UNITED STATES OF AMERICA Before the SECURITIES AND EXCHANGE COMMISSION SECURITIES EXCHANGE ACT OF 1934 Release No. 39329 / November 17, 1997 ACCOUNTING AND AUDITING ENFORCEMENT Release No. 987 / November 17, 1997 ADMINISTRATIVE PROCEEDING File No. 3-9488 In the Matter of ORDER INSTITUTING PUBLIC ADMINISTRATIVE PROCEEDINGS PURSUANT TO SECTION 21C OF THE SECURITIES EXCHANGE ACT OF 1934, MAKING FINDINGS, AND BAUSCH & LOMB INCORPORATED, IMPOSING A CEASE-AND-DESIST HAROLD O. JOHNSON, ORDER ERMIN IANACONE, and KURT MATSUMOTO, Respondents. I. The Securities and Exchange Commission ("Commission") deems it appropriate that public administrative proceedings be, and hereby are, instituted pursuant to Section 21C of the Securities Exchange Act of 1934 ("Exchange Act") against Bausch & Lomb Incorporated (hereinafter "B&L"), Harold O. Johnson, Ermin Ianacone, and Kurt Matsumoto (hereinafter the "Respondents"). II. In anticipation of the institution of these administrative proceedings, the Respondents have each submitted an Offer of Settlement (hereinafter the "Offers") 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 in which the Commission is a party, and without admitting or denying the findings set forth herein, Respondents consent to the entry of this Order Instituting Public Administrative Proceedings Pursuant to Section 21C of the Exchange Act of 1934, Making Findings, and Imposing a Cease-and-Desist Order (hereinafter the "Order"). III. On the basis of this Order and the Respondents' Offers, the Commission makes the following findings:<(1)> A. Summary B&L materially overstated its net income for 1993 by improperly recognizing revenue from the sale of contact lenses through its Contact Lens Division ("CLD") and the sale of sunglasses through its Asia- Pacific Division ("APD"). These overstatements of revenue resulted from the activities of certain of the individual Respondents and other employees of B&L. The portion of the overstatement relating to the CLD arose from sales of significant amounts of contact lenses to the CLD s distributors less than two weeks before B&L s 1993 fiscal year-end in connection with a marketing program that effectively resulted in consignment sales. The portion of the overstatement relating to the APD arose from certain APD personnel recording fraudulent sales. As a result of the foregoing, B&L violated the anti-fraud and reporting provisions of the federal securities laws by filing with the Commission materially false and misleading financial statements for its fiscal year ended December 25, 1993, which overstated revenue by $42.1 million and net income by at least $17.6 million, or 11%, as part of its annual reports on Form 10-K for 1993 and 1994, and violated the recordkeeping and internal controls provisions of the federal securities laws. As to the CLD, Ermin Ianacone, the CLD's Controller and Vice President of Finance, and Kurt Matsumoto, the CLD's Director of Distributor Sales, caused B&L's violations of the antifraud, reporting, recordkeeping, and internal controls provisions of the federal securities laws. Ianacone and Matsumoto also violated the recordkeeping and internal controls provisions of the federal securities laws. Harold O. Johnson, the CLD's President, caused B&L's violations of the reporting provisions. In the first quarter of 1996, B&L amended its Forms 10-K for 1993 and 1994 to include restated financial statements for 1993 which corrected this improper revenue recognition. B. Respondents During all relevant times, B&L was a New York corporation, doing business internationally with its headquarters in Rochester, New York, and a leading manufacturer of contact lenses and sunglasses. The CLD conducted B&L's U.S. contact lens business while the APD conducted B&L's sunglass and vision care business in the Asia-Pacific region. B&L's common stock has at all relevant times been registered with the Commission pursuant to Section 12(b) of the Exchange Act, and listed for trading on the New York Stock Exchange. Harold O. Johnson was at all relevant times the President of the CLD and Senior Vice President of B&L. Ermin Ianacone was at all relevant times Controller and Vice President of Finance of the CLD. He <(1)> The findings herein are made pursuant to the Respondents' respective Offers of Settlement and are not binding on any other person or entity in this or any other proceeding. ======END OF PAGE 2====== left B&L in November 1994.<(2)> Kurt Matsumoto was at all relevant times the CLD's Director of Distributor Sales. His employment was terminated in April 1995. C. Facts 1. The CLD December Program In the early 1990s, the CLD's contact lens business was undergoing substantial changes and faced major strategic challenges. The CLD's business historically had centered upon the sale of traditional "SVS" lenses, which were marketed to be worn for six months or more. However, beginning in the 1980s, new "disposable" contact lenses, designed to be worn for periods ranging from one day to several months, gained popularity in the market.