 |
Home | Previous Page | |
|
||
 |
|
|
|
||
 |
|
|
|
|
|||||||||||||||
|
|
|||||||||||||||
|
|
UNITED STATES DISTRICT COURT
|
|||||||||
Securities and Exchange Commission, Plaintiff, v. LAWRENCE O'SHAUGHNESSY,
Defendants. |
: : : : : : : : : : : : : : |
Civil Action No. |
The plaintiff Securities and Exchange Commission ("Commission") alleges the following against defendants Lawrence O'Shaughnessy ("O'Shaughnessy"), Gary H. Klein ("Klein"), Gary K. Levi ("Levi"), and Mark Tucker ("Tucker"):
1. This matter involves accounting fraud at Candie's, Inc. ("Candie's" or "the Company"), a public company that designs, markets and distributes women's shoes and accessories.
2. From at least August 1997 until the spring of 1999, Candie's senior management, including O'Shaughnessy (Candie's Chief Operating Officer ("COO")) and Klein (Candie's Vice President of Finance), employed various fraudulent accounting practices designed to improve Candie's publicly reported financial condition.
3. Specifically, O'Shaughnessy directed employees to engage in a practice known as "bill and hold." Through this bill and hold practice, Candie's prematurely recorded revenue from various purchase orders calling for future delivery of shoes, by recording these orders as final sales prior to shipping the shoes to customers. Candie's prematurely recognized over $4.4 million in revenue in fiscal years 1998 and 1999 through the improper use of bill and hold and other irregular shipping practices. Klein was aware that Candie's was engaged in the bill and hold practice.
4. Candie's also improperly recognized $3.1 million in revenue from two illusory transactions with a barter company ("Barter Company") that Levi controlled. In these transactions, Candie's purportedly sold shoes to the Barter Company for resale, and in exchange, Candie's received a combination of cash and advertising credits. The revenue and income Candie's recorded in connection with these transactions during the third quarter of fiscal year 1998 and fiscal year 1999 was improper because, among other reasons, Candie's either never shipped the shoes described by the contracts underlying these transactions, or Candie's shipped the shoes many months after recording the revenue. O'Shaughnessy and Klein negotiated and/or signed the barter agreements with Levi.
5. Candie's also recorded several unsupported journal entries in the fourth quarter of fiscal year 1999 to recognize approximately $1.65 million in baseless "sales credits" from one of its overseas buying agents ("Buying Agent"). Specifically, Candie's used the false sales credits to reduce its accounts payable to the Buying Agent, and correspondingly to understate expenses, which enabled Candie's to inflate reported income. Tucker, a Candie's director and member of the audit committee, as well as Candie's principal contact at the Buying Agent, agreed to permit Candie's to record the false credits and assisted Candie's in obtaining documentation of the nonexistent credits.
6. As a result of these fraudulent accounting practices, Candie's falsely and materially inflated its reported financial results for the quarter ended October 31, 1997, the fiscal year ended January 31, 1998, the quarters ended April 30, 1998, July 31, 1998, and October 31, 1998, and the fiscal year ended January 31, 1999.
7. In April 1999, Candie's auditors began to question certain transactions while auditing Candie's January 31, 1999 financial statements. O'Shaughnessy, Levi and Tucker knowingly provided false information to the auditors in an effort to document certain suspect transactions. The auditors, however, continued to have questions about the transactions and they advised Candie's that prior results might need to be restated, and recommended that Candie's conduct an internal investigation. Candie's then conducted an investigation and in September 1999, Candie's restated previously reported financial results.
8. By virtue of the conduct alleged in this Complaint, O'Shaughnessy, directly or indirectly, singly or in concert, has engaged in acts, practices and courses of business that constitute violations of Section 17(a) of the Securities Act, 15 U.S.C. § 77q(a), Sections 10(b) and 13(b)(5) of the Exchange Act, 15 U.S.C. §§ 78j(b) and 78m(b)(5), and Rules 10b-5, 13b2-1, and 13b2-2, 17 C.F.R. §§ 240.10b-5, 240.13b2-1 and 240.13b2-2, and has aided and abetted violations of Sections 13(a) and 13(b)(2)(A) & (B) of the Exchange Act, 15 U.S.C. §§ 78m(a), 78m(b)(2)(A) and 78m(b)(2)(B), and Rules 12b-20, 13a-1, and 13a-13, 17 C.F.R. §§ 240.12b-20, 240.13a-1, 240.13a-13.
9. By virtue of the conduct alleged in this Complaint, Klein, directly or indirectly, singly or in concert, has engaged in acts, practices and courses of business that constitute violations of Section 17(a) of the Securities Act, 15 U.S.C. § 77q(a), Sections 10(b) and 13(b)(5) of the Exchange Act, 15 U.S.C. §§ 78j(b) and 78m(b)(5), and Rules 10b-5 and 13b2-1, 17 C.F.R. §§ 240.10b-5 and 240.13b2-1, and has aided and abetted violations of Sections 13(a) and 13(b)(2)(A) & (B) of the Exchange Act, 15 U.S.C. §§ 78m(a), 78m(b)(2)(A) and 78m(b)(2)(B), and Rules 12b-20, 13a-1, and 13a-13, 17 C.F.R. §§ 240.12b-20, 240.13a-1, 240.13a-13.
