United States District Court
for the District of Columbia

Complaint for Civil Penalty

Plaintiff, United States Securities and Exchange Commission ("Commission"), for its Complaint alleges as follows:

Summary

1. This action arises from materially false and misleading financial statements that SmarTalk TeleServices, Inc. filed with the Commission as of the third quarter of 1997 and year-end 1997. SmarTalk's false and misleading financial statements were also incorporated in registration statements for offerings of stock filed with the Commission in September and December 1997, and May 1998.

2. SmarTalk falsely reported net income of $478,000 in its quarterly report for the third quarter of 1997. In fact, SmarTalk had losses that period. As Defendant Glen Andrew Folck, SmarTalk's Chief Financial Officer, knew or should have known, SmarTalk hid the losses by improperly capitalizing ordinary operating expenses. The expenses were improperly treated as an asset.

3. Additionally, in SmarTalk's year-end 1997 annual report, which included audited financial statements, SmarTalk reported a one-time charge, a $25 million restructuring reserve, purportedly for anticipated 1998 costs, after its purchase of several other prepaid telephone card businesses. As Folck knew or should have known, the entire restructuring reserve did not conform to Generally Accepted Accounting Principles ("GAAP") because the anticipated costs were not proper restructuring costs and the company had failed to properly establish a plan of restructuring in conformity with Emerging Issues Task Force Issue No. 94-3, Liability Recognition for Certain Employee Termination Benefits and other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring) ("EITF 94-3").

4. Also, as Folck knew or should have known, SmarTalk improperly understated current period operating expenses by charging 1997 operating expenses (including most of the above described expenses improperly capitalized as of the third quarter of 1997) against the non-GAAP restructuring reserve. This enabled SmarTalk to falsely inflate earnings before one-time charges at year-end 1997.

5. In November 1998, SmarTalk restated its audited financial statements for year-end 1997. In the restatement, SmarTalk reversed the entire $25 million restructuring reserve that had been recorded at year-end 1997. In addition, SmarTalk expensed most of the operating costs that had previously been charged against the restructuring reserve in 1997.

6. By engaging in the conduct described above, Folck violated Rule 13b2-1 under the Securities Exchange Act of 1934 ("Exchange Act") [17 C.F.R. § 240.13b2-1].

Jurisdiction and Venue

7. The Commission brings this action pursuant to the authority conferred upon it by Section 21(d)(3)(A) of the Exchange Act [15 U.S.C. § 78u(d)(3)(A)] to obtain a civil money penalty from Defendant Folck.

8. This Court has jurisdiction over this action pursuant to Sections 21 and 27 of the Exchange Act [15 U.S.C. §§ 78u and 78aa]. Venue lies in this Court pursuant to Section 27 of the Exchange Act [15 U.S.C. § 78aa].

9. Defendant, directly and indirectly, has made use of the means or instruments of transportation or communication in interstate commerce, or of the mails in connection with the acts, practices and transactions alleged herein, certain of which occurred within the District of Columbia.

The Defendant

10. Glen Andrew Folck was at all relevant times Chief Financial Officer of SmarTalk and assistant secretary to SmarTalk's board of directors. During the relevant period, Folck helped prepare and signed the company's filings with the Commission. Folck's job responsibilities also included preparation of the company's financial statements and supervising the accounting department. Folck attended board meetings, had frequent contacts with other upper management at SmarTalk and was the primary liaison with SmarTalk's auditors. Folck is licensed as a CPA in the state of Ohio, but was on inactive status during his employment with SmarTalk. Folck, currently age 38, is a resident of North Carolina.

Other Relevant Entity

11. SmarTalk was a provider of pre-paid telephone cards and wireless services and went public in October 1996. During the relevant period, SmarTalk's stock was registered with the Commission pursuant to Section 12(g) of the Exchange Act and was listed on the NASDAQ National Market. In November 1998, as a result of the accounting issues discussed in this Complaint, as well as other issues, SmarTalk restated its financial statements for its year ended December 31, 1997 and its first two quarters of 1998. When all of the restated items are taken into consideration, net income of $478,000 for the third quarter of 1997 changed to a net loss of $2.3 million, net losses at year-end 1997 decreased from $61.9 million to $25.7 million, net losses for the first quarter of 1998 increased from $3.4 million to $15.2 million, and net income of $2.2 million for the second quarter of 1998 changed to a net loss of $29.2 million.

12. On January 19, 1999, SmarTalk filed for Chapter 11 bankruptcy and trading in SmarTalk stock was halted. In March 1999, SmarTalk sold substantially all of its assets to AT&T. Since that time, SmarTalk has been liquidating its remaining assets in the bankruptcy proceeding.

Facts

Third Quarter 1997: Folck Causes SmarTalk to Falsely Report Net Income of $478,000 Instead of Losses

13. Paragraphs 1 through 12 above are re-alleged and incorporated herein by reference.

14. For the third quarter 1997, SmarTalk falsely reported net income of $478,000 in a November 12, 1997 press release and Form 10-Q, filed November 14, 1997. In fact, SmarTalk had losses that period. SmarTalk incorporated its third quarter financial statements in a registration statement on Form S-4 filed December 2, 1997, which Folck signed. Folck knew or should have known that the overstated net income was accomplished by the improper capitalization of ordinary operating expenses.

15. Beginning in August 1997, Folck began directing that operating expenses be reclassified to a so-called "restructuring reserve" account when the company had not yet established a restructuring reserve. As of the end of the third quarter 1997, there were about 41 such expense items totaling $1.1 million, including executive travel and entertainment costs, employee relocation expenses (associated with moving the finance department from California to Florida in 1997), various consulting and legal fees, telephone expenses, costs associated with employee terminations in mid-1997, and costs of preparing SmarTalk's annual report.