<(3)> A late entrant in the disposable lens market, B&L wished to devote increased efforts to increasing its sales in this critical and growing market segment. At the same time, the CLD wanted to continue to maximize its traditional SVS sales, which -- while diminishing over time -- continued to account for a substantial part of the CLD sales and revenues. In late 1993, the CLD decided that a reallocation of marketing responsibilities among its sales channels would offer the best means of meeting its strategic goals. The CLD's products, both traditional SVS and disposable, were sold to optical practitioners (i.e., ophthalmologists, optometrists, and opticians) primarily through two channels: directly, i.e., through a sales force of CLD employees; and through authorized optical distributors, who purchased lenses from the CLD for resale to optical practitioners. Johnson believed that, by giving the distributors primary sales responsibility for the traditional SVS segment of its product line, the CLD could allow its direct sales force to devote increased resources and efforts to the sale of disposable lens products, and he further believed that selling a substantial amount of traditional SVS inventory to distributors would serve this objective. In December 1993, to further this strategy of shifting traditional SVS sales responsibility to distributors, the CLD launched a marketing program -- the "December Program" -- in which it told its distributors, in order to maintain an authorized distributorship, to purchase an unprecedented amount of traditional SVS inventory less than two weeks before the end of its fiscal year. To encourage the distributors to participate, the CLD offered to provide optical practitioners with incentives to buy traditional SVS lenses from distributors, which would purportedly help the distributors resell the large amount of inventory they <(2)> Ianacone has never been a Certified Public Accountant. <(3)> The SVS Traditional Lens market, industry-wide, had fallen 18% between 1991 and 1992, and 11% between 1992 and 1993. In 1993, SVS traditional lenses comprised approximately 52% of the CLD's sales. The CLD's internal estimate in December 1993 was that this would decline to 46.0% of sales in 1994, and to 25.5% of sales by 1998. ======END OF PAGE 3====== were being asked to purchase. The CLD also offered several incentives, including profit-sharing opportunities, to the distributors, to encourage them to participate in the Program. As discussed below, B&L improperly recognized $22 million in revenue from this Program when, among other things, certain employees of the CLD granted unauthorized rights of return to certain distributors and shipped contact lenses after the fiscal year- end. a. The September Promotion B&L management placed great importance on each of B&L's operating divisions achieving or exceeding the sales and other financial goals it set. Many divisions were successful in reaching their goals, including the CLD, which, under Johnson, had met or exceeded sales goals for 48 consecutive months and had double-digit revenue growth each year between 1989 and 1992. Early in the fall of 1993, Johnson realized the CLD was not on target to meet its third quarter sales and earnings forecasts. Subsequently, Johnson met with a number of CLD employees, including Ianacone, Matsumoto, and Matsumoto's supervisor (a CLD Vice President), to discuss ways to boost sales. As a result of that meeting, the CLD developed a promotion whereby it would sell its distributors a large amount of traditional SVS lenses, significantly in excess of historical levels, at a discounted price of $6.00 per lens with extended payment terms. The promotion, which concluded in September 1993, enabled the CLD not only to meet, but substantially to exceed, its third quarter sales forecasts. However, as a result of this third-quarter promotion, the CLD had sold distributors enough traditional SVS inventory to meet or exceed most distributors' fourth quarter needs. b. Planning the December Program In October 1993, Johnson instructed certain members of the CLD staff to implement the December Program. Johnson hoped to use the Program to facilitate the strategic shift of marketing responsibility for traditional SVS lenses to the CLD s distributors. Additionally, he sought through the Program to achieve fourth quarter sales and earnings goals approved by B&L. In designing the December Program, the CLD did not attempt to ascertain how many lenses the distributors wanted to purchase. Rather, Johnson and the CLD staff divided the total amount of traditional SVS inventory the CLD had on hand (approximately 1.8 million units) among the distributors according to their pro rata share of overall distributor sales. As the Program was designed and presented, participation by the distributors was required in order for them to maintain their authorized distributor status. The CLD's internal estimates indicated that, under sales conditions which existed prior to the December Program, it might take certain of the distributors up to two years to sell the 1.8 million traditional SVS lenses that CLD management was expecting them to purchase in the two weeks before the close of B&L's 1993 fiscal year. To assist sales by the distributors, the Program provided them with access to optical practitioner accounts and large retail accounts which had previously been serviced by the CLD directly. Further, under the Program, B&L would permit distributors to share in incremental profits due to any expansion of the ======END OF PAGE 4====== CLD s share of the declining market for traditional SVS lenses up to fifteen percentage points.