10. By virtue of the conduct alleged in this Complaint, Tucker, directly or indirectly, singly or in concert, has engaged in acts, practices and courses of business that constitute violations of Section 13(b) of the Exchange Act, 15 U.S.C. § 78(b), and Rule 13b2-2, 17 C.F.R. § 240.13b2-2, and has aided and abetted violations of Sections 10(b) and 13(a) of the Exchange Act, 15 U.S.C. §§ 78j(b) and 78m(a), and Rules 10b-5, 12b-20, and 13a-1, 17 C.F.R. §§ 240.10b-5, 240.12b-20 and 240.13a-1.
11. By virtue of the conduct alleged in this Complaint, Levi has aided and abetted violations of Sections 10(b) and 13(a) of the Exchange Act, 15 U.S.C. §§ 78j(b) and 78m(a), and Rules 10b-5, 12b-20, 13a-1, and 13a-13, 17 C.F.R. §§ 240.10b-5, 240.12b-20, 240.13a-1 and 240.13a-13.
12. The Commission brings this action pursuant to the authority conferred upon it by Section 20 of the Securities Act, 15 U.S.C. § 77t, and Section 21 of the Exchange Act, 15 U.S.C. § 78u, seeking to restrain and enjoin permanently O'Shaughnessy, Klein, Levi and Tucker from engaging in the acts, practices, and courses of business alleged herein. The Commission is seeking disgorgement and pre-judgment interest from Klein and Tucker. The Commission is also seeking civil penalties from O'Shaughnessy, Klein, Tucker, and Levi pursuant to Section 20(d) of the Securities Act, 15 U.S.C. § 77t(d), and Section 21(d)(3) of the Exchange Act, 15 U.S.C. § 78u(d)(3). The Commission is seeking an order barring O'Shaughnessy, Tucker and Klein from acting as an officer and director of any issuer that has a class of securities registered pursuant to Section 12 of the Exchange Act, 15 U.S.C. § 781, or that is required to file reports pursuant to Section 15(d) of the Exchange Act, 15 U.S.C. § 78o(d). Finally, the Commission is seeking all other just and appropriate relief.
13. Defendants, directly and indirectly, have made use of the means or instrumentalities of transportation or communication in, and the means or instrumentalities of interstate commerce, or of the mails, or of the facilities of a national securities exchange, in connection with the transactions, acts, practices, and courses of business alleged herein.
14. This Court has jurisdiction over this action, and venue is proper in this district, pursuant to Section 20 of the Securities Act, 15 U.S.C. § 77t, and Sections 21 and 27 of the Exchange Act, 15 U.S.C. §§ 78u and 78aa. Certain of these transactions, acts, practices and courses of business occurred in the Southern District of New York. For instance, during the relevant period, Candie's was located in Purchase, NY. Candie's senior management prepared books and records, fraudulent earnings reports, public filings, and press releases from its offices in Purchase, NY.
15. O'Shaughnessy is 53 years old and resides in Chester, NJ. From 1993 until September 1999, O'Shaughnessy served as Candie's COO and a director. O'Shaughnessy left Candie's in March 2000 when his employment contract expired.
16. Klein is 48 years old and resides in Harrison, NY. Klein joined Candie's in November 1994. He served as Candie's principal accounting officer during fiscal year 1998 and part of fiscal year 1999. Candie's terminated Klein's employment in October 1998. Klein was a certified public accountant licensed in the State of New York.
17. Tucker is 56 years old and resides in New York, NY. Since June 1993, Tucker has been associated with the Buying Agent, a footwear "sourcing agent" located in Taichung, Taiwan. Tucker became a director of Candie's in May 1996. Tucker also served as a member of Candie's audit committee from May 1997 until his resignation from the board on June 26, 2001.
18. Levi is 51 years old and resides in Port Washington, NY. He is a principal of the Barter Company.
19. Candie's is a Delaware corporation with current headquarters in Valhalla, NY. During the period from 1997 to 1999, its headquarters were in Purchase, New York. Candie's primary business is designing, marketing, and distributing moderately priced women's shoes, handbags and other accessories. During the period from 1997 to 1999, Candie's filed periodic reports with the Commission pursuant to Section 12(g) of the Exchange Act and its stock was traded on the Nasdaq National Market. Candie's reports quarterly and annual results based on a fiscal year end of January 31.
20. In the late 1990's, Candie's was a rapidly growing company. Starting with the third quarter of fiscal year 1998, which quarter ended October 31, 1997, the financial results Candie's periodically reported to the public repeatedly met or exceeded analyst forecasts. As will be discussed below, however, Candie's senior management, and others, manipulated these financial results.
21. In August 1997, O'Shaughnessy and Klein negotiated an agreement with Levi, a principal of the Barter Company. The agreement provided that Candie's would sell shoes to the Barter Company, who then was to resell the shoes to third parties outside the United States, and in exchange, Candie's was to receive cash and credits for advertising and merchandise. Specifically, the agreement called for Candie's to sell approximately 160,000 pairs of "Candie's" and "Demi" brand slides, valued at approximately $10 per pair, to the Barter Company. Klein and Levi signed the agreement on behalf of Candie's and the Barter Company respectively.
22. Klein then arranged for Candie's to record a journal entry on October 31, 1997 to recognize revenue of approximately $1.3 million. This revenue reflected the purported sale of 133,000 pairs of shoes to the Barter Company that were the subject of the August 1997 agreement.
