WAYNE M. CARLIN (WC-2114)
Attorney for Plaintiff
UNITED STATES DISTRICT COURT
Plaintiff Securities and Exchange Commission ("Commission"), for its Complaint against defendants Brightpoint, Inc. ("Brightpoint" or "the Company"), American International Group, Inc. ("AIG"), Phillip Bounsall ("Bounsall"), John Delaney ("Delaney") and Timothy Harcharik ("Harcharik") (collectively, the "Defendants"), alleges as follows:
SUMMARY OF ALLEGATIONS
1. This case involves defendant Brightpoint's improper use of a purported insurance policy to reduce a $29 million loss by $11.9 million in order to report a much smaller loss. As a result of this deception, Brightpoint's 1998 financial statements, as reported in the 1998 Form 10-K, overstated Brightpoint's actual net income before taxes by 61 percent. The misrepresentation was subsequently republished in a registration statement filed in September 1999 and in Forms 10-K for 1999 and 2000.
2. In October 1998, Brightpoint publicly announced that in the fourth quarter ending December 31, it would recognize a one-time charge, ranging from $13 million to $18 million, arising out of losses sustained by one of its divisions in the United Kingdom ("UK"). However, by December 1998, the UK losses had mushroomed to about $29 million, and Brightpoint's corporate controller, defendant Delaney, and its director of risk management, defendant Harcharik, devised a scheme to cover-up these additional, unanticipated losses, rather than disclose them.
3. In December 1998, Delaney and Harcharik turned to the Loss Mitigation Unit ("LMU") of National Union Fire Insurance Company of Pittsburgh, Pa., one of defendant AIG's principal general insurance company subsidiaries. LMU offered "insurance" products specifically designed to "smooth" the financial statement impact of losses sustained by AIG clients. Brightpoint and AIG negotiated the terms of a $15 million "retroactive" insurance policy that covered all of the extra UK losses. The parties agreed to combine this "retroactive coverage" with prospective fidelity coverage (together, the "Policy") in an effort to avoid scrutiny from Brightpoint's auditors (the "Auditors"). The "cost" of the $15 million "retroactive coverage" to Brightpoint was about $15 million, which Brightpoint was to pay in monthly "premiums" over the prospective three-year term of the policy. The Policy, finalized in January 1999, enabled Brightpoint to record in 1998 an insurance receivable of $11.9 million, which Brightpoint netted against the total UK losses of about $29 million, bringing the net loss to within the previously disclosed $13 million to $18 million range.
4. In fact, the "retroactive coverage" should not have been accounted for as insurance. It was merely a "round-trip" of cash a mechanism for Brightpoint to deposit money with AIG, in the form of monthly "premiums," which AIG was then to refund to Brightpoint as purported "insurance claim payments." In drafting the Policy, Delaney and Harcharik took pains to ensure that the "retroactive coverage" raised no "red flags" for the Auditors: They created a blended fidelity coverage and retroactive policy that was designed to look like traditional, non-retroactive indemnity insurance and they gave the policy an effective date of August 1998.
5. In October 2001, following an inquiry by the Commission's staff, the Auditors began looking more closely at the Policy and determined that it was not traditional insurance. Although the Auditors questioned whether the policy was insurance at all, they decided at the very least that the policy provided retroactive coverage and, therefore, that all premium expense associated with it should have been recorded in 1998. On November 13, 2001, Brightpoint announced a restatement, which treated the Policy as real, but retroactive, insurance (the "First Restatement"). The First Restatement expensed the full policy "premium" in the fourth quarter of 1998, amounting to $15.3 million.
6. On January 31, 2002, Brightpoint announced that it would further restate its financial statements to reflect that the "premiums" for the "retroactive coverage" under the Policy were only deposits with AIG. This second restatement came about when the Auditors learned that, one day before Brightpoint announced the First Restatement, it had "cancelled" the "retroactive coverage" and obtained from AIG a refund in the full amount of premiums Brightpoint had paid over and above the "insurance claim payments" made to it by AIG under the "retroactive coverage." The cancellation transaction left no doubt that the "retroactive coverage" was not insurance.