<(4)> In order to convince distributors that the CLD was serious about increasing distributors sell-through of traditional SVS lenses, the CLD devised several initiatives and incorporated them into the December Program to support its claim that dramatic market share increases were within reach. Primary among these initiatives was the "Premier Vision" Program, through which optical practitioners, by purchasing traditional SVS lenses from the distributors, earned frequent-flyer type points that could be used to obtain premiums. The CLD did not offer distributors a price discount in the December Program. Instead, the CLD offered SVS lenses at $11.90 per lens, which was full list price and double what distributors had paid in the September 1993 promotion.<(5)> c. The CLD Prepares Promissory Notes Varying from B&L's usual practice, and to clearly evidence the distributors' obligation to pay, the December Program, as designed and as approved by senior B&L management, required that each distributor sign a promissory note for amounts owed to B&L. Under the terms of the promissory notes, all amounts owed to B&L, including the December Program purchases, would have to be satisfied in full by June 1994. The notes required distributors to pay their existing pre-December Program balances in January and February 1994. Beginning in March 1994, the notes also required distributors to make payments on their December Program balances calculated to coincide with expected product sell-through. In June 1994, the notes required distributors to make a "balloon" payment for their outstanding balances, which the CLD estimated would be approximately 70% of the December Program purchases. As discussed below, most distributors refused to sign the promissory notes. <(4)> As of April 1993, the Company's internal sales projections had estimated no market share increase in 1994, and only an increase of two percentage points in total over the next four years. There is little indication that, prior to the December Program, CLD management ever expected to achieve an increase in market share for traditional SVS lenses as large as the 15 percentage points that they represented as a goal to distributors. <(5)> The return to list pricing of $11.90 per lens reduced the profit distributors could make on resale. Moreover, since the average price at which the CLD sold traditional SVS lenses to practitioners (the "average realized price" or "ARP") ranged between $4.23 and $10.64 between August and November 1993, and was $7.46 for 1993 as a whole, distributors were concerned that they would not be able profitably to increase sales of traditional SVS lenses when they had purchased their inventories of these lenses from the CLD at significantly higher prices. ======END OF PAGE 5====== d. Presentation of the December Program to, and Negotiations With, the Distributors On December 13, 1993, the CLD held a meeting with its distributors to present to them the December Program. Even though participation was required to maintain an authorized distributorship, two of the CLD s thirty-two distributors refused to participate in the Program. As described below, many of the other distributors, though not refusing participation outright, demanded terms and concessions from certain CLD representatives varying the terms of their December Program purchases. Johnson and other senior B&L officials did not approve these terms and concessions, and were unaware they had been granted. Following the December 13 meeting, the CLD implemented the December Program and, at year end, recognized revenue from its sales. In the process, certain CLD representatives: (1) extended credit limits significantly without analyzing the distributors' creditworthiness and ability to pay; (2) recognized revenue on lenses shipped after year-end; (3) granted many distributors the right to return unsold lenses; (4) shipped product to warehouses; and (5) violated B&L s policies and procedures, and failed to comply with generally accepted accounting principles ("GAAP"), with respect to revenue recognition. e. B&L Increases Credit Limits Without Performing Financial Analyses Required by Company Policy The CLD knew that, in many instances, the distributors would not be able to order the lenses they were being asked to purchase in the December Program unless the CLD increased the distributors credit limits. Some of the contemplated December Program purchases were so large that they exceeded not only certain distributors credit limits, but also their net worth,<(6)> making it highly unlikely that, absent resale, such distributors would be able to pay for the lenses.