23. Candie's, however, did not ship the 133,000 pairs of shoes to the Barter Company in October 1997, or at any other time during the third quarter of fiscal year 1998. In fact, Candie's did not deliver the 133,000 pairs of shoes to the Barter Company until approximately July 1999. According to Generally Accepted Accounting Principles ("GAAP"), a company can recognize revenue from a sales transaction only when title and risk pass to the customer, which is typically when a company ships goods to the customer. In fact, Candie's own revenue recognition policy permitted the company to recognize revenue only upon the shipment of goods with risk and title passing. Therefore, Candie's should not have recognized the approximately $1.3 million in revenue from the sale of the 133,000 pairs of shoes until July 1999.
24. O'Shaughnessy and Klein were aware, or were reckless in not knowing, that Candie's did not ship 133,000 pairs of shoes to the Barter Company in October 1997, or at any other time during the third quarter of fiscal year 1998.
25. After Candie's auditors raised questions about the August 1997 barter transaction during a subsequent audit, Candie's Chief Financial Officer ("CFO") directed Levi to prepare a false letter, which was backdated to October 15, 1997, directing Candie's to ship the shoes to a Barter Company warehouse. Candie's then used this letter to attempt to satisfy the auditors that the $1.3 million sale Candie's had recorded in the third quarter of fiscal year 1998 was proper.
26. On October 31, 1997, Klein also improperly recorded a $1.6 million sales credit from the Buying Agent on Candie's books and records. Klein recorded this credit knowing that it reduced Candie's expenses by $1.6 million and correspondingly increased pretax income by the same amount for the third quarter of fiscal year 1998.
27. On approximately November 24, 1997, Candie's issued a press release reporting revenue for the quarter ended October 31, 1997 of $23,780,002, and net income of $808,504.
28. On December 15, 1997, Candie's filed a Form 10-Q with the Commission for the third quarter of fiscal year 1998 reporting the same revenue and income figures announced in the November 24 press release. Klein and others signed the Form 10-Q on Candie's behalf.
29. Candie's materially overstated the revenue and income figures contained in the November 24, 1997 press release and the December 15, 1997 Form 10-Q because, for instance, Candie's had improperly recognized $1.3 million in revenue from the barter transaction. Specifically, Candie's overstated reported revenue by $1.3 million, or six percent, and net income by $335,000, or forty-one percent.
30. During approximately January 1998, O'Shaughnessy and other Candie's employees held weekly sales meetings to discuss fourth quarter sales targets. At this time, O'Shaughnessy and others learned that Candie's would fall short of its sales and revenue projections.
31. In January 1998, O'Shaughnessy directed Candie's customer service manager and other employees to "bill and hold" certain sales orders to generate additional revenue. 32. Through the bill and hold practice, Candie's invoiced purchase orders calling for Candie's to deliver shoes in future periods (i.e. after the quarter-ended January 31, 1998) and prematurely recorded the revenue in the quarter-ended January 31, 1998 without shipping the shoes to the customer described in the orders. Under GAAP, Candie's improperly recorded this revenue from the bill and hold practice because Candie's did not ship the shoes to its customers at the time of invoicing and therefore risk and title did not pass to the customers.
33. As a result of the bill and hold practice (and other irregular shipping practices), Candie's prematurely recognized approximately $1.8 million in revenue on its books and records during fiscal year 1998.
34. During the winter and spring of 1998, Candie's auditors conducted an audit of Candie's January 31, 1998 financial statements.
35. During the audit, Levi confirmed that Candie's stated balance of cash and barter credits from the August 1997 agreement was accurate despite the fact that Candie's had never shipped the 133,000 pairs of shoes to the Barter Company.
36. No one from Candie's advised the auditors about the improper revenue recognition from the August 1997 agreement with the Barter Company, or the premature recognition of revenue from the bill and hold practice described above.
37. O'Shaughnessy, Klein, and others represented in writing to the auditors that Candie's financial statements had been prepared in conformity with GAAP when, in fact, they had not been.
38. Candie's issued a press release on or about April 21, 1998 announcing results for the fourth quarter and fiscal year ended January 31, 1998. Candie's announced quarterly revenue of $22,609,162, and net income for the quarter of $709,144. Candie's further announced annual revenue of $92,976,416, and net income for the year of $4,535,926.
39. On May 1, 1998, Candie's filed a Form 10-K with the Commission for fiscal year 1998 reporting the same fourth quarter and full year revenue and income figures announced in the April 21 press release. O'Shaughnessy, Klein, and others, signed the Form 10-K on Candie's behalf.
40. Candie's materially overstated quarterly revenue in its April 21, 1998 press release and May 1, 1998 Form 10-K because Candie's improperly recognized revenue from the bill and hold practice (and other irregular shipping practices). Specifically, Candie's overstated reported quarterly revenues by $1.8 million, or nine percent, and net income by $775,000, which converted a $65,000 loss into net income of $709,144.
41. In its April 21, 1998 press release and May 1, 1998 Form 10-K, Candie's also materially overstated annual revenue for fiscal year 1998 by $3.1 million, or three percent, and annual net income by $1,110,000, or twenty-four percent.
42. During the first quarter of fiscal year 1999, Candie's recognized $474,760 of revenue on its books and records from the purported sale of an additional 47,476 pairs of shoes to the Barter Company, which were the subject of the August 1997 agreement. Candie's did not, however, ship the shoes to the Barter Company during the first quarter of fiscal year 1999. In fact, Candie's did not ship the shoes to the Barter Company until approximately July 1999. Consequently, as with the third quarter of fiscal year 1998, Candie's recognition of revenue from the purported shipment of shoes to the Barter Company was improper under GAAP.
