U.S. SECURITIES AND EXCHANGE COMMISSION
Litigation Release No. 20166 / June 25, 2007
Accounting and Auditing Enforcement Release No. 2624 / June 25, 2007
SEC v. Kevin B. Collins, Civil Action No. 3:07-0676 (M.D. Tenn.) (filed June 25, 2007)
In the Matter of International Business Machines Corporation, Exchange Act Rel. No. 34-55954, Accounting and Auditing Enforcement Rel. No. 2623 (June 25, 2007)
SEC Files Settled Actions Against Kevin B. Collins and IBM for Assisting in Dollar General Corporation's Accounting Fraud
The Securities and Exchange Commission today announced the filing of a settled civil action against Kevin B. Collins, an employee of International Business Machines Corporation (IBM), for aiding and abetting Dollar General Corporation's commission of accounting fraud. The Commission filed the civil action against Collins in the United States District Court for the Middle District of Tennessee. As set forth in the Commission's complaint, Collins assisted Dollar General's commission of accounting fraud through a sham transaction that was designed to achieve a particular accounting result for Dollar General. Also today, the Commission instituted a settled cease-and-desist proceeding against IBM for its role in the Dollar General fraud and for IBM's own books and records violations.
According to the Commission's complaint, in 1999, IBM and Dollar General agreed that Dollar General would lease new electronic cash registers from IBM to replace Dollar General's old registers. As originally planned, Dollar General would phase out the old registers and purchase the new IBM equipment over a multi-year period. As alleged in the Commission's complaint, in the second half of 2000, IBM, through Collins, instead suggested that Dollar General accelerate the roll-out of new IBM equipment by leasing for approximately $10 million all of the new equipment by the end of 2000. This would have the result of increasing IBM's revenue for fiscal year 2000, as well as increasing Collins' bonus compensation for that period. As alleged by the Commission, Dollar General initially rejected the proposal, however, due to an accounting problem. Specifically, if Dollar General replaced all of the Omron equipment, it would be required to write off the book value of that equipment as an expense. This "book loss" problem, as it became known, in turn, would have a negative impact on Dollar General's earnings for its fiscal year 2000.
The Commission further alleges in its complaint that IBM, through Collins, devised a way to solve Dollar General's "book loss" problem. Specifically, Collins proposed that IBM would purchase Dollar General's old cash registers for approximately $11 million. As alleged, by selling the equipment at that price, Dollar General would avoid most of the negative consequences of having to write off the book value of the equipment that would have occurred if it simply replaced the old registers with the new IBM equipment. According to the Commission's complaint, the proposed "purchase" was not a bona fide transaction because, among other reasons, IBM's purchase price for Dollar General's old cash registers was repaid to IBM by an offsetting increase in the amount that Dollar General was to pay for the new IBM equipment. In addition, although IBM agreed to buy the Omron equipment for more than Dollar General was going to pay for the new IBM registers, IBM and Collins knew that the old cash registers were worthless to IBM, IBM intended to destroy the equipment, and ultimately IBM never took possession of any of the sales registers. As alleged, IBM nevertheless engaged in the "purchase" and Dollar General removed the old cash registers from its books and minimized the negative impact on its earnings in fiscal year 2000.
The Commission's complaint alleges that, as a result of his conduct, Collins aided and abetted Dollar General's violations of Sections 10(b), 13(a), and 13(b)(2)(A) of the Exchange Act and Exchange Act Rules 10b-5, 12b-20 and 13a-11. Collins has agreed, without admitting or denying the allegations in the complaint, to the entry of a final judgment permanently enjoining him from aiding and abetting violations of these provisions. In addition, the final judgment orders Collins to pay $95,000, comprising $48,769 in disgorgement, $21,231 in prejudgment interest and a civil penalty of $25,000. Collins' settlement is subject to court approval.
In the related administrative proceeding instituted today against IBM, the Commission found that, as a result of the above-referenced conduct, IBM caused Dollar General's violations of Sections 10(b), 13(a), and 13(b)(2)(A) of the Securities Exchange Act of 1934 and Exchange Act Rules 10b-5, 12b-20 and 13a-11. The Commission's order also finds that IBM maintained inaccurate books and records during 2000 and 2001 as a result of numerous discrete revenue recognition errors that took place in the United States and at least 23 other countries, totaling approximately $577 million in revenues over that two-year period. The order also finds that IBM violated Section 13(b)(2)(A) by failing to keep accurate books and records. IBM, without admitting or denying the Commission's findings, consented to the issuance of the Commission's order directing IBM to cease and desist from committing or causing future violations of these provisions. Under the terms of the order, IBM also undertakes to pay $7 million to the court in connection with the Commission's previously filed action SEC v. Dollar General, et al. C.A. No. 3:05-0283 (M.D. Tenn.).