<(7)> To secure distributor participation in the December Program, the CLD, on its own initiative, extended the distributors' credit limits substantially, without completing the substantive analysis of the distributors' creditworthiness required by Company policy. Ultimately, existing credit limits, which had been increased to accommodate the September 1993 promotion, were raised up to 100% or more for some distributors. B&L's Credit Limit Authorization Policy required senior CLD and B&L officials personally to authorize the credit limit increases granted in connection with the December Program. Before this could be <(6)> For example, a distributor that was being asked to purchase $2.5 million worth of lenses in the December Program had a net worth at the time of approximately $600,000. <(7)> Many distributors told CLD employees who urged them to participate in the December Program that they would be unable to pay for the lenses unless and until they were resold. ======END OF PAGE 6====== done, a CLD credit analyst (under Ianacone's supervision) was required under the Company s policy to perform a detailed analysis of the distributors creditworthiness using credit histories and other relevant information and then submit a recommendation for the requested increase for appropriate approvals. On December 10, 1993, Ianacone prepared a summary memorandum requesting credit limit increases for 11 of the CLD s distributors. The memorandum described the results of the September 1993 promotion, the potential strategic benefits of the December Program, the intended reliance upon promissory notes to secure the distributors credit balances, and the payment history and status of the 11 distributors. Johnson approved the requested credit limit increases based upon this summary memorandum. In light of the large size of the December Program and the large increases in distributor credit limits it required, the CLD should have conducted a more probing, substantive analysis of the distributors credit-worthiness. f. The CLD Ships Lenses After the End of its 1993 Fiscal Year B&L's 1993 fiscal year ended on Saturday, December 25, 1993. However, at least $5.7 million of revenue from the December Program -- approximately 26% of the revenue generated by the Program -- was recognized from sales that were not shipped until after the end of the fiscal year. The CLD extended its cutoff date, at Ianacone's instruction, to the morning of Monday, December 27, 1993. g. Certain CLD Employees Waive the Promissory Note Requirement, Grant Rights of Return, and Offer Storage and Delayed Shipping to Secure Distributor Participation in the December Program In the twelve days between the December 13 meeting and the end of B&L's 1993 fiscal year, certain CLD representatives spoke or met with those distributors who left the December 13 meeting without committing to participate in the December Program. As the fiscal year-end approached, certain CLD representatives, without permission from their superiors, made significant concessions to undecided distributors varying the terms of the December Program to persuade those distributors to participate. For example, on December 13, while certain distributors signed the notes, most of the distributors refused to sign the promissory notes that the CLD had prepared. Although Ianacone had intended to require participating distributors to sign the notes because of the unusual collection risk, he decided, in a number of cases, to waive the promissory note requirement, in large part, because he knew that CLD salesmen were having difficulty getting distributors to sign the notes. Also, before the end of B&L's 1993 fiscal year, many distributors obtained written or oral assurances from certain CLD representatives that they could return unsold traditional SVS lenses for credit or could later renegotiate payment terms. These distributors accounted for approximately $13 million in "sales," or approximately 59% of the total December Program. In violation of B&L's corporate policies, Matsumoto and Matsumoto s supervisor granted, and instructed others under ======END OF PAGE 7====== their direction to grant, certain distributors the right to return unsold lenses in connection with the December Program. Additionally, although Ianacone was not asked to approve these side agreements, a copy of a letter from the CLD s largest distributor, evidencing its understanding that it could return unsold traditional SVS lenses, was found in Ianacone's files. Finally, several distributors told certain CLD representatives, during and after the December 13 