U.S. SECURITIES AND EXCHANGE COMMISSION
Litigation Release No. 19735 / June 22, 2006
Accounting and Auditing Enforcement Release No. 2443 / June 22, 2006
SEC v. Scientific-Atlanta, Inc., Civil Action No. 06 CIV. 4823 (PKC) (S.D.N.Y.)
SEC Charges Scientific-Atlanta for Aiding and Abetting and Two Senior Executives for Causing Adelphia's Reporting Violations
Scientific-Atlanta to Pay $20 Million in Settlement
The Securities and Exchange Commission today charged Scientific-Atlanta, Inc. with aiding and abetting Adelphia Communications Corporation's violations of the reporting, books and records, and internal controls provisions of the federal securities laws. Scientific-Atlanta entered into a marketing support agreement with Adelphia in 2000 that Adelphia misused to inflate its earnings by approximately $43 million. Scientific-Atlanta has agreed to pay $20 million in disgorgement in settlement of the charges.
The SEC also today announced that Wallace G. Haislip, Scientific-Atlanta's Senior Vice President, Operations, and Julian W. Eidson, Scientific-Atlanta's Senior Vice President, have consented to the issuance of cease-and-desist Orders for their respective roles in causing Adelphia's violations.
The SEC's Complaint against Scientific-Atlanta, filed today in federal court in Manhattan, alleges that in or about August 2000, Adelphia requested that Scientific-Atlanta increase the price of digital cable television set-top boxes it was selling to Adelphia and pay the amount of the price increase back to Adelphia in the form of marketing support for the stated purpose of marketing the Scientific-Atlanta cable television set-top boxes. Adelphia did not use the marketing support payments to market Scientific-Atlanta cable television set-top boxes. Adelphia recorded the price increase it paid Scientific-Atlanta as a capital expense, and recognized the marketing support payments as a contra marketing expense, thereby artificially reducing its marketing expense and increasing EBITDA. The transaction did not impact Scientific-Atlanta's public financial statements.
The Complaint alleges that Scientific-Atlanta was aware of a number of facts that together demonstrated that Adelphia was misusing the marketing support agreement. Those facts included, among others, (i) a retroactive price increase on set-top boxes previously delivered to Adelphia; (ii) Adelphia's request for a commercially unreasonable high dollar amount in marketing support payments; (iii) repeated requests for higher levels of marketing support in later periods even though the major marketing push was to have occurred in earlier periods; (iv) knowledge that Adelphia's request for the marketing support agreement was driven by its desire to obtain an accounting benefit; and (v) the inclusion of a false reason for the price increase in one of the contracts documenting the marketing support agreement.
Scientific-Atlanta, without admitting or denying the allegations in the Complaint, has consented to the entry of a final judgment, subject to court approval, that requires Scientific-Atlanta to pay $20 million in disgorgement and enjoins Scientific-Atlanta from violating and aiding and abetting any violations and any future violations of Sections 13(a), 13(b)(2)(A), and 13(b)(2)(B) of the Securities Exchange Act of 1934 ("Exchange Act"), and Rules 12b-20, 13a-1, and 13a-13 thereunder. The settlement takes into consideration Scientific-Atlanta's cooperation during the investigation.
The SEC's Orders against Haislip and Eidson find that they were the most senior Scientific-Atlanta executives responsible for approving the form of the marketing support agreement, and that they should have been on notice that it was unlikely that Adelphia was using the marketing support agreement to market Scientific-Atlanta set-top boxes. The Orders order Haislip and Eidson to cease and desist from causing any violations and any future violations of Sections 13(a), 13(b)(2)(A), and 13(b)(2)(B) of the Exchange Act and Rules 12b-20, 13a-1, and 13a-13 thereunder.
Haislip and Eidson agreed to the settlements without admitting or denying the findings in the SEC's Orders.