SECURITIES AND EXCHANGE COMMISSION Washington, D.C. LITIGATION RELEASE NO. 15680 / March 25, 1998 ACCOUNTING AND AUDITING ENFORCEMENT RELEASE NO. 1020 In the Matter of SENSORMATIC ELECTRONICS CORPORATION, Administrative Proceeding File No. 3-9563, Securities Act of 1933 Release No. 33- 7518, Securities Exchange Act of 1934 Release No. 34-39791, and Accounting and Auditing Enforcement Release No. 1017 SECURITIES AND EXCHANGE COMMISSION v. RONALD G. ASSAF, MICHAEL E. PARDUE AND LAWRENCE J. SIMMONS, Civil Action No. 98-757(EGS)(D.D.C. March 25, 1998) In the Matter of JOY LYNN SCHNEIDER GREEN, CPA, Administrative Proceeding File No. 3-9564, Securities Exchange Act of 1934 Release No. 34-39792, and Accounting and Auditing Enforcement Release No. 1018 In the Matter of THOMAS H. PIKE, Administrative Proceeding File No. 3-9565 , Securities Exchange Act of 1934 Release No. 34-39793, and Accounting and Auditing Enforcement Release No. 1019 The Securities and Exchange Commission ("Commission") today instituted and simultaneously settled administrative proceedings against Sensormatic Electronics Corporation ("Sensormatic"), a manufacturer and marketer of electronic security systems. In addition, the Commission filed a civil action seeking permanent injunctions and civil penalties in the United States District Court for the District of Columbia against the following three former senior officers of Sensormatic: Ronald G. Assaf, formerly Sensormatic's President and Chief Executive Officer and currently the Chairman of its Board of Directors; Michael E. Pardue, formerly Sensormatic's Chief Operating Officer, Chief Financial Officer and Executive Vice President and a member of its Board of Directors; and Lawrence J. Simmons, Sensormatic's former Vice President of Finance. Finally, the Commission instituted and simultaneously settled administrative proceedings against Joy Lynn Schneider Green, Sensormatic's former Controller of U.S. Operations, and Thomas H. Pike, Sensormatic's former Director of Management Information Systems. SENSORMATIC SETTLES CHARGES OF SECURITIES LAW VIOLATIONS IN CONNECTION WITH SCHEME TO MANIPULATE EARNINGS In the first of three separate administrative Orders issued today, the Commission found that Sensormatic violated the antifraud, reporting, internal controls, and books and records provisions of the federal securities laws in connection with its manipulation of its quarterly revenue and earnings in order to reach its earnings goals and thereby meet analysts' quarterly earnings projections. Simultaneous with the institution of the administrative proceedings, and without admitting or denying the findings contained in the Commission's Order, Sensormatic consented to the issuance of a cease- and-desist order. The Commission Order finds, among other things, that from at least the start of its 1994 fiscal year through July 10, 1995, Sensormatic manipulated its quarterly revenue and earnings in order to reach its budgeted earnings goals and thereby meet analysts' quarterly earnings projections. During the relevant period, Sensormatic consistently met, within one cent, the analysts' forecasts of quarterly earnings per share, even for the third quarters which were Sensormatic's seasonally weaker quarter. Sensormatic carried out this fraudulent scheme by improperly recognizing revenue through several different practices. The conduct, which occurred over a number of years and involved employees throughout the organization, primarily involved recognizing and recording revenue in one quarter from product shipped in the next quarter. At the end of each quarter Sensormatic turned back its computer clock that recorded and dated shipments so that out-of- period shipments, and consequently revenue, would be recorded in the prior quarter. According to the Order, revenue also was recognized through the following improper practices: recognizing revenue in one quarter, when products were shipped to warehouses leased by Sensormatic, instead of in the next quarter, when the products were shipped to the customers; slow shipments, whereby revenue was recognized on shipments which were made during the last days of a quarter but which were not scheduled to arrive at the customers' location until well into the next quarter; and recognizing revenue on goods at the time that they were shipped to customers even though the customers' contracts with Sensormatic contained an FOB destination provision. The amount of out-of-period revenue that Sensormatic recognized in quarters ranged from $4.6 million to $30.2 million. The Order also finds that, as a result of the fraudulent scheme, Sensormatic filed materially false and misleading periodic reports as well as registration statements for the sale of securities that incorporated these periodic reports by reference. The reports were false and misleading because they misstated Sensormatic's quarterly results of operations, including revenue and net income. They also falsely stated that the company recognized revenue upon shipment, when, in fact, it intentionally and prematurely recognized revenue for shipments made in the succeeding period or periods, and did not comply with generally accepted accounting principles ("GAAP") or the company's stated revenue recognition policy. In addition, Sensormatic issued a press release that overstated its preliminary estimates of earnings for the fourth quarter of fiscal year 1995 by over 40%, and for the year by over 18%. During the relevant period, Sensormatic's misstatements of its quarterly net income ranged from an understatement of about $1.9 million (9.1%) in the second quarter of fiscal year 1994 to an overstatement of about $5.2 million (40.5%) in the fourth quarter of fiscal year 1995. The Order ultimately finds that, based on the foregoing, Sensormatic violated Section 17(a) of the Securities Act of 1933 ("Securities Act"), Sections 10(b), 13(a), 13(b)(2)(A) and 13(b)(2)(B) of the Securities Exchange Act of 1934 ("Exchange Act"), and Exchange Act Rules 10b-5, 12b-20, 13a-1, and 13a-13. In light of these findings, the Commission orders Sensormatic to cease and desist from committing or causing any violation, and future violation, of these provisions. COMPLAINT FILED AGAINST FORMER SENSORMATIC OFFICERS The Commission's Complaint filed in District Court alleges that from at least July 1, 1993, through mid-1995, Pardue and Simmons participated in a fraudulent scheme to manipulate Sensormatic's quarterly revenue and earnings by improperly recognizing revenue through several different practices. The Complaint also alleges that Assaf knew that in every quarter Sensormatic recognized revenue improperly on goods shipped after the end of the quarter, but