meeting, that they did not have sufficient capacity to store additional lenses in their warehouses. As an accommodation to these distributors, certain CLD employees arranged to hire freight forwarders and warehouse facilities, in some cases at the CLD s expense, to hold inventories until distributors would accept delivery of the lenses. In some cases, the CLD selected and paid for warehouses while other distributors chose their own storage facilities with the understanding that the CLD would reimburse them for storage. In at least one case, Ianacone personally authorized reimbursement of storage expenses. h. B&L Ends the December Program During the December 13 meeting, CLD representatives had told the distributors that the Company would encourage optical practitioners who had previously purchased traditional SVS lenses directly from the CLD to purchase such lenses from distributors. Subsequently, distributors realized they were receiving few, if any, orders from new customers. As a result, the distributors asked Johnson to reiterate his encouragement, in writing, to these customers. Johnson refused, because he was concerned about possibly alienating the optical practitioners whose goodwill was crucial to CLD s business. Furthermore, when it appeared that the CLD's direct sales of disposable lenses were behind forecast for the second quarter of 1994, Johnson instructed his subordinates that maintaining the Division's own direct sales efforts for the disposable lens market took priority over efforts to increase distributors' sales of traditional SVS lenses.<(8)> In June 1994, most distributors advised CLD that they were unable to make the balloon payment, and the CLD did not ultimately seek to enforce the balloon payment. Thereafter, the CLD s efforts to spur distributor sell-through and make collections proved unsuccessful. CLD management decided in October 1994, to take back a substantial percentage of the December Program inventory. Also, in October 1994, after B&L had decided to take back most of the December Program lenses, Matsumoto, Matsumoto's supervisor, and other CLD employees under their direction asked <(8)> After the December Program, distributors continued to purchase a significant amount of traditional SVS lenses from the CLD, even though they had been sold one to two years of inventory in the December Program. In many cases, distributors made these additional purchases because they had no intent to resell the inventory purchased through the Program and believed they could return it. The CLD's traditional SVS sales to distributors in the first quarter of 1994 were 304% above those projected by its operating plan. ======END OF PAGE 8====== three of the distributors who had been granted rights of return to destroy or not disclose the existence of those rights of return.<(9)> 2. Overview of the Fraudulent APD Sunglass Sales From their offices in Hong Kong, the APD s former President and former Controller, with the complicity of certain APD employees and customers, executed a scheme to record revenue from fictitious sales of Ray Ban and other sunglasses.<(10)> As a result, B&L Hong Kong, a division of the APD, recognized revenue for sunglass "sales" that in fact were shipments of sunglasses to public warehouses in Hong Kong or to accommodating customers who agreed to hold, but not pay for, the shipments. In some instances, fictitious sunglass sales were titled to customers without the customer s knowledge. In other cases, the APD titled goods to a freight forwarder and recorded the transactions as sales. APD personnel in Hong Kong fabricated documents to make the fictitious sales appear genuine, to circumvent B&L's accounting controls, and to prevent detection by B&L's management and auditors. a. The Fraudulent Transactions Fraudulent sunglass sales at the APD were initiated by a phone call placing a fictitious order or a seemingly genuine "order" on misappropriated customer letterhead. Unlike a genuine sale, however, APD warehouse personnel in Hong Kong received oral instructions from the APD warehouse manager to withhold warranty cards, consumer information, and trademarks required to customize the orders by destination country. The additional documentation for a genuine sale was generated, but warehouse personnel were similarly instructed to ignore the "ship to" address on the delivery note and ship instead to the warehouse. At the instruction of his supervisors, the Hong Kong warehouse manager titled the goods shipped to warehouses in the name of a commonly used freight forwarder and also sent the warehouses the delivery notes. In some instances, the warehouse manager forged delivery notes with receipt acknowledgments, while in other cases cooperating customers falsely stamped the delivery notes "received." Cooperating customers simply ignored the fraudulent sales reflected on their account statements, while the APD managed to delete fraudulent sales from monthly statements sent to customers who were not