-desist proceedings be, and hereby are, instituted pursuant to Section 21C of the Securities Exchange Act of 1934 ("Exchange Act") against Jerry K. Lester ("Lester" or "Respondent").
In anticipation of the institution of these proceedings, Respondent has submitted an Offer of Settlement (the "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 him and the subject matter of these proceedings, which are admitted, Respondent consents to the entry of this Order Instituting Cease-and-Desist Proceedings, Making Findings and Imposing a Cease-and-Desist Order Pursuant to Section 21C of the Securities Exchange Act of 1934 ("Order"), as set forth below.
On the basis of this Order and Respondent's Offer, the Commission finds1 that:
1. eFunds, a Delaware corporation with its principal executive office in Scottsdale, Arizona, processes electronic payments including debit card and automated teller machine ("ATM") transactions. eFunds also sells products to help financial institutions, retailers and other businesses that accept debit payments to determine the likelihood of account fraud and identity manipulation. eFunds' common stock is registered with the Commission pursuant to Section 12(b) of the Exchange Act, and trades on the New York Stock Exchange. Before its listing on the NYSE, during the period of the conduct discussed herein, eFunds' common stock was registered under Section 12(g) of the Exchange Act and traded on the NASDAQ National Market System.
2. Access Cash International, L.L.C. ("Access Cash"), a Delaware limited liability company, headquartered in Saint Paul, Minnesota, was a privately held company primarily in the business of deploying and managing ATMs. In March 2000, eFunds paid $20 million to acquire an approximately 24 percent interest in Access Cash.
3. ATM Holding, Inc., a Delaware corporation, was a holding company created and owned by the founders of Access Cash in March 2000 to facilitate eFunds' acquisition of an approximately 24 percent interest in Access Cash. ATM Holding possessed no assets other than a 76 percent ownership interest in Access Cash.
4. Lester, age 52, a resident of Austin, Texas, was president of eFunds' financial institutions and networks division from November 2000 until September 2001. Lester has no disciplinary history and has never been registered with the Commission.
5. In financial statements filed with its Form 10-Q for the second quarter of 2001, eFunds improperly recognized $2.1 million in revenue from a transaction with Access Cash. For the second quarter of 2001, eFunds' improper revenue recognition overstated revenue by approximately 1.7 percent, inflated net earnings by more than 11.5 percent and enabled the company to meet consensus analysts' expectations.
6. On September 1, 2000, Lester helped negotiate a management agreement between eFunds and Access Cash whereby Access Cash agreed to assign its future ATM deployment and management revenues to eFunds, in exchange for eFunds' agreement to assume responsibility for management of the ATM business and to pay a monthly management fee, initially set at approximately $5.2 million per month ("Management Agreement").The amount of the management fee was designed to approximate Access Cash's historical revenue from its ATM deployment and management business.
7. On March 1, 2001, Access Cash attempted to exercise an option to cancel the Management Agreement, effective September 1, 2001. eFunds challenged Access Cash's ability to terminate the Management Agreement and instead sought to expand the Management agreement going forward by including eFunds' management of Access Cash's equipment sales business.
8. During June 2001 negotiations, eFunds and Access Cash agreed to provisions amending the Management Agreement to include eFunds' management of Access Cash's equipment sales business going forward ("Amendment Agreement"). eFunds and Access Cash further agreed to extend the term of the Management Agreement through March 31, 2002.
9. As part of the proposed Amendment Agreement, eFunds also attempted to settle past disputes regarding the implementation of the Management Agreement by requesting that Access Cash make a penalty payment in exchange for a release of all eFunds' potential claims. eFunds requested that Access Cash make the penalty payment by assigning to eFunds Access Cash's second quarter 2001 equipment sales revenues, which were expected to be approximately $2.1 million for the quarter.
10. Access Cash initially refused to make the penalty payment requested by eFunds. In order to obtain Access Cash's penalty payment in the second quarter of 2001, Lester and other eFunds executives agreed to include a provision whereby eFunds would pay Access Cash an additional sales assistance consulting fee of $250,000 per month for the remaining nine-month term of the Management Agreement, for a total of $2.25 million. Lester knew that eFunds was obligated to pay the additional sales assistance consulting fee regardless of how much consulting, if any, that Access Cash performed. Lester also knew that eFunds was obligated to pay the fee for the entire remaining term of the Management Agreement, with the exception of an acquisition of Access Cash by eFunds, even if either party terminated the Management Agreement early. With the inclusion of the additional sales assistance consulting fee, Access Cash agreed to make the penalty payment as part of the amendment to the Management Agreement.
11. During negotiations between eFunds and Access Cash regarding the Amendment Agreement, ATM Holding continued its ongoing efforts to sell to eFunds the remaining 76 percent of Access Cash. On June 30, 2001, Access Cash's chief executive officer informed Lester that, while he had signed the Amendment Agreement, he would not return an executed copy to eFunds until eFunds and ATM Holding had finalized a separate agreement whereby eFunds would commit to purchase the remainder of Access Cash for a mutually agreeable price and over a mutually agreeable timeframe ("Commitment Letter").
12. On July 2, 2001, eFunds and ATM Holding executed a commitment letter, whereby eFunds agreed to a timetable in which it would purchase the remaining 76 percent of Access Cash based upon a total valuation of $57 million. The Commitment Letter also contained provisions that provided that eFunds would pay ATM Holding various penalty payments totaling $1.5 million if the acquisition was not completed by certain milestone dates through March 31, 2002.
