Litigation Release No. 16309 / September 28, 1999

SEC v. HAROLD M. ICKOVICS and STEPHEN J. KESH, Civil Action No. 1:99CV02563 (D.D.C.) (September 28, 1999)

SEC v. ROBERT M. CANKES, Civil Action No. 1:99CV02564 (D.D.C.) (September 28, 1999)


The Securities and Exchange Commission ("Commission") today filed a complaint in the United States District Court for the District of Columbia charging two former officers of Model Imperial, Inc. with falsifying Model Imperial's financial statements and fraudulently inflating the company's sales and net income. Model Imperial, based in Boca Raton, Florida, is a wholesale distributor of brand name fragrances and cosmetics to discount retailers, drugstore and supermarket chains and other mass merchants. At the time of the actions alleged in the Commission's complaint, Model Imperial was a public company. All of its stock, however, has subsequently been acquired by a private entity.

The officers of Model Imperial named in the first complaint are Harold M. Ickovics and Stephen J. Kesh. Ickovics, a resident of Boca Raton, Florida, was Model Imperial's President, Chief Executive Officer and Chairman. Kesh, also a resident of Boca Raton, Florida, was Model Imperial's Chief Financial Officer. The complaint alleges that during 1994 and 1995, Ickovics and Kesh caused Model Imperial to record: (1) a $1.3 million gain from a "barter" transaction which lacked economic substance; (2) sales revenue from consignment shipments; (2) customer returns of merchandise as purchases of goods; and (3) sham sales transactions to create fraudulent receivables in connection with a revolving credit agreement. In addition, Model Imperial overstated gross profits on retail sales and made payments to an officer of a perfume supplier to obtain a supply of product and recorded fictitious purchases to conceal the nature of those payments. These practices, which were not in conformity with generally accepted accounting practices, resulted in the filing with the Commission of numerous false and misleading periodic reports during 1994 and 1995.

Simultaneous with the filing of the complaint in this action, Harold Ickovics and Stephen Kesh each consented, without admitting or denying the Commission's allegations, to a Final Judgment that permanently enjoins each of them from violating or aiding and abetting violations of Sections 10(b) (the general "antifraud" provision), 13(a) (the "periodic reporting" provision) and 13(b)(5) (the "internal controls" provision) of the Exchange Act and Exchange Act Rules 12b-20, 13a-1, 13a-13, 13b2-1 and 13b2-2. In addition, Ickovics agreed to pay a civil penalty of $200,000, and Kesh agreed to pay a civil penalty of $25,000. Kesh has also consented to the entry of an order, in an administrative proceeding to be brought under Commission Rule of Practice 102(e)(3)(i), permanently denying him the privilege of practicing as an accountant before the Commission.

Named in a separate Complaint, also filed today in the U.S. District Court of the District of Columbia, is Robert M. Cankes, a resident of Franklin Lakes, New Jersey. From April 1991 until July 1996, Cankes was the president of a major fragrance company which supplied products to Model Imperial. The complaint alleges that Cankes was questioned by Model Imperial's outside auditors about payments made by Model Imperial to an individual, now deceased, for the purpose of obtaining supplies of fragrance. Cankes falsely stated that he was unaware of the arrangement and did not disclose to the auditors that he had been given money by this individual. Through his conduct, according to the Commission's complaint, Cankes provided substantial assistance to the president of Model Imperial in misleading Model Imperial's independent accountants in connection with the audit of Model Imperial's 1995 financial statements. In so doing, Cankes aided and abetted Icovicks' violations of Exchange Act Rule 13b2-2, or the "lying to auditors'" provision of the Exchange Act. Simultaneously with the filing of the complaint in this action, Cankes consented, without admitting or denying the Commission's allegations, to a Final Judgment against him that imposes: (i) a permanent injunction against violating or aiding and abetting the above provision of the Exchange Act and (ii) a civil penalty of $50,000.

In a related matter, the Commission instituted an administrative proceeding against Kenneth Schwartz and Joel Steinberg, partners in a retail fragrance shop. According to the Order Instituting that proceeding, in order to ensure a continuing supply of products from a fragrance supplier, Model Imperial made payments to an officer of the supplier, either directly or through a middleman. Model Imperial's President, Harold Ickovics, obtained cash for some of these payments from Schwartz and Steinberg. On at least three occasions, Ickovics delivered a Model Imperial check to Schwartz and Steinberg and received cash in exchange, minus a three percent fee retained by them. Ickovics obtained, on behalf of Model Imperial, at least $490,000 in cash from Schwartz and Steinberg in exchange for Model Imperial checks which totaled at least $504,500, or $14,500 more than the amount of cash exchanged. In all three instances Schwartz and Steinberg provided Ickovics with fraudulent invoices for merchandise in the amount of the checks, which allowed Model Imperial to record the transactions as purchases of product and thus conceal their true nature. The Commission's order finds that Schwartz and Steinberg, through this conduct, were each a cause of Model Imperial's violations of Exchange Act Sections 10(b) (the general "antifraud" provision) and 13(a) (the "periodic reporting" provisions) and Exchange Act Rules 10b-5, 13a-1 and 13a-13, and that they falsified Model Imperial's books and records in violation of Exchange Act Rule 13b2-1. Simultaneously with the institution of the administrative proceeding, and without admitting of denying the Commission's findings, Schwartz and Steinberg consented to the issuance of an order that they cease and desist from committing or causing any violations of the above provisions of the securities laws and pay disgorgement of $14,500, plus prejudgment interest. In the Matter of Kenneth Schwartz and Joel Steinberg, Admin. Proc. File No. 3-10044 (September 28, 1999).

Finally, the Commission instituted public administrative proceedings, pursuant to Section 12(j) of the Exchange Act, to determine whether to revoke the registration with the Commission of the common stock of Model Imperial. In the Matter of Model Imperial, Inc., Admin. Proc. File No. 3-10043 (September 28, 1999.)