participants in the scheme. b. "Refreshing" Transactions To hide the fraudulent scheme from B&L's internal controls and recordkeeping procedures, the APD president and controller needed to mask rising accounts receivable and avoid setting up greater bad debt reserves. To accomplish this, APD personnel conducted fraudulent "exchange" transactions whereby customers received credits to their <(9)> Matsumoto, his supervisor, and the other CLD employees acted to prevent their violation of company policy from coming to light. <(10)> Neither of these APD employees was a member of B&L s corporate management. ======END OF PAGE 9====== accounts and were permitted to repurchase similar or identical goods stored in the APD warehouse. There was, however, little, if any, physical movement of inventory in these transactions. APD personnel prepared false paperwork reflecting nonexistent transactions, including customer "requests for exchange," warehouse receipts (similar to delivery notes), and "credit notes" showing the quantity of sunglasses credited and the amount of the credit. The warehouse manager falsified documents including "requests for exchange" and warehouse receipts, to facilitate this scheme, and kept track of false invoices to further prevent detection. This process "refreshed" the accounts receivable by clearing the oldest balance from the customer's statement, and avoided the need to increase bad debt reserves. To cover up the extended receivable dating resulting from these activities, APD personnel in Hong Kong manually altered a computer-generated aging report. c. B&L's Investigation of Fraudulent APD Transactions Beginning in June 1994, a B&L audit team conducted an internal investigation of various accounting irregularities in the APD s Hong Kong sales operation. As that investigation was continuing, in late August 1994, B&L management in Rochester received an anonymous letter from "a group of concerned APD employees," asserting that APD management in Hong Kong had been booking fraudulent sales and falsifying documents to conceal their misconduct from the company's management and auditors. In response, B&L management assigned additional auditors to the ongoing investigation and retained outside auditors to assist the Company s investigation. By October 1994, these investigators uncovered evidence of the scheme described above. After discovering the scheme by APD personnel to generate fictitious sunglass sales, B&L s management replaced the personnel in Hong Kong who were responsible for the scheme. As to the CLD, the management of B&L replaced all CLD personnel responsible for granting the rights of return. During the course of the Commission's investigation, B&L restated its 1993 and 1994 financial statements in order to correct the improperly recognized revenue in the APD and the CLD. D. Violations 1. B&L Violated the Antifraud, Reporting, Recordkeeping, and Internal Controls Provisions of the Exchange Act Section 10(b) of the Exchange Act, and Rule 10b-5 thereunder, prohibit material misstatements or omissions, made with scienter, in connection with the purchase or sale of securities. SEC v. Texas Gulf Sulphur Co., 401 F.2d 833, 860-62 (2d Cir. 1968), cert. denied, 394 U.S. 976 (1969). Recklessness or wilful disregard of the truth generally satisfies the scienter requirement. See, e.g., Hollinger v. Titan Capital Corp., 914 F.2d 1564, 1568-69 (9th Cir. 1990); SEC v. Blavin, 760 F.2d 706, 711 (6th Cir. 1985); SEC v. Falstaff Brewing Corp, 629 F.2d 62, 77 (D.C. Cir. 1980); Rolf v. Blyth Eastman Dillon & Co., 570 F.2d 38, ======END OF PAGE 10====== 46 (2d Cir. 1978), cert. denied, 439 U.S. 1039 (1978). A fact is material if there is a substantial likelihood that a reasonable investor would consider the information to be important. Basic, Inc. v. Levinson, 485 U.S. 224, 231-32 (1988). Misrepresentation of a company's earnings, SEC v. Texas Gulf Sulphur Co., 401 F.2d 833, 849 (2d Cir. 1968), cert. denied, 394 U.S. 976 (1969), and the improper recognition of revenue in contravention of GAAP, see Fine v. American Solar King Corp., 919 F.2d 290, 297, 300-01 (5th Cir. 1990), may be material. Section 13(a) of the Exchange Act, and Rule 13a-1 thereunder, require issuers whose securities are registered with the Commission pursuant to the Exchange Act to file annual reports. Such reports must be true and correct. See SEC v. Savoy Industries, 587 F.2d 1149, 1165 (D.C. Cir. 1978). Rule 12b-20 requires that such reports include all material information necessary to make the required statements, in the light of the circumstances under which they are made, not misleading. Pursuant to the instructions applicable to Form 10-K, financial statements contained therein must conform to Regulation S- X, which, in turn, requires conformity with GAAP. 17 C.F.R.  210.4- 01(a)(1). Statement of Financial Accounting Concepts No. 5, paragraphs 83 and 84, provides that revenue should not be recognized until it is (1) realized or realizable