43. Candie's also continued the bill and hold practice at the end of the first quarter of fiscal year 1999.
44. O'Shaughnessy again directed employees to bill and hold purchase orders calling for Candie's to deliver shoes in future periods to generate enough revenue to make up for an expected sales and revenue shortfall in the first quarter of fiscal year 1999. Specifically, Candie's improperly recorded $991,573 of revenue on its books and records as part of the bill and hold practice.
45. Numerous Candie's employees questioned the propriety of the bill and hold practice. For instance, in April 1998, an employee in the credit department questioned Klein about the bill and hold practice, but Klein failed to investigate the practice, stop the practice, or otherwise prevent Candie's from prematurely recognizing revenue from this practice.
46. Candie's employees created schedules titled "Summary of Special Bill and Hold Invoices," which listed the customer invoices subject to the bill and hold practice. Candie's officers and employees used the schedule to track the orders used in the bill and hold practice. For instance, one such schedule dated April 30, 1998 was distributed to Klein and O'Shaughnessy.
47. On May 14, 1998, Candie's filed a Form S-4 registration statement with the Commission to register the issuance of more than 2.9 million shares of common stock. O'Shaughnessy, Klein, and others, signed the Form S-4, which contained Candie's fiscal year 1998 financial statements and incorporated by reference Candie's October 31, 1997 Form 10-Q.
48. On approximately May 28, 1998, Candie's issued a press release reporting results for the quarter ended April 30, 1998. Candie's reported quarterly revenue of $25,693,000, and net income of $1,056,000.
49. On June 11, 1998, Candie's filed a Form 10-Q with the Commission for the first quarter of fiscal year 1999 reporting the same revenue and income figures announced in the May 28, 1998 press release. Klein, among others, signed the Form 10-Q on Candie's behalf.
50. Candie's materially overstated the revenue and income figures contained in the May 28, 1998 press release and the June 11, 1998 Form 10-Q because Candie's had improperly recognized $474,760 of revenue from the August 1997 Barter Company agreement and prematurely recognized $991,573 of revenue through the bill and hold practice. Specifically, Candie's overstated revenue by $1,466,333, or six percent, and overstated net income by $324,000, or forty-four percent.
51. During the second quarter of fiscal year 1999, Candie's continued to prematurely recognize revenue and income through the bill and hold practice.
52. In July 1998, O'Shaughnessy directed Candie's employees to bill and hold additional purchase orders calling for Candie's to deliver shoes in future periods. As a result, Candie's prematurely recorded revenue of $1,698,000 through the bill and hold practice in this quarter.
53. Candie's employees again created and circulated a spreadsheet entitled "Summary of Special Bill and Hold Invoices" dated July 30, 1998 to track the improper bill and hold purchase orders. The schedule was distributed to O'Shaughnessy and Klein, among others.
54. In the second quarter of fiscal year 1999, Candie's improperly recognized $209,160 of revenue from the purported sale of 17,309 pairs of shoes to the Barter Company, which were the subject of the August 1997 agreement. Candie's, however, did not ship the shoes to the Barter Company during the second quarter of fiscal year 1999. In fact, Candie's did not ship these shoes until approximately July 1999, which is in fiscal year 2000. Thus, Candie's should not have recognized this $209,160 in revenue on its books and records.
55. On approximately August 25, 1998, Candie's issued a press release that announced revenues for the second quarter of fiscal year 1999 of $41,477,000, and net income of $3,361,000.
56. On September 14, 1998, Candie's filed a Form 10-Q with the Commission for the second quarter of fiscal year 1999 reporting the same revenue and income figures Candie's had announced in the August 25, 1998 press release. Klein, among others, signed the Form 10-Q on Candie's behalf.
57. Candie's materially overstated the revenue and income figures in the August 25, 1998 press release and the September 14, 1998 Form 10-Q because of the improper revenue recognition described above. Specifically, Candie's overstated revenue by $1,907,160, or five percent, and overstated net income by $548,000, or sixteen percent.
58. In or about September or October 1998, representatives of Candie's met with Levi to discuss the terms of another barter arrangement. During the meeting, O'Shaughnessy proposed that Candie's would "sell" to the Barter Company valid customer purchase orders calling for the future delivery of 62,000 pairs of shoes to customers in exchange for $1.2 million of barter credits. O'Shaughnessy also proposed that the shoes Candie's purportedly sold to the Barter Company in the August 1997 agreement be revalued to generate an additional $600,000 in income.
59. O'Shaughnessy and Levi subsequently signed an agreement reflecting the terms described above, which was purportedly dated October 30, 1998.
60. O'Shaughnessy and Levi also then signed amendments to the October 1998 agreement. One amendment dated December 11, 1998 added contingencies to the October 1998 agreement by requiring Candie's to compensate the Barter Company if the Barter Company could not resell the shoes to customers at a certain price.
61. The October 1998 agreement, as well as amendments O'Shaughnessy and Levi signed on approximately April 15, 1999, also falsely indicated that the Barter Company had purchased and taken title to all of the shoes that were the subject of the August 1997 and October 1998 agreements.
62. As with the August 1997 agreement, however, Candie's never shipped or otherwise transferred title or possession of these shoes to the Barter Company during the third quarter of fiscal year 1999.
63. On October 31, 1998, Candie's recorded $1.8 million in revenue (and $1.2 million in income) from the purported sale of shoes to the Barter Company, which were the subject of the October 1998 agreement.
64. On approximately December 2, 1998, Candie's issued a press release that announced revenues for the third quarter of fiscal year 1999 of $30,365,000, and net income of $822,000.
