SECURITIES AND EXCHANGE COMMISSION
Litigation Release No. 17001 / May 15, 2001
Accounting and Auditing Enforcement Release No. 1395 / May 15, 2001
Securities and Exchange Commission v. Albert J. Dunlap, Russell A. Kersh, Robert J. Gluck, Donald R. Uzzi, Lee B. Griffith, and Phillip E. Harlow, 01-8437-CIV-DIMITROULEAS (S.D. Fla., May 15, 2001).
In the Matter of Sunbeam Corporation, Securities Act Release No. 7976; Accounting and Auditing Enforcement Release No. 1393 (May 15, 2001)
In the Matter of David C. Fannin, Securities Act Release No. 7977; Accounting and Auditing Enforcement Release No. 1394 (May 15, 2001)
SEC Sues Former Top Officers of Sunbeam Corporation and Arthur Andersen Auditor in Connection with Massive Financial Fraud
The Securities and Exchange Commission today filed a civil injunctive action in U.S. District Court in Miami, Florida, against five former officers of Sunbeam Corporation and the former engagement partner on the Arthur Andersen LLP audits of Sunbeam's financial statements. The Commission alleges that the Defendants engaged in a scheme to fraudulently misrepresent the Company's results of operations in connection with a purported "turnaround" of the Company. When Sunbeam's "turnaround" was exposed as a sham, the stock price plummeted, causing investors billions of dollars in losses. The defendants are: Sunbeam's former CEO and chairman Albert J. Dunlap; former principal financial officer Russell A. Kersh; former controller Robert J. Gluck, former vice-presidents Donald R. Uzzi, and Lee B. Griffith, and Arthur Andersen LLP partner Phillip Harlow.
According to the Commission's Complaint:
- Dunlap, a turnaround specialist, was hired by Sunbeam's Board in July 1996 to restructure the financially ailing Company. Dunlap placed Kersh in charge of Sunbeam's finance organization. Soon after their arrival, Dunlap and Kersh promised a rapid turnaround to enable Sunbeam to substantially improve its financial performance. Together with Sunbeam senior executives Gluck, Uzzi, and Griffith, they then employed improper accounting techniques and undisclosed non-recurring transactions to meet promised sales and earnings figures. As a result, Sunbeam's financial statements and press releases reporting 1996 year-end results, quarterly and year-end 1997 results, and first-quarter 1998 results were materially false and misleading. These actions inflated the price of Sunbeam shares to a high of $52 per share in March 1998. If the Company had been sold at an inflated share price, Dunlap and Kersh could have reaped tens of millions of dollars from the sale of their Sunbeam securities.
- The illegal conduct began at year-end 1996 with the creation by Kersh and Gluck of inappropriate accounting reserves, which increased Sunbeam's reported loss for 1996. These "cookie-jar" reserves were then used to inflate income in 1997, thus contributing to the false picture of a rapid turnaround. In addition, to further boost income in 1997, and to create the impression that Sunbeam was experiencing significant revenue growth, Dunlap, Kersh, Gluck, Uzzi, and Griffith ("the Sunbeam officers") caused the Company to recognize revenue for sales that did not meet applicable accounting rules. As a result, for fiscal 1997, at least $60 million of Sunbeam's reported (record-setting) $189 million in earnings from continuing operations before income taxes ("income") came from accounting fraud.
- Also in 1997, the Sunbeam officers failed to disclose that Sunbeam's 1997 revenue growth was, in part, achieved at the expense of future results. The Company had offered discounts and other inducements to customers to sell merchandise immediately that otherwise would have been sold in later periods, a practice also known as "channel stuffing." The resulting revenue shift threatened to suppress Sunbeam's future results of operations.
- Phillip E. Harlow, a partner at Arthur Andersen, Sunbeam's outside auditing firm, authorized unqualified audit opinions on Sunbeam's 1996 and 1997 financial statements although he was aware of many of the Company's accounting improprieties and disclosure failures. These opinions were false and misleading in that, among other things, they incorrectly stated that Andersen had conducted an audit in accordance with generally accepted auditing standards, and that the Company's financial statements fairly represented Sunbeam's results and were prepared in accordance with generally accepted accounting principles.
- The above-described earnings management did not lead to a sale of the Company by year-end 1997. At the same time, Sunbeam's improper accounting and channel stuffing in 1997 created the prospect of diminished results in 1998. In early 1998, the Sunbeam officers named as defendants took increasingly desperate measures to conceal the Company's mounting financial problems, meanwhile attempting to finance the acquisition of three other companies, in part through a bond offering. The Sunbeam officers again engaged in, and recognized revenue for, sales that did not meet the applicable accounting rules; again caused Sunbeam to engage in acceleration of sales revenue from later periods; deleted certain corporate records to conceal pending returns of merchandise; and misrepresented the Company's performance and future prospects in its filing on Form 10-Q for the first quarter of 1998, its offering materials in connection with the bond offering, its press releases, and its communications with analysts.
- In June 1998, negative statements in the press about the quality of the Company's earnings prompted Sunbeam's Board of Directors to begin an internal investigation. This resulted in the termination of Dunlap, Kersh and other members of Company management and, eventually, to an extensive restatement of Sunbeam's financial statements from the fourth quarter of 1996 through the first quarter of 1998. Sunbeam is presently in a reorganization proceeding under Chapter 11 of the U. S. Bankruptcy Code.
According to the Commission's Complaint, through this conduct, Dunlap and Kersh, personally and as controlling persons within the meaning of Section 20(a) of the Securities Exchange Act of 1934 ("Exchange Act"), and Gluck and Griffith violated or aided and abetted violations of Section 17(a) of the Securities Act of 1933 and Sections 10(b), 13(a), 13(b)(2)(A), 13(b)(2)(B) and (with the exception of Dunlap) 13(b)(5) of the Exchange Act and Rules 10b-5, 12b-20, 13a-1, 13a-13, 13b2-1, and 13b2-2 thereunder; and Uzzi and Harlow violated or aided and abetted violations of all of the above provisions except Exchange Act Rule 13b2-2. The Commission seeks, as to all defendants, permanent injunctions against future violations of the above provisions of the securities laws and civil penalties and, in the case of Dunlap, Kersh, Gluck, and Uzzi, permanent bars from acting as an officer or director of any public company;
In a related matter, the Commission filed an administrative proceeding against Sunbeam Corporation, based in part on allegations that Sunbeam's filings with the Commission were materially false and misleading from the fourth quarter of 1996 through the first quarter of 1998. Without admitting or denying the allegations in the Order Instituting Proceedings, Sunbeam consented to the entry of a cease-and-desist order prohibiting 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, 13a-1, and 13a-13 thereunder.
In another related matter, the Commission filed a settled administrative action against David C. Fannin, former Executive Vice President, General Counsel and Secretary of Sunbeam, based on allegations that Fannin participated in the drafting of certain Sunbeam press releases in early 1998 that presented a misleading picture of the Company's results of operations. Without admitting or denying the Commission's allegations, Fannin consented to the entry of a cease- and-desist order prohibiting future violations of Section 17(a)(3) of the Securities Act.http://www.sec.gov/litigation/litreleases/lr17001.htm