and (2) earned. Revenue is realized or realizable when products are exchanged for cash or for assets which are readily convertible to cash or claims to cash. Revenue is earned when the entity has substantially accomplished what it must do (generally including delivery to the customer) to be entitled to the benefits represented by the revenue. In connection with many of the December Program sales, the CLD granted rights of return. Furthermore, the December Program raised significant questions as to whether the revenue was realized, realizable, and earned. GAAP also requires that transactions be accounted for based on their substance, not their form. In substance, many of the December Program transactions were consignment sales, not bona fide sales. The fictitious APD sales were similarly not bona fide and, indeed, were entirely fictitious. The December Program was designed, in part, to meet the Company s sales targets. The CLD had been successful in meeting or exceeding its targets for 48 consecutive months between 1989 and 1992 and was anxious to continue this trend. As described above, the December Program raised significant revenue recognition risks. Under such circumstances, B&L should have exercised greater care to ensure that revenues from the Program were properly recognized, although B&L senior management was not aware of the CLD rights of return or the fictitious APD sales when the Company s 1993 financials were published. B&L violated Sections 10(b) and 13(a) of the Exchange Act, and Rules 10b-5, 12b-20, and 13a-1 thereunder, by including financial statements for the fiscal year ended December 25, 1993, in its 1993 and 1994 Annual Reports on Form 10-K, filed with the Commission, that were ======END OF PAGE 11====== materially false and misleading.<(11)> B&L recognized, in contravention of GAAP and the Company's own revenue recognition policies, $42.1 million of revenue, resulting in at least a $17.6 million, or 11%, overstatement of the net income originally reported for its 1993 fiscal year. B&L also violated Section 13(b)(2)(A) of the Exchange Act by maintaining false and misleading books and records which, among other things, overstated the company s 1993 revenue, resulting in a material overstatement of net income for 1993. B&L violated Section 13(b)(2)(B) of the Exchange Act by failing to maintain a system of internal accounting controls sufficient to provide reasonable assurances that certain sales transactions in the CLD and APD were recorded as necessary to permit preparation of financial statements in conformity with GAAP. 2. Ianacone Was a Cause of B&L's Violations of the Antifraud, Reporting, Recordkeeping, and Internal Controls Provisions of the Exchange Act and Violated Section 13(b)(5) of the Exchange Act Ianacone was a cause of B&L's violations of Section 10(b) of the Exchange Act, and Rule 10b-5 thereunder, and Section 13(a) of the Exchange Act, and Rules 12b-20 and 13a-1 thereunder, because he prepared division financial statements that he knew, or should have known, included revenue that was not properly recognized under GAAP. He knew the significant amount of inventory the distributors were purchasing, the price at which they were purchasing it, and that distributors had been given significant increases in their credit limits without adequate analysis of their creditworthiness or ability to pay. Thus, he knew, or should have known, that the division's financial statements contained improperly recognized revenue, in that the distributors were unlikely to be able to resell the product they were purchasing, which they needed to do to pay for the product. Furthermore, Ianacone knew, or should have known, that numerous distributors had refused to sign promissory notes, and that the CLD had recognized revenue from sales that were shipped to third party warehouses. Additionally, the copy of the letter found in Ianacone's files from the CLD's largest distributor, evidencing its understanding that it could return unsold traditional SVS lenses, indicates that Ianacone knew, or should have known, that this distributor had been granted a right of return, and that this right of return would cause B&L's financial statements to include improperly recognized revenue. Ianacone also knew that the CLD's financial statements included revenue improperly recognized because he had extended the 1993 fiscal year to include sales of lenses that were shipped after the fiscal year ended. Ianacone also violated Section 13(b)(5) of the Exchange Act, and Rule 13b2-1 thereunder, and caused B&L's violations of Sections 13(b)(2)(A) and (B) of the Exchange Act, by improperly recording the <(11)> B&L's liability under Section 10(b) of the Exchange Act and Rule 10b-5 thereunder is imputed from the acts of Ianacone, Matsumoto, Matsumoto's supervisor, and the former President and former Controller of the APD. ======END OF PAGE 12====== December Program sales in the books and records of B&L, and knowingly failing to adopt and implement, or circumventing, internal controls designed to reasonably assure that revenue was properly recognized in the correct accounting period. 