U.S. SECURITIES AND EXCHANGE COMMISSION
Litigation Release No. 16731 / September 27, 2000
Accounting and Auditing Enforcement Release No. 1326 / September 27, 2000
SEC v. Richard I. Berger and Donna M. Richardson, Civil Action No. 00-10351 R (JWJx)(C.D. Cal.).
On September 27, 2000, the Securities and Exchange Commission filed a complaint alleging financial statement fraud against the former Chief Executive Officer and the former Chief Financial Officer of Craig Consumer Electronics, Inc. ("Craig"). Craig was a former marketer of consumer electronic products that was located in Los Angeles County, California. The complaint charges Richard I. Berger, former CEO, and Donna M. Richardson, former CFO, with fraud in connection with Craig's initial public offering registration statement and in periodic financial reports filed on behalf of Craig in 1996 and 1997.
Also on September 27, 2000, the United States Attorney for the Central District of California announced indictments against Berger, Richardson and Bonnie K. Metz for conduct similar to that alleged in the Commission's complaint.
The Commission's action, filed in federal court in Los Angeles, alleges that Berger and Richardson failed to disclose the true state of Craig's precarious financial condition and the true state of Craig's cash flow situation in periodic reports and Craig's IPO registration statement. As part of their fraudulent scheme, the complaint alleges:
The Complaint further alleges that, in addition to the conduct described above, Berger caused Craig to overstate its revenue and earnings for the first quarter 1997. As alleged in the complaint, Berger caused Craig to recognize improperly $1.3 million in revenue by recognizing sales of known defective product. This resulted in Craig overstating its revenue by 11% and understating its pretax loss by 14%.
The Commission's complaint alleges that Berger and Richardson violated or aided and abetted violations of the antifraud provisions (Section 17(a) of the Securities Act of 1933 and Section 10(b) of the Securities Exchange Act of 1934 ("Exchange Act") and Rule 10b-5 thereunder), the reporting provision (Section 13(a) of the Exchange Act and Rules 12b-20, 13a-1 and 13a-13 thereunder), record keeping provision (Section 13(b)(2)(A) of the Exchange Act), internal controls provision (Section 13(b)(2)(B) of the Exchange Act), books and records provision (Rule 13b2-1 of the Exchange Act), knowing circumvention of internal controls provisions (Section 13(b)(5) of the Exchange Act) and lying to an accountant provision (Rule 13b2-2 of the Exchange Act).
The Commission's complaint seeks permanent injunctions and civil penalties against the defendants. Additionally, as to Berger, the complaint seeks an order barring him from serving as an officer or director of a public company.
Simultaneous with the filing of the Commission's complaint, Berger offered to settle the action by consenting to a permanent injunction, without admitting or denying the allegations in the complaint, for the violations outlined above. Berger also agreed to pay a civil penalty in the amount of $25,000 and to be barred from serving as an officer or director for a period of five years.
The defendants named in the Commission's complaint are:
In a related administrative proceeding, the Commission found that Craig's Vice-President/Managing Director for Craig's Hong Kong office, Bonnie M. Metz, knowingly circumvented Craig's internal controls by falsifying bills of lading to create the illusion that Craig held title to goods owned by others. Without admitting or denying the findings in the Commission's Order, Metz agreed to cease and desist from knowingly circumventing Craig's internal controls and falsifying Craig's books and records. In the Matter of Bonnie K. Metz, Admin. Proc. File No. 3-10316 (Sept. 27, 2000).
In another related administrative proceeding, the Commission instituted a proceeding against Craig to determine whether to revoke its registration for common stock. In the Matter of Craig Consumer Electronics, Inc., Admin. Proc. File No. 3-10315 (Sept. 27, 2000).