UNITED STATES DISTRICT COURT
Plaintiff Securities and Exchange Commission ("Commission") alleges:
1. This matter involves the misstatement of Ashford.com Inc.'s financial results in order to beat analysts' pro forma earnings expectations. In March 2000, Ashford.com, Inc. ("Ashford.com") and two of its executives improperly deferred $1.5 million in expenses under a contract with Amazon.com, Inc. ("Amazon.com"), causing Ashford.com to materially understate its marketing expenses.
2. In September 2000, Ashford.com misstated its pro forma results by changing the classification of certain expenses on its income statement.
3. This Court has jurisdiction pursuant to Section 27 of the Securities Exchange Act of 1934 ("Exchange Act").
4. Defendant Kenneth E. Kurtzman, age 39, was the Chief Executive Officer of Ashford.com until April 2001, when he resigned. Kurtzman is a resident of Houston, Texas.
5. Defendant Brian E. Bergeron, age 35, was Ashford.com's Vice President of Finance until May 2001, when he was promoted to Chief Financial Officer. Bergeron is licensed as a Certified Public Accountant by the state of Texas and is a resident of Galveston County, Texas.
6. On November 29, 1999, Ashford.com entered into a New Customer Agreement with Amazon.com. Under this agreement, Ashford.com agreed to pay Amazon.com $6 million to perform promotional placements and marketing services for Ashford.com targeted at Amazon.com's customer base and agreed to pay an extra $2 million if Amazon.com delivered 45,000 customers before December 31, 2000.
7. Ashford.com recorded the $6 million paid at closing as a prepaid asset and decided to amortize the asset on a per-customer basis, expensing $177.78 for each new customer referred by Amazon.com. Ashford.com classified this expense on its income statement as "Marketing and Sales."
8. The first significant joint Ashford.com/Amazon.com promotion pursuant to the New Customer Agreement was for Valentine's Day 2000. Amazon.com issued coupons to its customers for substantial discounts on Ashford.com products, but the coupons were not assigned unique serial numbers. As a result, when an unknown coupon recipient posted the redemption instructions for certain of these coupons on a publicly accessible Internet chat board, a large number of persons who were not necessarily Amazon.com customers were able to use them.
9. When the promotion ended, Ashford.com calculated that approximately 11,500 customers had redeemed the coupons, of which approximately 8,500 were unintended recipients. At the time, Ashford.com estimated that the unintended coupon use had reduced the company's revenue by about $600,000.
10. By mid-March 2000, Amazon.com and Ashford.com reached a settlement by which Amazon.com would pay $600,000 to Ashford.com, and Ashford.com would credit Amazon.com with 11,500 new customers under the New Customer Agreement. On March 20, 2000, an Amazon.com employee signed a letter on Amazon.com letterhead, setting forth these terms. This letter, however, was never sent to Ashford.com.
11. After negotiating the terms reflected in the March 20 letter, Kurtzman realized that crediting Amazon.com with 11,500 customers would require Ashford.com to recognize substantial expenses associated with them during the quarter ended March 31, 2000, and that this would hurt Ashford.com's GAAP and pro forma financial results.
12. As a result, Kurtzman suggested crediting Amazon.com with 3,000 customers during the quarter ended March 31, 2000 and deferring credit for the remaining 8,500 customers until accounting periods after March 31, 2000. To accomplish this deferral, Kurtzman consulted with Bergeron, who proposed that the documentation for the settlement be split into two letters. Ashford.com communicated the proposal to Amazon.com, which drafted the letters as requested.
13. On March 27, 2000, Amazon.com faxed a letter on its letterhead to Ashford.com stating that, in settlement of the Valentine's Day Promotion, Amazon.com would pay $600,000 to Ashford.com, and Ashford.com would credit Amazon.com for 3,000 customers under the New Customer Agreement. The March 27 letter did not fully reflect the settlement between Amazon.com and Ashford.com, which was that Amazon.com would pay $600,000 and receive credit for 11,500 customers.
14. Kurtzman countersigned the March 27 letter and signed a letter on Ashford.com letterhead, dated March 28, that credited Amazon.com with 8,500 customers under the New Customer Agreement as follows: 3,000 as of April 1, 2000; 2,750 as of July 1, 2000; and 2,750 as of October 1, 2000. This letter made no reference to the Valentine's Day promotion or to the March 27 letter.
15. Based upon the March 27 letter, which Ashford.com provided to its auditors, Ashford.com recognized marketing expenses of $533,340 during the quarter ended March 31, 2000. Based upon the March 28 letter, which Ashford.com failed to disclose to its auditors, Ashford.com improperly deferred the recognition of $1,511,130 in marketing expenses.
16. Because of Ashford.com's improper deferral of expenses, the financial statements in its Form 10-K for the year ended March 31, 2000 materially understated the company's marketing expenses. Ashford.com's reported marketing expenses were material information for investors and analysts.
17. Ashford.com's understatement of its marketing expenses during the quarter ended March 31, 2000 allowed Ashford.com to report a pro forma net loss of $0.30 per share, just beating analysts' estimates of a net loss of $0.31 per share. Without the understatement of the marketing expenses, Ashford.com would have reported a pro forma loss of $0.32, missing analysts' estimates by $0.01.
18. During September 2000, Ashford.com changed its amortization method for the New Customer Agreement from per customer to straight-line. Bergeron, along with Ashford.com's CFO and other personnel and advisors, participated in this decision. When Ashford.com changed its amortization method, it also improperly classified $2.9 million in New Customer Agreement expenses from marketing to depreciation and amortization ("D&A").
19. The reclassification caused Ashford.com to materially understate its marketing expenses in the financial statements included in its Form 10-Q for the quarter ended September 30, 2000.
20. The reclassification and understatement allowed Ashford.com to report pro forma losses of $0.19 per share, beating analysts' estimates by $0.08, and to claim that it had achieved three straight quarters of "significantly reduced [pro forma] losses." Without the reclassification, Ashford.com would have beaten analysts' estimates by a penny (3.7%), rather than by $0.08 (almost 30%). In addition, Ashford.com would have reported increased pro forma losses from the previous quarter.
Violation of Sections 10(b), 13(a), 13(b)(2)(A) and 13(b)(5) of the Exchange Act
21. Plaintiff realleges and incorporates by reference paragraphs 1 through 20 above.
22. By reason of the foregoing, Kurtzman violated Sections 10(b) and 13(b)(5) of the Exchange Act, and Rules 10b-5, 13b2-1 and 13b2-2 thereunder and aided and abetted Ashford.com's violation of Sections 13(a) and 13(b)(2)(A) of the Exchange Act and Rules 12b-20 and 13a-1 thereunder.
23. By reason of the foregoing, Bergeron violated Exchange Act Rule 13b2-1 and aided and abetted Ashford.com's violation of Sections 13(a) and 13(b)(2)(A) of the Exchange Act and Rules 12b-20, 13a-1 and 13a-13 thereunder.
PRAYER FOR RELIEF
24. The Commission respectfully requests that this Court enter a Final Judgment against Kurtzman and Bergeron ordering them to pay a civil penalty pursuant to Section 21(d)(3) of the Exchange Act
Dated: __________________ (202) 942-4769 (Coe)