3. Matsumoto Was a Cause of B&L's Violations of the Antifraud, Reporting, Recordkeeping, and Internal Controls Provisions of the Exchange Act and Violated Section 13(b)(5) of the Exchange Act Matsumoto was a cause of B&L's violations of Section 10(b) of the Exchange Act, and Rule 10b-5 thereunder, and Section 13(a) of the Exchange Act, and Rules 12b-20 and 13a-1 thereunder, by granting distributors the right to return unsold lenses in connection with the December Program. He knew, or should have known, that his conduct would cause B&L to improperly recognize revenue, and contribute to improper revenue recognition in B&L s financial statements. Matsumoto also violated Section 13(b)(5), and Rule 13b2-1 thereunder, and caused B&L's violations of Sections 13(b)(2)(A) and (B) of the Exchange Act, by knowingly issuing rights of return to distributors. 4. Johnson Was a Cause of B&L's Violation of the Reporting Provisions of the Exchange Act Johnson was a cause of B&L's violation of Section 13(a) of the Exchange Act, and Rules 12b-20 and 13a-1 thereunder. Johnson saw and presented divisional financial statements to B&L's financial department that he should have known contained improperly recorded revenue. Johnson knew that the December Program was ambitious and it was his idea to move all of CLD's traditional SVS lens inventory from CLD s warehouse to the distributors. Johnson knew the distributors were expected to buy all the inventory in December 1993, and pay for it in six months. Johnson also knew that distributors were being asked to sell these lenses at prices significantly higher than the September promotion price and that, despite the high price, the Program depended on an unprecedented increase in CLD's market share. Johnson further knew that the distributors were extended credit far in excess of anything that had been extended to them before and should have known that in some cases the credit far exceeded the net worth of the distributors. The design and structure of the December Program raised significant questions and risks about whether revenue from the Program would be properly recognized, and Johnson had final responsibility for the CLD's financial statements. Given these circumstances, Johnson should have been especially vigilant in monitoring the implementation of the Program. For example, Johnson knew before the December 13 meeting with distributors that Ianacone had decided to require the distributors to sign promissory notes evidencing their large indebtedness to B&L. Yet he did not know, but should have known, that shortly after the December 13 meeting, in response to resistance from the distributors, Ianacone abandoned that requirement. Johnson also did not know, but should have known, that certain distributors were granted rights of return. Finally, Johnson did not know, but should have known, that the CLD held the books ======END OF PAGE 13====== open after the close of the fiscal year and that certain distributors required B&L to pay for storage of the lenses. Because of the foregoing, and the risks associated with this large, end of the year transaction, Johnson was a cause of B&L's violation of the reporting requirements. IV. Based on the foregoing, the Commission deems it appropriate to accept the Respondents' Offers and to impose the relief specified in those Offers. Accordingly, IT IS HEREBY ORDERED, pursuant to Section 21C of the Exchange Act, that B&L cease and desist from committing or causing any violation, and any future violation, of Sections 10(b), 13(a), and 13(b)(2)(A) and (B) of the Exchange Act, and Rules 10b-5, 12b-20, and 13a-1 thereunder. IT IS ALSO ORDERED, pursuant to Section 21C of the Exchange Act, that Ermin Ianacone cease and desist from causing any violation, and cease and desist from committing or causing any future violation, of Sections 10(b) and 13(b)(5) of the Exchange Act, and Rules 10b-5 and 13b2-1 thereunder, and from causing any violation, and any future violation, of Sections 13(a) and 13(b)(2)(A) and (B) of the Exchange Act, and Rules 12b-20 and 13a-1 thereunder. IT IS ALSO ORDERED, pursuant to Section 21C of the Exchange Act, that Kurt Matsumoto cease and desist from causing any violation, and cease and desist from committing or causing any future violation, of Sections 10(b) and 13(b)(5) of the Exchange Act, and Rules 10b-5 and 13b2-1 thereunder, and from causing any violation, and any future violation, of Sections 13(a) and 13(b)(2)(A) and (B) of the Exchange Act, and Rules 12b-20 and 13a-1 thereunder. IT IS ALSO ORDERED, pursuant to Section 21C of the Exchange Act, that Harold O. Johnson cease and desist from causing any violation, and any future violation, of Section 13(a) of the Exchange Act, and Rules 12b-20 and 13a-1 thereunder. By the Commission. Jonathan G. Katz, Secretary ======END OF PAGE 14======