7. By virtue of the foregoing conduct:
a. Brightpoint, 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 of 1933 ("Securities Act") [15 U.S.C. § 77q(a)], Sections 10(b), 13(a) and 13(b)(2) of the Securities Exchange Act of 1934 ("Exchange Act") [15 U.S.C. §§ 78j(b), 78m(a) and 78m(b)(2)], and Rules 10b-5, 12b-20, 13a-1 and 13b2-1 [17 C.F.R. §§ 240.10b-5, 240.12b-20, 240.13a-1 and 240.13b2-1];
b. AIG, directly or indirectly, singly or in concert, has engaged in acts, practices and courses of business that constitute violations of Section 10(b) of the Exchange Act [15 U.S.C. § 78j(b)] and Rules 10b-5 and 13b2-2 [17 C.F.R. §§ 240.10b-5 and 240.13b2-2];
c. Bounsall directly or indirectly, singly or in concert, has engaged in acts, practices and courses of business that constitute violations of Rule 13b2-1 of the Exchange Act [17 C.F.R. §§ 240.13b2-1];
d. Delaney, 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 and 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; and Delaney is also liable as a control person of Brightpoint, pursuant to Section 20(a) of the Exchange Act [15 U.S.C. § 78t(a)], for Brightpoint's violations of Section 13(a) of Exchange Act and Rules 12b-20 and 13a-1;
e. Harcharik, directly or indirectly, singly or in concert, has engaged in acts, practices and courses of business that constitute violations, or aiding and abetting violations, of Section 10(b) of the Exchange Act and Rule 10b-5; and Harcharik is also liable, pursuant to Section 20(e) of the Exchange Act, as an aider and abettor of violations of Section 13(b)(5) of the Exchange Act and Rules 13b2-1 and 13b2-2.
JURISDICTION AND VENUE
8. The Commission brings this action pursuant to the authority conferred upon it by Section 20(b) of the Securities Act [15 U.S.C. § 77t(b)] and Section 21(d)(1) of the Exchange Act [15 U.S.C. § 78u(d)(1)], seeking an order:
a. permanently restraining and enjoining Delaney and Harcharik from engaging in the acts, practices and courses of business alleged herein;
b. requiring Brightpoint and Delaney to pay civil money penalties pursuant to Section 20(d) of the Securities Act [15 U.S.C. § 77t(d)], and all Defendants to pay civil money penalties pursuant to Section 21(d)(3) of the Exchange Act [15 U.S.C. § 78u(d)(3)]; and
c. permanently barring Delaney, pursuant to Section 20(e) of the Securities Act [15 U.S.C. § 77t(e)] and Section 21(d)(2) of the Exchange Act [15 U.S.C. § 78u(d)(2)], from serving as an officer or director of any issuer that has a class of securities registered under Section 12 of the Exchange Act [15 U.S.C. § 78l] or that is required to file reports pursuant to Section 15(d) of the Exchange Act [15 U.S.C. § 78o(d)].
9. This Court has jurisdiction over this action pursuant to Section 22(a) of the Securities Act [15 U.S.C. § 77v(a)] and Sections 21(e) and 27 of the Exchange Act [15 U.S.C. §§ 78u(e) and 78aa].
10. The Defendants, directly and indirectly, have made use of the means and instrumentalities of interstate commerce, or of the mails, in connection with the transactions, acts, practices and courses of business alleged herein. Certain of these transactions, acts, practices and courses of business occurred in the Southern District of New York, including, among other things, the negotiations for and issuance of the Policy.
11. Brightpoint is a Delaware corporation headquartered in Plainfield, Indiana. Brightpoint provides outsourced services such as distribution, fulfillment, customized packaging, prepaid and e-business solutions, and inventory management in the wireless telecommunications and data industry. Brightpoint's securities are registered pursuant to Section 12(g) of the Exchange Act and its common stock is listed on NASDAQ's National Market under the symbol CELL.
12. AIG is a Delaware corporation with its principal corporate offices located in New York, New York. AIG is a holding company that, through its subsidiaries, is engaged in a broad range of insurance and insurance-related activities in the United States and abroad. Its primary activities include both general and life insurance operations. AIG's securities are registered pursuant to Section 12(b) of the Exchange Act and are listed on the New York Stock Exchange.
13. Bounsall, age 42, served as Brightpoint's executive vice president, chief financial officer and treasurer from October 1996. In April 2002, Bounsall resigned from these positions at Brightpoint. Prior to joining Brightpoint, Bounsall worked as an auditor at an accounting firm for twelve years. Bounsall is a CPA.