13. On August 14, 2001, eFunds filed its Form 10-Q for the second quarter ended June 30, 2001, reporting as revenue the $2.1 million penalty payment assigned by Access Cash pursuant to the Amendment Agreement.
14. Lester knew or should have known that, under generally accepted accounting principles ("GAAP), eFunds' agreement to repay Access Cash's penalty payment through future, consulting payments over nine months prohibited eFunds from recognizing Access Cash's penalty payment as revenue in the second quarter of 2001. Lester further knew or should have known that the Amendment Agreement and Commitment Letter were linked. Therefore, Lester knew or should have known that because the Commitment Letter had not been executed until the third quarter of 2001, it was not appropriate for eFunds to recognize revenue from the Amendment Agreement in the second quarter of 2001.
15. On March 4, 2002, eFunds restated its financial statements accompanying its Forms 10-Q for the second and third quarter of 2001. eFunds concluded that the Amendment Agreement and the Commitment Letter were interdependent under GAAP and therefore should have been treated as one agreement that became effective in July 2001. eFunds further determined that equipment sales revenues assigned to it by Access Cash under the Amendment Agreement, which were originally recorded as eFunds revenues, and fees paid to Access Cash and ATM Holding under the Amendment Agreement and the Commitment Letter, which were originally recorded as eFunds expenses, should have been accounted for as advances and repayments on the purchase price for ATM Holding's remaining equity interest in Access Cash. This resulted in a $1.3 million net reduction in the purchase price paid by eFunds for the remaining equity interests in Access Cash. For the second quarter of 2001, as restated, eFunds' revenue declined from $128.2 million to $126.0 million, a decrease of 1.7 percent, and its net income declined from $8.7 million to $7.7 million, a decrease of 11.5 percent. For the third quarter of 2001, as restated, eFunds' revenue declined from $135.4 million to $133 million, a decrease of 1.8 percent, and net income increased from $13.2 million to $13.6 million, an increase of 3 percent.
16. Section 13(b)(5) of the Exchange Act provides that: "No person shall knowingly circumvent or knowingly fail to implement a system of internal accounting controls or knowingly falsify any book, record, or account described in [Section 13(b)(2)]." By engaging in the conduct described in paragraphs III.1. through III.15. above, Lester committed violations of Section 13(b)(5) of the Exchange Act.
17. Section 13(a) of the Exchange Act requires all issuers with securities registered under Section 12 of the Exchange Act to file periodic and other reports with the Commission containing such information as the Commission's rules prescribe. Pursuant to Section 13(a), the Commission promulgated Rule 13a-13 that requires issuers to file quarterly reports. In addition, Rule 12b-20 requires that reports contain such further material information as may be necessary to make the required statements, in light of the circumstances under which they were made, not misleading. As a result of the conduct described in paragraphs III.1. through III.15. above, Lester was a cause of eFunds' violations of Section 13(a) of the Exchange Act and Rules 12b-20 and 13a-13.
18. Section 13(b)(2)(A) of the Exchange Act states that every Section 12 registrant must "make and keep books, records, and accounts, which, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the issuer." Rule 13b2-1 provides that no person shall, directly or indirectly, falsify or cause to be falsified, any book, record, or account subject to Section 13(b)(2)(A). As a result of the conduct described in paragraphs III.1. through III.15. above, Lester committed violations of Rule 13b2-1 of the Exchange Act, and was a cause of eFunds' violations of Section 13(b)(2)(A) of the Exchange Act.
19. Respondent undertakes to cooperate with the Commission staff in preparing for and presenting any civil litigation or administrative proceeding concerning any transaction or related transaction that is the subject of the Order. Respondent understands that if he fails to comply with these undertakings, the Commission reserves the right to reopen this proceeding and reconsider the appropriateness of the Order imposed.
20. In determining whether to accept the Offer, the Commission has considered these undertakings.
In view of the foregoing, the Commission deems it appropriate to impose the sanctions agreed to in Respondent's Offer.
Accordingly, it is hereby ORDERED that:
1. Respondent cease and desist from committing or causing any violations and any future violations of Section 13(b)(5) of the Exchange Act and Rule 13b2-1 thereunder, and from causing any violations and any future violations of Sections 13(a) and 13(b)(2)(A) of the Exchange Act and Rules 12b-20 and 13a-13 thereunder;
2. Respondent, within 10 days of the entry of this Order, pay disgorgement and prejudgment interest in the total amount of $21,782.44 to the United States Treasury. Such payment shall be: (A) made by United States postal money order, certified check, bank cashier's check or bank money order; (B) made payable to the Securities and Exchange Commission; (C) hand-delivered or mailed to the Office of Financial Management, Securities and Exchange Commission, Operations Center, 6432 General Green Way, Alexandria, Stop 0-3, VA 22312; and (D) submitted under cover letter that identifies Jerry K. Lester as a Respondent in these proceedings, the file number of these proceedings, a copy of which cover letter and money order or check shall be sent to Donald M. Hoerl, Associate Regional Director, Division of Enforcement, Securities and Exchange Commission, Central Regional Office, 1801 California Street, Suite 1500, Denver, CO 80202.
By the Commission.
Jonathan G. Katz
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