UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Litigation Release No. 16792 / November 8, 2000
Accounting and Auditing Enforcement Release No. 1340 / November 8, 2000
Securities and Exchange Commission v. Aviation Distributors, Inc., Osamah S. Bakhit, and James J. Goulet, Civil Action No. SACV 00-1089 DOC (EEx) (C.D. Cal.)
SEC CHARGES SOUTHERN CALIFORNIA COMPANY AND FORMER PRESIDENT AND CEO WITH ACCOUNTING FRAUD
The Securities and Exchange Commission ("Commission") yesterday charged Aviation Distributors, Inc. ("ADI"), an airline parts distribution company headquartered in Lake Forest, California, and Osamah S. Bakhit, ADI's founder and former President, Chief Executive Officer, and Chairman, with accounting fraud. Also named in the Commission's Complaint is James Goulet, ADI's Director of Quality Control. The Complaint alleges that the three defendants engaged in a scheme to overstate ADI's financial results, which caused the registration statement filed in connection with the company's March 3, 1997 initial public offering, as well as two subsequent quarterly reports, to be materially false and misleading.
The Complaint, which was filed in the United States District Court for the Central District of California, alleges that during fiscal years 1995 and 1996, and portions of 1997, ADI routinely recognized revenue in one reporting period on goods that were not shipped until subsequent periods; recognized revenue on goods that were never shipped; created false "inventory exchanges" to offset outstanding receivables; and altered invoices submitted to its bank for financing. ADI engaged in these practices in order to brighten its financial picture and to obtain vital bank financing. As a result of its fraudulent practices, ADI filed with the Commission and disseminated to the public a materially false and misleading registration statement and two Forms 10-QSB that misstated ADI's financial results. In its financial statement for 1996, which was included in the company's registration statement, ADI fraudulently overstated its reported income by approximately 488 percent, overstating its revenues by approximately $788,358 and understating its expenses by approximately $319,500. Thus, ADI reported pre-tax net income of $227,155 for 1996 when it should have shown a loss of over $800,000. ADI's registration statement and quarterly reports also falsely stated that the company was in compliance with the terms of its lines of credit.
The Complaint alleges that this fraudulent scheme was orchestrated and implemented by Bakhit, ADI's former President, CEO, and Chairman, who is currently a sales and marketing consultant for the company, as well as the company's largest shareholder. Bakhit directed ADI employees to recognize revenue fraudulently on out-of-period sales and fictitious transactions; falsify ADI's books and records; and submit false documents to ADI's bank. Bakhit signed both the registration statement and quarterly reports when he knew, or was reckless in not knowing, that these documents contained materially false and misleading information. Bakhit also made false statements to ADI's former independent auditor in order to conceal this fraudulent scheme.
In its Complaint, the Commission charges Bakhit with: violating the antifraud provisions of the federal securities laws, Section 17(a) of the Securities Act of 1933 ("Securities Act") and Section 10(b) of the Securities Exchange Act of 1934 ("Exchange Act") and Rule
10b-5 thereunder; falsifying ADI's books and records, Section 13(b)(5) of the Exchange Act and Exchange Act Rule 13b2-1; making false statements to ADI's former independent auditor, Exchange Act Rule 13b2-2; aiding and abetting ADI's filing of false and misleading quarterly reports, Sections 13(a) of the Exchange Act and Rules 12b-20 and 13a-13 thereunder; and aiding and abetting ADI's books and records and internal accounting control violations, Sections 13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act. The Complaint seeks an injunction against Bakhit for future violations, a civil monetary penalty, and an order prohibiting him from serving as an officer or director of any public company.
The Commission's Complaint alleges that Goulet falsified ADI's books and records and aided and abetted violations of the antifraud provisions. At Bakhit's direction, Goulet performed many of the day-to-day tasks necessary to carry out the fraudulent scheme, including creating false invoices, purchase orders, and shipping documents.
ADI and Goulet have agreed to settle the charges brought against them without admitting or denying the allegations set forth in the Complaint. ADI consented to the entry of a final judgment permanently enjoining it from future violations of Section 17(a) of the Securities Act and Sections 10(b), 13(a), 13(b)(2)(A), and 13(b)(2)(B) of the Exchange Act and Rules 10b-5, 12b-20, and 13a-13 thereunder. Goulet consented to the entry of a final judgment permanently enjoining him from future violations of Sections 10(b) and 13(b)(5) of the Exchange Act and Rules 10b-5 and 13b2-1 thereunder. The proposed final judgment for Goulet does not impose a civil monetary penalty based upon his sworn representations concerning his financial condition.
Also today, the United States Attorney's Office for the Central District of California is announcing related criminal charges against the three defendants.