65. On December 15, 1998, Candie's filed a Form 10-Q with the Commission for the quarter ended October 31, 1998, which contained the same revenue and income figures which Candie's had announced in the December 2, 1998 press release. Candie's Chief Executive Officer ("CEO") and CFO, among others, signed the Form 10-Q on Candie's behalf.
66. Candie's materially overstated the revenue and income figures in the December 2, 1998 press release and December 15, 1998 Form 10-Q because of the improper revenue recognition from the October 1998 Barter Company agreement. Specifically, Candie's overstated its third quarter revenue by $1,800,000, or six percent. Significantly, the improper revenue recognition enabled Candie's to convert a $388,000 loss for the quarter to an $822,000 profit.
67. In January 1999, Candie's cancelled the October 1998 agreement with the Barter Company. Candie's then reversed the recognition of $1.8 million in revenue from that transaction in October 1998 and rebooked the revenue from the sale of these shoes in the fourth quarter of fiscal year 1999, when Candie's shipped the shoes to the ultimate purchasers of the shoes.
68. Shortly before the end of fiscal year 1999, Candie's CFO attempted to generate additional income to make up for an expected shortfall by manufacturing sales credits with Candie's Buying Agent.
69. Candie's CFO recorded a journal entry on Candie's books and records reflecting a purported $1 million "business interruption credit," and a journal entry reflecting a purported $650,000 "volume incentive" credit for designating the Buying Agent as its main sourcing agent. In addition, to offset these credits, and insure that Candie's continued to pay the Buying Agent for shoes it had bought, Candie's CFO recorded journal entries on Candie's books and records that reflected a purported $2 million capital investment in a design center in Taiwan for the Buying Agent. Through these entries, Candie's reduced regular operating expenses (i.e. accounts payable) for the fourth quarter of fiscal year 1999 by $1.65 million, and correspondingly increased income.
70. The $1.65 million business interruption and volume incentive credits, as well as the $2 million capital investment credit, were baseless.
71. In April 1999, Candie's auditors questioned the credits from the Buying Agent and the investment in the design center. The auditors also questioned why Candie's had reversed during the fourth quarter the $1.8 million of revenue recognized on the October 1998 Barter Company agreement in the third quarter.
72. When the auditors asked for documents supporting the recognition of the Buying Agent credits, Candie's CFO orally and falsely confirmed to the auditors that the credits were genuine. Candie's CFO also created two documents entitled Memorandum of Understanding ("MOU"). One document, purportedly dated October 22, 1998, reflected a $1 million business interruption credit from the Buying Agent. The other document, purportedly dated May 20, 1998, reflected a $650,000 volume incentive credit from the Buying Agent.
73. Candie's CFO then provided the MOUs to Tucker, who obtained the signature of a Buying Agent principal on the MOUs. Tucker then sent the MOUs to Candie's for signature. Candie's CEO signed the MOUs and backdated them to May 20, 1998 and October 22, 1998. Candie's CFO then provided the MOUs to the auditors as purported support for the $1.65 million credits.
74. Tucker also transmitted to Candie's auditors, by facsimile, false documentation to support Candie's purported investment in the design center. The auditors were not satisfied with Candie's representations about the design center investment and suggested sending a representative to Taiwan to confirm that a design center had been built. Instead, O'Shaughnessy and Candie's CFO provided Candie's auditors with photographs ostensibly taken at the design center, and they falsely indicated that Candie's had purchased all of the equipment depicted in the photographs. In fact, Candie's had not made any investment in a design center nor had Candie's purchased any of the equipment depicted in the photographs.
75. Candie's auditors also questioned the legitimacy of both the August 1997 and October 1998 Barter Company agreements. The auditors asked O'Shaughnessy for proof as to when Candie's had shipped shoes to the Barter Company to determine the proper period for Candie's to book revenue from the purported sale of shares to the Barter Company.
76. O'Shaughnessy, knowing that there was no proof of shipment because Candie's had not shipped the shoes to the Barter Company, directed Candie's employees to create false shipping documents, which were then provided to Candie's auditors.
77. In addition, Levi signed documentation confirming Candie's stated balance of cash and barter credits from agreements with the Barter Company despite the fact that Levi knew Candie's had never shipped any shoes to the Barter Company pursuant to the August 1997 or October 1998 agreements.
78. Still unsatisfied, Candie's auditors requested a detailed confirmation that included exact dates that Candie's had purportedly shipped shoes to the Barter Company. Levi handwrote false shipping dates on the confirmation, and then orally confirmed this information to the audit team.
79. By the end of April 1999, Candie's auditors still had questions about the Buying Agent credits and the agreements with the Barter Company. The auditors requested a meeting with Candie's Board of Directors, and recommended that Candie's conduct an internal investigation.
80. Following the completion of its internal investigation, Candie's restated previously reported results for fiscal year 1998 and for the first three quarters of fiscal year 1999. Candie's restatement, among other things, reversed both Barter Company transactions, and reassigned the bill and hold sales to the proper reporting periods.
81. On September 21, 1999, Candie's issued a press release reporting results for the fourth quarter and full year ended January 31, 1999. Candie's reported fourth quarter revenue of $24,069,000, and a net loss of $2,812,000. Candie's also reported full year revenue of $114,696,000, and a net loss of $866,000.
82. On September 22, 1999, Candie's filed its Form 10-K for the fiscal year ended January 31, 1999, which contained restated financial statements for the fiscal year ended January 31, 1998. The Form 10-K contained financial statements that continued to recognize income reflecting the improper $1.65 million business interruption and volume incentive credits. O'Shaughnessy and Tucker, among others, signed this filing on behalf of Candie's.