14. Delaney, age 37, served as Brightpoint's corporate controller and chief accounting officer from June 1996 until he left Brightpoint in September 2000. In approximately April 2001, Delaney rejoined Brightpoint as executive vice president of its Solutions Development Group and continued in that position until Brightpoint terminated him in February 2002. Delaney is licensed as a CPA in the state of Ohio. He currently has a non-practicing registration because he is not actually practicing there. Delaney is not licensed in Indiana.
15. Harcharik, age 48, worked for Brightpoint as an independent contractor, serving as Brightpoint's director of risk management from June 1997 until he was terminated in February 2002. At all relevant times, Harcharik was physically located in Brightpoint's offices and he spent almost all of his time on Brightpoint matters. Harcharik's duties principally were to manage Brightpoint's insurance matters.
16. In the spring of 1998, Brightpoint became aware that its UK operation had suffered certain losses related to the loss or devaluation of product within the Company's Trading Division. The Trading Division was involved in the purchase of wireless handsets from sources other than manufacturers or network operators and in the sale of those handsets to other trading companies dealing in the secondary market. Bounsall asked Delaney, who in turn directed Harcharik, to investigate and determine the amount of the UK loss and evaluate the possible insurance recoveries available to Brightpoint under the policies Brightpoint had at the time (the "Brightpoint Policies"). Based on the information gathered during Harcharik's investigation, Delaney initially estimated the UK losses to total between $13 million and $18 million.
17. By the end of September 1998, given all the Trading Division's problems and its unprofitable history, Brightpoint decided to close the Trading Division in the UK. Brightpoint's Board of Directors approved the closure on October 1, 1998, and the Company issued a press release on October 2, 1998 announcing that it was eliminating the division and that the Company would recognize in the fourth quarter of 1998 a one-time charge expected to range from $13 million to $18 million relating to the closure ("One-Time Charge"). After October 2, 1998, Harcharik continued to investigate the UK losses and to gather documentation for the purpose of making claims under the Brightpoint Policies.
18. In early December 1998, it was clear to Delaney that the amount of the One-Time Charge was much greater than the original estimate and that Brightpoint's insurers were disputing coverage for the UK losses making it uncertain that there would be insurance recoveries under the Brightpoint Policies. At this point, Brightpoint was faced with the prospect of recording a much larger loss in the fourth quarter than it had previously disclosed, at least $12 million more.
19. In mid-December, Brightpoint initiated contact with AIG. Harcharik was an insurance specialist, who was responsible for Brightpoint's insurance matters. He had prior familiarity with AIG products designed to cover retroactive losses, and he became the point person in the discussions that ensued. From the very first discussion, Harcharik and Delaney presented Brightpoint's predicament to AIG in stark terms: That Brightpoint had issued a press release in October announcing a very specific range for the estimated loss and was now faced with a much larger loss that it did not want to disclose. Although there was initially some discussion of having AIG assume some of Brightpoint's risk in the anticipated insurance coverage litigation with Brightpoint's insurers, discussion very quickly shifted to a deposit mechanism because AIG was unwilling to take on any risk associated with Brightpoint's UK losses. In the transaction eventually consummated, AIG bore no insurance risk for retroactive losses covered under the Policy; every dollar Brightpoint paid to AIG to cover such losses was to be returned upon Brightpoint's demand.
Overview of Relevant Accounting Principles
20. Under generally accepted accounting principles ("GAAP"), when it is "probable" that an insured will realize an "insurance recovery" against a specified loss, the insured is entitled to record a receivable on its balance sheet in the amount of the probable recovery and, for income statement purposes, net the amount of probable recovery against the loss, thereby reducing the loss.
21. The recovery must be "probable." If recovery is only possible, the insured must recognize the loss to its full extent, without regard to insurance. Moreover, the recovery must be an "insurance" recovery. A recovery is not an "insurance" recovery for accounting purposes unless the insurance policy transfers some risk from the insured to the insurer. If a policy does not involve risk transfer, GAAP treats it as a financing arrangement, with all premiums to be accounted for as deposits.
