U.S. SECURITIES AND EXCHANGE COMMISSION
Litigation Release No. 20096 / April 30, 2007
Accounting and Auditing Enforcement Release No. 2603 / April 30, 2007
SEC v. Richard D. Power, Edward Federman, and Richard J. "Skip" Heger, Civil Action No. 06-15343 (RWS) (S.D.N.Y. filed December 21, 2006)
SEC Settles With Former Tyco Executive for Role in Accounting Fraud
The U.S. Securities and Exchange Commission today announced that it had submitted to the United States District Court for the Southern District of New York a proposed settled Final Judgment as to Defendant Edward Federman, in the Commission's previously filed civil injunctive action against Federman and two other former executives of Tyco International Ltd., U.S. Securities and Exchange Commission v. Richard D. Power, Edward Federman, and Richard J. "Skip" Heger, Civil Action No. 06-15343 (RWS) (S.D.N.Y. filed December 21, 2006). The proposed settlement is based on the allegations in the Commission's complaint concerning Federman's involvement in fraudulent accounting practices at Tyco in violation of the federal securities laws.
Without admitting or denying the allegations in the Commission's complaint, Federman consented to the entry of a final judgment that would permanently enjoin him from violating Rule 13b2-1 promulgated under the Securities Exchange Act of 1934 and from aiding and abetting violations of Sections 10(b), 13(a), and 13(b)(2)(a) of the Exchange Act and Exchange Act Rules 10b-5, 12b-20, 13a-1, and 13a-13. The proposed final judgment would also order Federman to pay disgorgement in the amount of $1,651,064, plus prejudgment interest thereon in the amount of $799,693.10, and a civil penalty in the amount of $200,000. Finally, pursuant to the proposed final judgment, Federman would be barred from serving as an officer or director of a public company for a period of five years.
Edward Federman joined Tyco in 1983 as Assistant Corporate Controller. From February 1998 through April 1999, Federman was the Controller and Vice President of Finance at Tyco. From 1999 until his resignation in January 2001, Federman was the Executive Vice President and Chief Financial Officer of Tyco's Electronics division.
The Commission's complaint alleges that Federman and his co-defendants inflated Tyco's publicly reported operating income and cash flow through the use of a sham "dealer connection fee" transaction utilized in Tyco's ADT Security Services, Inc. subsidiary from 1997 through 2002. During the period when Federman served as Corporate Controller, Tyco's independent accountant raised concerns about the transaction. In response to those concerns, Federman successfully defended and repackaged the sham transaction to better conceal its fraudulent nature. As a result, from Tyco's fiscal year ended September 30, 1998, through its fiscal quarter ended December 30, 2002, the dealer connection fee transaction improperly inflated Tyco's operating income and cash flow by hundreds of millions of dollars. The complaint further alleges that Federman assisted the inflation of Tyco's operating income by means of improper acquisition accounting and the misuse of accounting reserves. In one such instance, after Tyco's fiscal 1998 year-end books had been closed, Federman directed the reversal of reserves to offset a previously unanticipated $40 million compensation expense.
Pursuant to the proposed final judgment, the disgorgement, prejudgment interest, and penalty would be paid into a court account, pursuant to the Fair Fund provisions of Section 308(a) of the Sarbanes-Oxley Act of 2002, for possible ultimate distribution to victims of the fraud.
See Litigation Release No. 17722 (September 12, 2002); Litigation Release No. 17896 (December 17, 2002); Exchange Act Release No. 48328 (August 13, 2003); Litigation Release No. 19657 (April 17, 2006); Litigation Release No. 19678 (May 1, 2006); Litigation Release No. 19953 (December 21, 2006).