83. On October 4, 1999, Candie's filed amended Forms 10-Q that contained restated financial statements for the quarters ended April 30, 1998, July 31, 1998, and October 31, 1998.
84. From August 1997 through the spring of 1999, Candie's failed to make and keep books and records that, in reasonable detail, fairly and accurately reflected Candie's transactions and disposition of assets.
85. From August 1997 through the spring of 1999, Candie's had inadequate internal controls. Candie's internal controls failed to insure that transactions were recorded to permit the preparation of financial statements in conformity with GAAP, and failed to maintain the accountability of assets.
86. The Commission realleges and incorporates by reference herein each and every allegation contained in paragraphs 1 through 85.
87. O'Shaughnessy and Klein, directly or indirectly, singly or in concert, by use of the means and instrumentalities of interstate commerce or of the mails, or of the facilities of a national securities exchange, in connection with the offer, purchase, or sale of Candie's securities, knowingly or recklessly, has: (a) employed devices, schemes or artifices to defraud; (b) obtained money or property by means of, or otherwise made, untrue statements of material fact, or has omitted to state material facts necessary in order to make statements made, in light of the circumstances under which they were made, not misleading; and/or (c) engaged in acts, practices or courses of business which operated or would have operated as a fraud or deceit upon purchasers of Candie's securities and upon other persons.
88. As part, and in furtherance, of the violative conduct, O'Shaughnessy improperly inflated Candie's reported financial results in press releases, Candie's Form S-4, Candie's Form 10-Q for the third quarter of fiscal year 1998, Candie's Form 10-K for fiscal year 1998, and Forms 10-Q for the first, second and third quarters of fiscal year 1999 by enabling Candie's to recognize improperly revenue and income from the bill and hold practice and the sales transactions with the Barter Company.
89. As part, and in furtherance, of the violative conduct, Klein improperly inflated Candie's reported financial results in press releases, Candie's Form S-4, Candie's Form 10-Q for the third quarter of fiscal year 1998, Candie's Form 10-K for fiscal year 1998, and Forms 10-Q for the first and second quarters of fiscal year 1999 by enabling Candie's to recognize improperly revenue and income from the bill and hold practice and the August 1997 sales transaction with the Barter Company.
90. The Form S-4, Form 10-K and Forms 10-Q identified above, and the accompanying press releases announcing Candie's earnings, contained material misstatements of revenue and income.
91. O'Shaughnessy knew or was reckless in not knowing, that Candie's press releases, Form S-4, and periodic filings were materially false and misleading.
92. Klein knew or was reckless in not knowing, that Candie's press releases, Form S-4, and periodic filings were materially false and misleading.
93. By reason of the foregoing, O'Shaughnessy and Klein, singly or in concert, directly or indirectly, violated Section 17(a) of the Securities Act, 15 U.S.C. § 77q(a), Section 10(b) of the Exchange Act, 15 U.S.C. § 78j(b), and Rule 10b-5, 17 C.F.R. § 240.10b-5.
94. The Commission realleges and incorporates by reference herein each and every allegation contained in paragraphs 1 through 93.
95. Candie's, Levi and Tucker, directly or indirectly, singly or in concert, by use of the means and instrumentalities of interstate commerce or of the mails, or of the facilities of a national securities exchange, in connection with the purchase or sale of Candie's securities, knowingly or recklessly, has: (a) employed devices, schemes or artifices to defraud; (b) made untrue statements of material fact, or has omitted to state material facts necessary in order to make statements made, in light of the circumstances under which they were made, not misleading; and/or (c) engaged in acts, practices or courses of business which operated or would have operated as a fraud or deceit upon purchasers of Candie's securities and upon other persons.
96. Candie's violated Section 10(b) of the Exchange Act, 15 U.S.C. § 78j(b), and Rule 10b-5, 17 C.F.R. § 240.10b-5, by filing Forms 10-Q for the third quarter of fiscal year 1998 and first three quarters of fiscal year 1999, and Forms 10-K for fiscal year 1998 and 1999 that contained materially false revenue and income figures.
97. Tucker substantially assisted Candie's violations of Section 10(b) of the Exchange Act and Rule 10b-5 when, among other things, he agreed to permit Candie's to falsely claim it had obtained $1.65 million in credits from the Buying Agent, and Tucker arranged to have the two MOUs reflecting the purported credits backdated and signed by a representative of the Buying Agent.
98. Tucker knew, or was reckless in not knowing, that Candie's was improperly recognizing the credits and that his conduct was improper.
99. Levi substantially assisted Candie's violations of Section 10(b) of the Exchange Act and Rule 10b-5 by, among other things, agreeing to enter into illusory sales transactions with Candie's in August 1997 and October 1998 in order to permit Candie's to generate revenue improperly.
100. Levi knew, or was reckless in not knowing, that Candie's was improperly recognizing revenue from the sales transactions and that his conduct was improper.
101. By reason of the foregoing, and pursuant to Section 20(e) of the Exchange Act, 15 U.S.C. § 78t(e), Tucker and Levi, singly or in concert, directly or indirectly, aided and abetted violations of Section 10(b) of the Exchange Act, 15 U.S.C. § 78j(b), and Rule 10b-5, 17 C.F.R. § 240.10b-5.
102. The Commission realleges and incorporates by reference herein each and every allegation contained in paragraphs 1 through 101.