16. In connection with preparing the third quarter 1997 Form 10-Q, Folck directed the $1.1 million of expenses to be added to prepaid expenses, an asset on the balance sheet. A prepaid expense is an expense with benefits that extend into the future, but which is paid for in advance. In contrast, the third quarter expenses were payments for services that had already been rendered. The addition of operating expenses to prepaid expenses created a fictitious asset. If the expenses had been properly classified as operating expenses, SmarTalk would have reported losses for the third quarter of up to $622,000.

Year-End 1997: Folck Causes SmarTalk To Establish a Non-GAAP Restructuring Reserve and To Overstate Net Income Before One-Time Charges

17. In its year-end 1997 financial statements, which were audited, SmarTalk recorded a one-time charge, a $25 million restructuring reserve. In 1997, Folck had compiled an initial list of potential restructuring reserve costs. Folck further prepared draft and final restructuring reserve schedules in early 1998, made presentations to the board regarding the restructuring reserve, was responsible for calculating the amounts to be included in the restructuring reserve and provided the rationale for including certain costs in the restructuring reserve.

18. The $25 million restructuring reserve consisted of five types of costs purportedly to be incurred in 1998 in order to exit certain activities: contract termination fees; write-down of prepaid card inventory that would be recalled in 1998; certain asset write-downs; severance benefits associated with personnel reductions in 1998; and various general reserves. The entire restructuring reserve did not comply with GAAP. Folck knew or should have known that SmarTalk's management had failed to execute a properly detailed and approved plan of restructuring prior to year-end 1997. Folck also knew or should have known that a number of costs were not estimable by year-end and that the anticipated costs were not proper restructuring costs. In SmarTalk's restated financial statements, the entire $25 million restructuring reserve was reversed.

19. As set forth below, Folck knew or should have known that SmarTalk improperly understated 1997 operating expenses by charging them against the non-GAAP restructuring reserve. This enabled SmarTalk, in a February 26, 1998 press release to falsely announce that its 1997 year-end earnings, before one-time charges, were $2.3 million.

20. SmarTalk's year-end 1997 materially false and misleading financial statements, which were audited, were included in SmarTalk's annual report on Form 10-K filed March 31, 1998, that Folck reviewed and signed. The materially false and misleading financial statements were also incorporated in a registration statement on Form S-8 filed in September 1997 and May 7, 1998, which Folck signed. The registration statement on Form S-8 filed in September 1997 expressly incorporated all subsequently filed periodic reports.

Folck Causes SmarTalk to Overstate Year-End 1997 Net Income Before One-time Charges by Directing 1997 Operating Expenses to be Charged Against the 1998 Restructuring Reserve

21. SmarTalk's restructuring plan contemplated that SmarTalk would incur the previously described categories of costs in 1998. Nevertheless, beginning in about December 1997, Folck approved charging against the restructuring reserve most of the operating expenses that had been improperly added to prepaid expenses in the third quarter of 1997, and additional fourth quarter 1997 operating expenses. A total of $1.06 million of 1997 operating expenses were improperly charged to the restructuring reserve as of year-end. The expenses, which were not contemplated by the restructuring reserve, included executive travel and entertainment costs, telephone and moving expenses, and consulting fees. Some of the operating expenses charged in the fourth quarter were incurred in the third quarter of 1997 or even earlier. If the total operating expenses charged as of December 31, 1997 had been properly reflected on SmarTalk's financial statements, earnings before one-time charges would have been reduced by as much as 52% from $2.3 million to $1.2 million. In SmarTalk's restated financial statements, most 1997 charges against the restructuring reserve were reversed.

First Claim

Folck Violated Exchange Act Rule 13b2-1

22. Paragraphs 1 through 21 are realleged and incorporated herein by reference.

23. Exchange Act Rule 13b2-1 [17 C.F.R. § 240.13b2-1] states 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) of the Exchange Act [15 U.S.C. § 78m(b)(2)(A)].

24. As set forth above, Folck caused SmarTalk's books and records to be falsified when, as of the third quarter of 1997, he directed operating expenses to be reclassified as restructuring reserve expenses, but SmarTalk had not yet established a restructuring reserve, and then he directed those expenses to be capitalized by adding them to prepaid expenses, thereby creating a fictitious asset. As discussed above, Folck further caused SmarTalk's books and records to be falsified by approving charging against the $25 million restructuring reserve at year-end 1997 the previously capitalized third quarter 1997 operating expenses and additional fourth quarter 1997 operating expenses, when the restructuring reserve had been established for costs purportedly to be incurred in 1998. As a result of this conduct, Folck violated Exchange Act Rule 13b2-1 [17 C.F.R. § 240.13b2-1].

Prayer for Relief

WHEREFORE, the Commission respectfully requests that this Court:

I.

Enter an order requiring defendant Folck to pay a civil money penalty pursuant to Section 21(d)(3) of the Exchange Act [15 U.S.C. § 78u(d)(3)];

II.

Retain jurisdiction of this action in accordance with the principles of equity and the Federal Rules of Civil Procedure in order to implement and carry out the terms of all orders and

decrees that may be entered, or to entertain any suitable application or motion for additional relief within the jurisdiction of the Court; and

III.

Grant such other relief as the Court deems just and appropriate.

Dated: February 26, 2003

http://www.sec.gov/litigation/complaints/comp18002.htm