22. In December 1998, as the Auditors were beginning field work for the year-end audit, Delaney presented the Auditors with schedules of the UK losses, which assumed that Brightpoint would be offsetting against those losses at least $11.9 million in anticipated insurance recoveries. To accomplish this offset, Brightpoint needed to satisfy the probability principle outlined above. However, at the time, it had no such coverage available because its insurers were already indicating that coverage under the Brightpoint Policies was doubtful. On December 22, Delaney wrote to Harcharik an e-mail saying: "I need to support for [the Auditors] the recording of an insurance receivable related to the losses in the UK (in the amount of $12MM Whoa)."
23. Through the efforts of Harcharik and Delaney, Brightpoint eventually used the Policy to satisfy this probability standard. In constructing the Policy, Brightpoint faced two accounting obstacles: First, the policy had to look like insurance. If it looked like a deposit, Brightpoint would not be able to net anticipated recoveries against the loss. Second, the policy could not look like retroactive insurance, i.e., insurance designed to cover a loss already quantified and known, because Brightpoint might then be required to expense the full $15 million "premium" immediately. Under GAAP, the insured is obligated to recognize the full premium expense associated with a retroactive policy at the time it recognizes the benefits of the policy.
24. The Policy consists of two governing documents: The Binder of Coverage (the "Binder") and the policy itself. The Binder was executed on January 6, 1999, but was dated effective August 1, 1998. The Binder states the policy period to be the three-year period August 1, 1998 to August 1, 2001. The Policy provides two separate limits of coverage: Limit A and Limit B. Limit A has an aggregate limit of $15 million, while Limit B has a per loss limit of $15 million.
25. Although not referred to in the policy as "retroactive," Limit A effectively provides broad retroactive coverage. The policy contains an insuring clause that provides: "The Company shall indemnify the Insured for Loss of Assets unless otherwise excluded by the terms and conditions of this policy." This insuring clause is applicable to both Limit A and Limit B. However, Limit B is subject to a laundry list of exclusions, while Limit A has no exclusions. Thus, virtually every "Loss" of "Assets" is covered under Limit A up to an aggregate amount of $15 million. Limit B, on the other hand, essentially provides prospective fidelity insurance coverage, which is severely circumscribed by the exclusions.
26. The Binder reflects a single, indivisible premium applicable to both limits. The total premium is $15,302,400, but this aggregate figure is never set forth. Instead, the Binder provides only a list of the elements constituting the premium: It provides that the premium shall be payable as follows:
27. Although neither the policy nor the Binder states how much of the premium is applicable to Limit A and how much is applicable to Limit B, Limit A was fully pre-funded by Brightpoint: The premium Brightpoint paid for Limit A coverage was $15 million plus a $100,000 fee that AIG charged for putting the deal together. Limit B was intended to provide traditional prospective fidelity coverage. The premium Brightpoint paid for Limit B was $202,400.
28. The Policy contains no express provision granting Brightpoint the right to a refund under Limit A if Brightpoint ended up paying more in premiums than it was claiming in losses. However, there was an oral understanding between AIG and Harcharik that Brightpoint would receive such a refund, and the mechanism for obtaining that refund was to submit a claim under the very broad definition of coverage, which allowed Brightpoint to receive payment for just about any claim submitted under Limit A up to an aggregate maximum of $15 million.
29. Delaney accounted for the Policy as if it were prospective fidelity insurance. As a result, Brightpoint expensed the premiums monthly over the three-year life of the Policy, and it netted "probable recoveries" under Limit A against the UK losses, purporting to rely on the probability principle outlined above.
30. Given the true substance of the Policy, Limit A was not insurance because there was no transfer of risk. Limit A was not even a financing arrangement because AIG was not extending credit to Brightpoint. The only money Brightpoint was entitled to receive under the Limit A was money that it first deposited with AIG deposits on which AIG paid no interest. Accordingly, the premium payments should have been accounted for as deposits.
The Negotiations Between Brightpoint and AIG
31. From the first discussions between Brightpoint and AIG, Delaney and Harcharik made clear to AIG that Brightpoint needed a policy to reduce the One-Time Charge and that the final policy had to "pass the insurance test" with Brightpoint's Auditors. In a conference call with AIG in which Harcharik and Delaney participated, Delaney explained to AIG that Brightpoint needed about $15 million in insurance coverage to bring the One-Time Charge within the $13 million to $18 million range previously announced in October 1998. Delaney also told AIG that while Brightpoint expected to receive some recoveries for the UK losses under the Brightpoint Policies, the claims under those policies would not be resolved by the year-end. Thus, the Policy was necessary to establish for the Auditors that there was a probability of sufficient insurance recovery.