103. O'Shaughnessy and Klein knowingly circumvented or knowingly failed to implement a system of internal accounting controls required to be devised and maintained pursuant to Section 13(b)(2)(B) of the Exchange Act, 15 U.S.C. § 78m(b)(2)(b), or knowingly falsified books, records and accounts that were required to be maintained under Section 13(b)(2)(A) of the Exchange Act, 15 U.S.C. § 78m(b)(5).
104. O'Shaughnessy and Klein, directly or indirectly, falsified or caused to be falsified, books, records or accounts subject to Section 13(b)(2)(A) of the Exchange Act, 15 U.S.C. § 78m(b)(2)(A).
105. As part of the violative conduct, O'Shaughnessy and Klein created false and misleading books and records by, among other things, permitting Candie's to recognize revenue prematurely through the bill and hold practice, and by recognizing revenue from the sales transactions with the Barter Company.
106. O'Shaughnessy and Klein acted knowingly when they created certain false and misleading books and records.
107. By reason of the foregoing, O'Shaughnessy and Klein, singly or in concert, directly or indirectly, violated Section 13(b)(5) of the Exchange Act, 15 U.S.C. § 78m(b)(5), and Rule 13b2-1, 17 C.F.R. § 240.13b2-1.
108. The Commission realleges and incorporates by reference herein each and every allegation contained in paragraphs 1 through 107.
109. O'Shaughnessy and Tucker knowingly or recklessly, directly or indirectly, made or caused to be made a materially false or misleading statement, or omitted to state or caused others to omit to state, material facts necessary in order to make statements made, in light of the circumstances under which such statements were made, not misleading, to Candie's auditors in connection with an audit or examination of Candie's financial statements required to be made pursuant to Commission rules and regulations, or the preparation or filing of any document or report required to be filed with the Commission.
110. As part of the violative conduct, during the course of the fiscal year 1999 audit, O'Shaughnessy directed Candie's employees to fabricate bills of lading to be given to the auditors.
111. O'Shaughnessy was an officer and director of Candie's.
112. As part of the violative conduct, during the course of the fiscal year 1999 audit, Tucker falsified and backdated documents reflecting sales credits with the Buying Agent, which were given to the auditors.
113. Tucker was a director of Candie's.
114. By reason of the foregoing, O'Shaughnessy and Tucker, singly or in concert, directly or indirectly, violated Section 13(b) of the Exchange Act, 15 U.S.C. § 78m, and Rule 13b2-2, 17 C.F.R. § 240.13b2-2.
115. The Commission realleges and incorporates by reference herein each and every allegation contained in paragraphs 1 through 114.
116. Candie's failed to file with the Commission, in accordance with the Commission's rules and regulations, such annual and quarterly reports as the Commission has prescribed, and Candie's failed to include, in addition to the information expressly required to be stated in such reports, such further material information as was necessary to make the statements made therein, in light of the circumstances in which they are made, not misleading, in violation of Section 13(a) of the Exchange Act, 15 U.S.C. § 78m(a), and Rules 12b-20, 13a-1, and 13a-13, 17 C.F.R. §§ 240.12b-20, 240.13a-1, 240.13a-13. As alleged above, Candie's Forms 10-K for fiscal years 1998 and 1999, and Forms 10-Q for the third quarter of fiscal year 1998 and the first three quarters of fiscal year 1999 were false and misleading because, among other things, they included financial statements that materially overstated Candie's revenue and net income.
117. O'Shaughnessy substantially assisted Candie's violations by, among other things, permitting Candie's to record improperly revenue from the bill and hold practice and the sales transactions with the Barter Company.
118. Klein substantially assisted Candie's violations by, among other things, permitting Candie's to record improperly revenue from August 1997 sales transaction with the Barter Company and the bill and hold practice.
119. Levi substantially assisted Candie's violations by, among other things, entering into illusory sales transactions with Candie's.
120. O'Shaughnessy, Klein and Levi knew, or were reckless in not knowing, that Candie's was improperly recognizing revenue and income, and that their actions were improper.
121. By reason of the foregoing, and pursuant to Section 20(e) of the Exchange Act, 15 U.S.C. §78(t)(e), O'Shaughnessy, Klein and Levi, singly or in concert, aided and abetted Candie's violations of Section 13(a) of the Exchange Act, 15 U.S.C. § 78m(a), and Rules 12b-20, 13a-1 and 13a-13, 17 C.F.R. §§ 240.12b-20, 240.13a-1, 240.13a-13.
122. The Commission realleges and incorporates by reference herein each and every allegation contained in paragraphs 1 through 121.
123. Candie's failed to file with the Commission, in accordance with the Commission's rules and regulations, such annual reports as the Commission has prescribed, and Candie's failed to include, in addition to the information expressly required to be stated in such reports, such further material information as was necessary to make the statements made therein, in light of the circumstances in which they are made, not misleading, in violation of Section 13(a) of the Exchange Act, 15 U.S.C. § 78m(a), and Rules 12b-20 and 13a-1, 17 C.F.R. §§ 240.12b-20 and 240.13a-1. As alleged above, Candie's Form 10-K for fiscal year 1999 was false and misleading because it included income figures that falsely reflected $1.65 million in sales credits with the Buying Agent.
124. Tucker substantially assisted Candie's violations by, among other things, agreeing to permit Candie's to falsely claim it had obtained $1.65 million in sales credits from the Buying Agent, and falsifying documents purportedly reflecting these credits.
125. Tucker knew, or was reckless in not knowing, that Candie's was improperly recognizing the sales credits, and that his conduct was improper.