he did not take any steps to stop the improper accounting practices. The Complaint alleges that, under Pardue's and Simmons' supervision, Sensormatic employees backdated computer-generated documents reflecting shipments to make it appear that the shipping had occurred in the prior quarter. According to the Complaint, revenue also was recognized improperly on warehouse shipments, slow shipments and on a contract containing an FOB destination provision. It is alleged that Pardue and Simmons carried out the improper recognition of revenue for the purpose of manipulating Sensormatic's earnings to meet its budgeted earnings goals and thereby meet analysts' quarterly earnings projections. According to the Complaint, during the same period, Assaf understood that by recognizing revenue improperly, the company would meet its earning goals and thereby meet analysts' quarterly earning projections. The Complaint further alleges that, as a result of Pardue's and Simmons' conduct, Sensormatic filed with the Commission and disseminated to the public materially false and misleading reports, including registration statements and periodic reports, that misstated quarterly financial results and falsely stated that the company recognized revenue upon shipment. According to the Complaint, Assaf signed annual reports and permitted quarterly reports to be filed with the Commission, and he knew or was generally aware that these reports were false and misleading because, among other things, they misstated Sensormatic's quarterly earnings by including improperly recognized revenue. As a result, according to the Complaint, investors could not rely on the quarterly financial information reported by the company. The Complaint also alleges that to conceal the improper recognition of revenue from Sensormatic's independent auditors and shareholders, defendants Simmons and Pardue caused Sensormatic's accounting records to be falsified, made false statements to the independent auditors, and intentionally circumvented the company's internal accounting controls. According to the Complaint, by allowing the company's improper recognition of revenue, Assaf also caused Sensormatic's accounting records to be falsified. The Commission alleges that by engaging in such conduct, Pardue and Simmons each violated provisions of the federal securities laws that prohibit fraud, falsifying accounting records, and making misrepresentations to auditors; and Assaf aided and abetted Sensormatic's reporting violations and caused the falsification of accounting records. Specifically, Pardue and Simmons each violated Section 17(a) of the Securities Act, Sections 10(b) and 13(b)(5) of the Exchange Act, and Exchange Act Rules 10b-5, 13b2-1, and 13b2-2, and Assaf aided and abetted violations of Section 13(a) of the Exchange Act and Exchange Act Rules 12b-20, 13a-1, and 13a-13 and violated Exchange Act Rule 13b2-1. Simultaneous with the filing of the Commission's Complaint, Assaf, Pardue and Simmons, without admitting or denying the allegations of the Complaint, each consented to the entry of Final Judgments permanently enjoining them from violating the relevant provisions of the federal securities laws and ordering Assaf, Pardue and Simmons to pay civil money penalties of $50,000, $40,000 and $50,000, respectively. As part of his settlement, Simmons also agreed to settle administrative proceedings pursuant to Rule 102(e) of the Commission's Rules of Practice, to be instituted after entry of the injunction, which will deny him the privilege of appearing or practicing before the Commission as an accountant, with the right to apply to resume appearing or practicing after five years. OTHER PROCEEDINGS The Commission also instituted and simultaneously settled proceedings pursuant to Section 21C of the Exchange Act and Rule 102(e) of the Commission's Rules of Practice against Joy Lynn Schneider Green ("Schneider"), Sensormatic's Controller of U.S. Operations during the relevant period of time. Without admitting or denying the findings contained in the Order, Schneider consented to the issuance of the Order which finds, among other things, that she was aware that shipping documents had been backdated and that revenue was improperly and prematurely recorded based on the documents. The Order also finds that Schneider knew that Sensormatic prepared its financial statements using the improperly recorded revenue and that she knew or should have known that, due to the improper recognition of revenue, the financial statements were not in conformity with GAAP and misstated Sensormatic's earnings. The Order further finds that Schneider permitted this conduct to continue and failed to report it to the Audit Committee of Sensormatic's Board of Directors or the independent auditors. In addition, Schneider knew that documents had been withheld from the independent auditors during the fiscal year 1994 audit, but did not report this to auditors. Finally, during the fiscal year 1995 audit, Schneider hid in her desk a document containing information requested by the auditors and discussed it with her superior, but did not reveal its contents to auditors. Based on the foregoing, the Commission Order finds that Schneider: willfully violated Exchange Act Rules 13b2-1 and 13b2-2; caused Sensormatic's violations of Section 13(a) of the Exchange Act and Rules 12b-20, 13a-1 and 13a-13 thereunder; caused and willfully aided and abetted Sensormatic's violations of Section 13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act; and engaged in improper professional conduct. In view of the foregoing, the Commission is ordering Schneider to cease and desist from committing or causing any violation, and any future violation, of the above listed provisions of the federal securities laws and denies her the privilege of appearing or practicing before the Commission as an accountant, with the right to apply for reinstatement after three years. In the final administrative proceedings instituted today, the Commission issued a cease-and-desist order, by consent, against Thomas H. Pike, Sensormatic's former Director of Management Information Systems, pursuant to Section 21C of the Exchange Act based upon his conduct that allegedly violated Exchange Act Rule 13b2-1 and caused Sensormatic's 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. Without admitting or denying the findings contained therein, Pike consented to the issuance of the Order that finds, among other things, that Pike caused the falsification of accounting records and Sensormatic's reporting violations by supervising employees who reset the computer clock in order to falsify dates on shipping records and prematurely recognize revenue.