32. Harcharik was keenly aware of the accounting issues. At the outset, he proposed that the policy contain both retrospective and prospective components. He told AIG that he wanted a prospective component to be part of the policy because, if Limit A stood alone, it would be too obvious to the Auditors that Brightpoint was paying $15 million in premiums for $15 million of coverage. In the course of the two-week negotiation, Harcharik and Delaney discussed in detail other "red flags" they wanted to avoid so as not to alert the Auditors that the policy was not insurance.
33. One such "red flag" was the problem associated with bifurcating the premium on the face of the contract between the retroactive and prospective portions of the policy. Harcharik made clear to AIG that he did not want the premium to be explicitly bifurcated in the contract because that would show that the cost of Limit A was $15 million. Harcharik did not want the total premium amount of $15.3 million even to be tallied in the contract. Instead, Harcharik wanted the premium to be reflected simply as three untallied components, consisting of an initial down payment, 32 monthly payments, and a $7.5 million letter of credit. Harcharik did not want the $15.3 million sum to be readily apparent to the Auditors because such a substantial premium might have caused the Auditors to question the bona fides of the policy.
34. AIG also counseled Harcharik and Delaney that the Policy should contain "no reference to an experience account" and that all refunds of premium back to Brightpoint should be through loss claim payments. An experience account or commutation provision refers to an insurance mechanism by which the insured is refunded premium at the end of the policy if there were few loss experiences over the course of the contract.
35. To avoid having an express refund mechanism in the policy for excess premiums paid, Harcharik and AIG reached an oral side agreement, not written into the Policy, that AIG would be "extremely flexible" in refunding premiums to Brightpoint through "claim payments," requiring little to no documentation from Brightpoint on the nature of the losses. Harcharik and AIG agreed that the retrospective coverage would be as broad as possible and there would be no exclusions to coverage in the policy for those losses. AIG documented the terms of this oral agreement with Harcharik in a contemporaneous internal AIG memorandum as follows:
...Brightpoint had already taken a charge for the [trading] division...assuming the $15M of insurance recovery would happen. Brightpoint's auditors ... wanted more evidence that an insurance recovery was possible. Otherwise, Brightpoint would be in a position to possibly restate the charge already taken...The feedback from [the Auditors] was that they wanted a letter from AIG explaining the use of the policy in case there are no proceeds paid by Chubb...If for some reason Chubb pays the loss or a portion of the loss, the $15M [million] or the balance after a partial loss payment by AIG would have to be returned as well. This would be returned under a future claim submitted by Brightpoint under Sub-Limit A. THUS, SUB-LIMIT A WAS MADE TO BE EXTREMELY BROAD AND ANY PAYMENTS MADE SHOULD ALWAYS BE MADE WITHOUT LIMITATIONS BY COVERAGE; ONLY LIMITATIONS TO PREMIUM RECEIVED.
36. On January 6, 1999, AIG and Brightpoint executed the Policy by signing the Binder, with Harcharik signing on behalf of Brightpoint as Director of Risk Management. The original version of the Binder had a date line, indicating that it was signed on January 6, 1999. That same day, Delaney sent Harcharik an email stating:
The binder you signed (I looked at it again) has January 6, 1999 (in one case 1998) all over it. This is not good and that copy must be destroyed and on [sic] with an August date executed.
37. AIG and Harcharik then executed a second version with only the August 1, 1998 effective date appearing in the document. Later that day, Brightpoint issued a press release stating that the One-Time Charge was "expected to be approximately $17.6 million ... which is consistent with the previously-announced estimate."