126. By reason of the foregoing, and pursuant to Section 20(e) of the Exchange Act, 15 U.S.C. § 78t(e), Tucker, singly or in concert, directly or indirectly, aided and abetted Candie's violations of Section 13(a) of the Exchange Act, 15 U.S.C. § 78m(a), and Rules 12b-20 and 13a-1, 17 C.F.R. §§ 240.12b-20 and 240.13a-1.
127. The Commission realleges and incorporates by reference herein each and every allegation contained in paragraphs 1 through 126.
128. Candie's failed to make and keep books, records and accounts that accurately reflected the transactions and dispositions of its assets or maintain a system of internal controls to record transactions, maintain accountability of its assets, and permit financial statements to be recorded in conformity with GAAP, in violation of Sections 13(b)(2)(A) & (B) of the Exchange Act, 15 U.S.C. § 78m(b)(2)(A) & (B).
129. O'Shaughnessy substantially assisted Candie's violations by, among other things, permitting Candie's to prematurely recognize revenue on the company's books and records from the bill and hold practice and the sales transactions with the Barter Company.
130. Klein substantially assisted Candie's violations by, among other things, permitting Candie's to recognize prematurely revenue on the company's books and records from the bill and hold practice, and the August 1997 sales transaction with the Barter Company.
131. O'Shaughnessy and Klein knew, or were at the least reckless in not knowing, that Candie's was improperly recognizing revenue on its books and records, and that their conduct was improper.
132. By reason of the foregoing, and pursuant to Section 20(e) of the Exchange Act, 15 U.S.C. § 78t(e), O'Shaughnessy and Klein, singly or in concert, directly or indirectly, aided and abetted Candie's violations of Sections 13(b)(2)(A) & (B) of the Exchange Act, 15 U.S.C. § 78m(b)(2)(A) & (B).
WHEREFORE, the Commission respectfully requests a Final Judgment:
Permanently enjoining O'Shaughnessy and Klein, and their agents, servants, employees and attorneys and all persons in active concert or participation with them who receive actual notice of the injunction by personal service or otherwise, and each of them, from future violations of Section 17(a) of the Securities Act, 15 U.S.C. § 77q(a), Sections 10(b) and 13(b)(5) of the Exchange Act, 15 U.S.C. §§ 78j(b) and 78m(b)(5), and Rules 10b-5 and 13b2-1, 17 C.F.R. §§ 240.10b-5 and 240.13b2-1.
Permanently enjoining Tucker and Levi, and their agents, servants, employees and attorneys and all persons in active concert or participation with them who receive actual notice of the injunction by personal service or otherwise, and each of them, from future violations of Sections 10(b) of the Exchange Act, 15 U.S.C. § 78j(b) and Rule 10b-5, 17 C.F.R. § 240.10b-5.
Permanently enjoining O'Shaughnessy, Klein, and Levi and their agents, servants, employees and attorneys and all persons in active concert or participation with them who receive actual notice of the injunction by personal service or otherwise, and each of them, from aiding and abetting future violations of Section 13(a) of the Exchange Act, 15 U.S.C. § 78m(a), and Rules 12b-20, 13a-1 and 13a-13, 17 C.F.R. §§ 240.12b-20, 240.13a-1, 240.13a-13
Permanently enjoining Tucker and O'Shaughnessy, and their agents, servants, employees and attorneys and all persons in active concert or participation with them who receive actual notice of the injunction by personal service or otherwise, and each of them from violating Section 13(b) of the Exchange Act, 15 U.S.C. § 78(b), and Rule 13b2-2, 17 C.F.R. § 240.13b2-2.
Permanently enjoining O'Shaughnessy and Klein and their agents, servants, employees and attorneys and all persons in active concert or participation with them who receive actual notice of the injunction by personal service or otherwise, and each of them from aiding and abetting future violations of Section 13(b)(2)(A) and (B) of the Exchange Act, 15 U.S.C. §§ 78(m)(b)(2)(A) and (B).
Permanently enjoining Tucker and his agents, servants, employees and attorneys and all persons in active concert or participation with them who receive actual notice of the injunction by personal service or otherwise, and each of them from aiding and abetting future violations of Section 13(a) of the Exchange Act, 15 U.S.C. § 78m(a), 78(m)(b)(2), and Rules 12b-20 and 13a-1, 17 C.F.R. §§ 240.12b-20 and 240.13a-1
Ordering Tucker and Klein to disgorge ill-gotten gains received as a result of the violations alleged above, and to pay prejudgment interest thereon.
Ordering all defendants to pay civil monetary penalties pursuant to Section 20(d) of the Securities Act, 15 U.S.C. § 77t(d), and Section 21(d)(3) of the Exchange Act, 15 U.S.C. § 78u(d)(3).
Enjoining O'Shaughnessy, Tucker and Klein, pursuant to Section 21(d)(2) of the Exchange Act, 15 U.S.C. § 78u(d)(2), from acting as an officer or director of any issuer that has a class of securities registered pursuant to Section 12 of the Exchange Act, 15 U.S.C. § 781, or that is required to file reports pursuant to Section 15(d) of the Exchange Act, 15 U.S.C. § 78o(d).
Granting such other and further relief as the Court may deem just and proper.
| Dated: New York, NY, | April 30, 2003
_________________________
|
|
Of Counsel:
| |
http://www.sec.gov/litigation/complaints/comp18120a.htm
| Home | Previous Page | Modified: 05/23/2003 |