==========================================START OF PAGE 1====== SECURITIES AND EXCHANGE COMMISSION Washington D.C. Litigation Release No. 15384 / June 11, 1997 Accounting and Auditing Enforcement Release No. 923 / June 11, 1997 SECURITIES AND EXCHANGE COMMISSION v. JOSEPH C. ALLEGRA, DAVID HERSH, J. LEE LEDBETTER and H. FLYNN CLYBURN, 97 Civ. 4305 (SS) (S.D.N.Y. June 11, 1997) The Securities and Exchange Commission announced today that it filed a civil injunctive action in federal court in Manhattan charging four former senior officers of T2 Medical, Inc. ("T2") with carrying out a financial fraud scheme that materially inflated T2's reported net income in each of the first two quarters of T2's fiscal year ended September 30, 1993 ("FY 1993"), and charging one of those officers with illegal insider trading. Named in the Commission's complaint were: Joseph C. Allegra ("Allegra"), age 48, was T2's president and chief executive officer and a member of T2's board of directors during the time of the events alleged in the complaint. Allegra resigned from all three positions in August 1993. David Hersh ("Hersh"), age 33, was T2's chief financial officer, treasurer and secretary during the time of the events alleged in the complaint. Hersh was placed on administrative leave in August 1993 and left T2 in December 1993. Hersh is a certified public accountant. J. Lee Ledbetter ("Ledbetter"), age 51, was T2's chief operating officer and senior executive vice president during the time of the events alleged in the complaint. Ledbetter resigned from T2 in October 1993. H. Flynn Clyburn ("Clyburn"), age 48, was an executive vice president at T2 during the time of the events alleged in the complaint. Clyburn resigned from T2 in September 1993. During the time of the events alleged in the complaint, T2 was a national provider of alternate site health care services whose primary business was home infusion therapy, which is the intravenous administration of pharmaceutical treatments at the patient's home. T2 merged with three other publicly-held health care companies in July 1994 to form Coram Healthcare Corporation. ==========================================START OF PAGE 2====== The Commission's complaint alleges, among other things, that Allegra, Hersh, Ledbetter and Clyburn inflated T2's net income for the quarters ended December 31, 1992 ("First Quarter") and March 31, 1993 ("Second Quarter") by engaging, and directing their subordinates to engage, in the following fraudulent accounting practices: * Recognizing January 1993 revenues in December 1992 and recognizing April 1993 revenues in March 1993, and artificially accelerating product delivery schedules at the end of both quarters * Deferring bad debt write-offs past the end of the fiscal quarter in which the write-offs were required to be recorded. The complaint also alleges that Hersh further inflated T2's reported net income during FY 1993 by engaging in the following fraudulent conduct: * Recording in the Second Quarter the gain from an asset sale that occurred in the next quarter * Reclassifying as assets certain period expenses incurred in the First and Second Quarter * Making fictitious entries in connection with T2's acquisition of certain companies in March 1993 that (i) pushed some of T2's current bad debt expense back to prior periods; and (ii) reduced the bad debt expense that T2 recorded in the Second Quarter. The complaint alleges that as a result of these fraudulent practices, T2's net income was materially overstated on its books and records, in press releases and in financial statements included in T2's Quarterly Reports on Form 10-Q for the First Quarter and the Second Quarter. As originally reported, T2's First Quarter net income was inflated by approximately $3,970,241, or 31%, and its Second Quarter net income was inflated by approximately $8,769,903, or 86%. The materially false and misleading financial statements contained in the First Quarter Form 10-Q and Second Quarter Form 10-Q were also incorporated in a Registration Statement on Form S-8 dated July 13, 1993. In addition, the First Quarter Form 10-Q was provided to the stockholders of private companies that T2 acquired on March 31, 1993 through merger transactions pursuant to which the stockholders of the private companies received shares of T2 stock. In addition to the above described financial fraud, the complaint alleges that Ledbetter engaged in illegal insider trading. Specifically, the complaint alleges that in June 1993, Ledbetter ==========================================START OF PAGE 3====== sold 10,000 shares of T2 common stock knowing that T2's financial condition was materially overstated, thereby avoiding losses of $52,522. The complaint also alleges that during FY 1993, Hersh received a $31,500 performance bonus based on T2's fraudulently overstated net income in the first two quarters. Finally, the complaint alleges that at Hersh's direction, certain of T2's field personnel also made materially misleading statements to T2's outside accountants in connection with an interim review of T2's financial statements for the quarter ended June 30, 1993. In the complaint, the Commission seeks: permanent injunctions and civil penalties against all defendants; disgorgement and prejudgment interest from Hersh and Ledbetter; and officer and director bars against Allegra, Hersh, and Ledbetter. Simultaneous with the filing of the complaint, Allegra, Hersh, Ledbetter and Clyburn consented, without admitting or denying the allegations in the complaint, to the following relief: * Allegra consented to the issuance of a final judgment permanently enjoining him from committing future violations of Section 17(a) of the Securities Act of 1933 ("Securities Act"), Sections 10(b) and 13(b)(5) of the Securities Exchange Act of 1934 ("Exchange Act") and Rules 10b-5 and 13b2-1, and from engaging in conduct as a controlling person that would render him liable pursuant to Section 20(a) of the Exchange Act for violations of Sections 13(a) and 13(b)(2) of the Exchange Act and Exchange Act Rules 12b-20 and 13a-13. Allegra also agreed to pay a civil money penalty of $150,000. In addition, Allegra consented to entry of an order barring him for a period of five years from serving or acting as an officer or director of any company whose securities are publicly traded. * Hersh consented to the issuance of a final judgment permanently enjoining him from committing future violations of Section 17(a) of the Securities Act, Sections 10(b) and 13(b)(5) of the Exchange Act and Rules 10b-5, 13b2-1 and 13b2-2, and from engaging in conduct as a controlling person that would render him liable pursuant to Section 20(a) of the Exchange Act for violations of Sections 13(a) and 13(b)(2) of the Exchange Act and Exchange Act Rules 12b-20 and 13a-13. Hersh also consented to be ordered to disgorge $31,500, the amount of the performance bonus he received in FY 1993 on the basis of T2's materially overstated net income in the first two quarters, plus prejudgment interest thereon. In addition, Hersh agreed to pay a civil money penalty of $100,000. Finally, Hersh consented to entry of an order barring him for a period of ten years from serving or acting as an officer or ==========================================START OF PAGE 4====== director of any company whose securities are publicly traded. * Ledbetter consented to the issuance of a final judgment permanently enjoining him from committing future violations of Section 17(a) of the Securities Act, Sections 10(b) and 13(b)(5) of the Exchange Act and Rules 10b-5 and 13b2-1, and from engaging in conduct as a controlling person that would render him liable pursuant to Section 20(a) of the Exchange Act for violations of Sections 13(a) and 13(b)(2) of the Exchange Act and Exchange Act Rules 12b-20 and 13a-13. Ledbetter also agreed to disgorge $52,522, plus prejudgment interest thereon, representing the losses he avoided by illegally selling T2 while in possession of material, nonpublic information. In addition, Ledbetter agreed to pay civil money penalties totalling $102,522, consisting of a $50,000 penalty in connection with his financial fraud violations and a $52,522 penalty in connection with his insider trading violations. Finally, Ledbetter consented to entry of an order barring him for a period of five years from serving or acting as an officer or director of any company whose securities are publicly traded. * Clyburn consented to the issuance of a final judgment permanently enjoining him from committing future violations of Sections 10(b) and 13(b)(5) of the Exchange Act and Rules 10b-5 and 13b2-1. Clyburn also agreed to pay a civil money penalty of $20,000.