Bounsall's Approval of the Policy and the Accounting
38. Bounsall was Delaney's immediate supervisor, and, as Brightpoint's chief financial officer, Bounsall was ultimately responsible for the accounting for the UK losses. Following the October 1998 press release, Delaney kept Bounsall apprised of the increasing magnitude of estimated UK losses. Delaney also informed Bounsall that (i) he and Harcharik were negotiating with AIG for the Policy; (ii) the Policy was primarily intended to cover the UK losses on a retroactive basis; and (iii) Delaney wanted to use anticipated insurance recoveries under the retroactive portion of the Policy to reduce the UK losses for accounting purposes. Bounsall knew that the Policy premium was very substantial. Without reviewing any written documentation or examining the Binder or any drafts of the Binder, Bounsall approved Brightpoint's purchase of the Policy and obtained approval for the Policy from Brightpoint's president and chief operating officer. Bounsall knew Delaney intended to account for the Policy by allowing Brightpoint to net the $11.9 million "insurance" receivable against the approximate $29 million UK losses in Brightpoint's 1998 year-end financial statements. On January 6, 1999, the day the Policy was executed, Bounsall prepared the initial draft of a press release announcing that the One-Time Charge was "expected to be approximately $17.6 million ... which is consistent with the previously-announced estimate."
AIG's Confirmation to the Auditors
39. In connection with the Auditors' 1998 year-end audit, the Auditors asked Delaney to obtain from AIG a letter confirming the probability that Brightpoint would recover at least $11.9 million as an insurance recovery under the Policy. Delaney directed Harcharik to obtain such a letter for the Auditors from AIG, knowing that, in fact, there would be no "insurance" recoveries under the Policy and, therefore, that such a letter would be false or materially misleading. Harcharik worked with Delaney and AIG to obtain the letter the Auditors had requested. After working through numerous drafts with Harcharik, AIG signed and provided a letter to Harcharik, dated January 27, 1999, which stated "we [AIG] believe it is probable that Brightpoint will recover no less than $11,900,000 in proceeds, net of deductibles, under the Policy." AIG faxed a copy of the letter directly to the Auditors. On the basis of this confirmation, the Auditors approved Brightpoint's accounting for the insurance receivable and allowed Brightpoint to offset the UK losses by $11.9 million in probable insurance recoveries.
40. Both Delaney and Harcharik knew, or were reckless in not knowing, that the letter was materially false or misleading because it suggested the existence of insurance when there was no insurance. Both Delaney and Harcharik also knew, or were reckless in not knowing, that the purpose of the letter was to provide false evidence to the Auditors sufficient to allow them to pass on the propriety of offsetting the purported insurance recoveries against the UK losses.
The Management Representation Letter
41. As part of its audit procedures, the Auditors obtained during the 1998 audit a management representation letter from Brightpoint, signed by Bounsall, Delaney and others, that enabled the Auditors to form an opinion as to whether Brightpoint's financial statements presented fairly, in all material respects, the financial position, results of operations, and cash flow of Brightpoint, in conformity with generally accepted accounting principles. This letter, dated January 26, 1999, represented that to the best of the knowledge of the signatories the financial statements were fairly presented in conformity with GAAP and that all financial records and significant contracts were made available to the Auditors. Further, the letter stated that no material transactions were improperly recorded in the accounting records underlying the financial statements, that there was no fraud involving management, and that no events or transactions occurred subsequent to December 31, 1998 that would have materially affected the financial statements. In light of the facts regarding the "insurance policy" between Brightpoint and AIG, these representations were not true. Moreover, Delaney knew, or was reckless in not knowing, that they were untrue.
Brightpoint's Publication of the Material Misstatements
42. In preparing the year-end 1998 financial statements, Delaney accounted for the retroactive portion of the Policy as if it were prospective fidelity insurance. Delaney recorded an insurance receivable of $11.9 million, purportedly reflecting the amount of Brightpoint's probable recoveries under the Policy on account of the UK losses. Delaney then improperly used the receivable to reduce the $29 million UK losses by $11.9 million.
43. Delaney knew or was reckless in not knowing that Limit A under the Policy was not insurance, but only a deposit mechanism that could not properly be used by Brightpoint to offset the UK Losses for accounting or financial statement reporting purposes.
44. Harcharik was instrumental in developing the Policy. Harcharik knew or was reckless in not knowing that the purpose of the Policy was to enable Brightpoint to misrepresent materially its financial condition.
45. As a consequence of Delaney's and Harcharik's intentional or reckless conduct, Brightpoint's 1998 financial statements overstated pre-tax net income by 61 percent. Brightpoint publicly reported the materially misleading financial statements in the Company's 1998 Form 10-K, which was filed with the Commission on March 31, 1999. Subsequently, Brightpoint republished the misrepresentations in a registration statement filed with the Commission on September 27, 1999. In addition, Brightpoint republished the 1998 financial data in its Forms 10-K filed for 1999 and 2000.
The First Restatement
46. In September 2001, the Commission's staff issued a subpoena to the Auditors for its workpapers relating to Brightpoint's 1998 One-Time Charge. The subpoena led the Auditors to reconsider Brightpoint's 1998 accounting for the UK losses. In the course of this review, the Auditors learned for the first time that (1) the Policy had not been executed until January 1999; (2) the Policy contained retroactive coverage; (3) the premium for the Policy was $15.3 million; and (4) the Policy was "non cancelable by either party and the entire premium [was] deemed earned at the inception of the policy," meaning that Brightpoint was obligated to pay the full $15.3 million premium in the fourth quarter of 1998.
47. At the end of October 2001, the Auditors informed Brightpoint that it had incorrectly accounted for the Policy and would have to restate its 1998 financial statements.
48. On November 13, 2001, the Company issued a press release announcing the First Restatement. The press release stated that: "Upon further review, the Company and its independent auditors now believe that premium expense should have been accrued at the date the Company entered into the [Policy], rather than over the prospective policy period because the Company could not allocate the costs of the policy between the retroactive and prospective coverage." The First Restatement expensed the full policy "premium" in the fourth quarter of 1998, amounting to $15.3 million, and reversed the monthly premium expense recorded in 1999 through 2001. While the First Restatement essentially corrected Brightpoint's bottom line for 1998, it left intact the $11.9 million in probable insurance recoveries under the Policy as an offset against the $29 million UK loss, in effect treating the Policy as real retroactive insurance.
The Second Restatement
49. A few days before Brightpoint's November 13th press release, Bounsall told the Auditors that Brightpoint was in negotiations with AIG to terminate the Policy. Bounsall represented to the Auditors that, under the anticipated termination agreement, Brightpoint and AIG would simply "walk away" from the Policy. The November 13 press release addressed the subject of termination, stating that "[t]he Company believes that it will recognize a gain in the fourth quarter of 2001 related to the termination of the retroactive portion of the insurance policy, which will result in the complete reversal of the remaining accrual." The press release did not give any particulars and was consistent with the Auditors' understanding.
50. The termination agreement, signed by Bounsall on behalf of Brightpoint, was actually executed on November 12, 2001, one day before the November 13 press release. However, neither Bounsall nor anyone else at Brightpoint notified the Auditors of the actual agreement prior to the issuance of the press release. The executed agreement essentially provided for full rescission of the Limit A part of the Policy. Under the agreement, Limit A was terminated, with Brightpoint to receive a refund of about $2.3 million just about the amount of premiums it had paid in excess of claims recovered. The agreement also provided that Limit B would continue in force for an annual premium of $97,000.
51. The Auditors did not learn the precise terms of the termination agreement until January 14, 2002 in the course of its 2001 year-end audit of Brightpoint. Upon learning the terms, the Auditors determined that Limit A was not real insurance and that Brightpoint had to restate its restatement, using the deposit method.
52. On January 31, 2002, Brightpoint announced that "the Company has now determined that the appropriate accounting method for the agreement is deposit accounting... Deposit accounting requires treating the Company's payments under this agreement as deposits rather than as premiums and the Company's receipts under the agreement as withdrawals rather than claims paid by the insurance company...."Harcharik's Untruthful Investigative Testimony
53. In the course of the Commission's investigation in this matter, the Commission's staff called Harcharik to testify as a witness under subpoena, and Harcharik appeared and gave testimony under oath. Throughout his testimony, Harcharik made several demonstrably false statements, which conveyed the false impression that Limit A under the Policy was real insurance and not a mechanism created to assist Brightpoint's effort to hide material losses in its financial statements. Specifically, Harcharik testified: (1) that he first contacted AIG and began negotiating the Policy in July or August of 1998, well before the October 2, 1998 press release, which announced the anticipated $13 million to $18 million charge; (2) that the premium for the Policy totaled $7.8 million and not $15.3 million; (3) that he did not participate in any discussions with anyone regarding the One-Time Charge; and (4) that he was never told or had any discussions with anyone about the relationship between the Policy and Brightpoint's need to show probable insurance recoveries to the auditors. Each of these statements was false.
FIRST CLAIM FOR RELIEF
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