SECURITIES AND EXCHANGE COMMISSION
Litigation Release No. 17734 / September 18, 2002
Accounting and Auditing Enforcement Release No. 1628 / September 18, 2002
S.E.C. v. Stephen L. Holden, Scott Skooglund, Kuldershan S. Padda, and Stephan C. Beal (U.S.D.C. N.D. Illinois, Civil Action No. 01-C-7463)
The United States Securities and Exchange Commission ("Commission") today announced that it had reached a settlement with Stephen L. Holden in connection with his role in a multi-million dollar accounting fraud involving Sabratek Corp, a now-bankrupt Skokie, Illinois manufacturer that developed and sold remote healthcare equipment, including infusion pumps and flush syringes and related equipment and software used in both hospital and home healthcare situations. Holden had served as the company's Chief Financial Officer, Controller and Treasurer from August 1996 to July 1998 and its President and Treasurer from July 1998 to January 2000. The Commission's lawsuit charged Holden and three other executives with fraudulently inflating the company's earnings during 1998 and 1999 in order to meet their previously announced quarterly projections. In the second half of 1999, when news of Sabratek's inflated operating results began to emerge, its market capitalization declined by approximately 98%.
Holden, a former resident of Deerfield, Illinois who now resides in Ohio, agreed to pay a civil penalty of $90,000.00 and also to pay disgorgement plus interest totaling $68,376, which reflect bonuses that he received during the period in which the Commission claims that Sabratek was cooking its books. Holden also agreed to the entry of a permanent injunction barring him from future violations of anti-fraud, record-keeping, and reporting provisions of the federal securities laws, contained in from violations of Sections 10(b), 13(a), 13(b)(2)(A), 13(b)(2)(B) and 13(b)(5) of the Securities Exchange Act of 1934 and Rules 10b-5, 12b-20, 13a-1, 13a-13, 13b2-1, and 13b-2-2 thereunder. The court order reflecting this settlement was entered on September 13, 2002.
Two of the other defendants previously settled the Commission's claims against them. Kulderhsan S. Padda, the founder and former CEO of Sabratek, agreed to pay $125,000 in civil penalties and Stephan C. Beal, the company's Vice President of Sales, agreed to disgorge bonuses and commissions totaling $29,237 (plus prejudgment interest of $6,193) that he received during the 1998-1998 period, and to pay a civil penalty of $60,000. Beal and Padda also agreed to the entry of the same permanent injunctions as were entered against Holden. The only remaining defendant is Scott Skooglund, the company's former Chief Accounting Officer.
In the lawsuit, the Commission alleged that the defendants engaged in a scheme to overstate Sabratek's sales and results of operation in its Form 10-K for the year 1998 and Forms 10-Q for the first three quarters of 1998 and the first quarter of 1999. During those years, Padda was Sabratek's chief executive officer and chairman of the board; Holden was at first Sabratek's chief financial officer, controller, and treasurer and then later its president and treasurer; Beal was Sabratek's vice president of sales; and Skooglund was Sabratek's vice president of finance and chief accounting officer.
According to the Commission's complaint, Sabratek's pump and flush syringe businesses were the company's two primary sources of sales. Prior to 1998, Sabratek capitalized on strong demand for pumps from large institutional customers to increase its sales. In 1998, however, Sabratek faced first slowing demand for its pumps and later an FDA demand that the company stop selling its flush syringes. The Commission alleged that despite these adverse developments, Padda and Holden told analysts that Sabratek's sales would continue to grow in 1988. Based on Padda and Holden's representations, analysts projected that Sabratek's net sales would grow by as much as $23 million in 1998.
The Commission charged that to meet these forecasts, from the first quarter of 1998 through the first quarter of 1999 the defendants recognized numerous large, end-of-the-quarter transactions that did not qualify as sales under Generally Accepted Accounting Principles ("GAAP"). In some instances, the defendants allegedly created fictitious sales of pumps that had not been ordered by customers, but instead were parked at third-party warehouses. In other instances, they allegedly entered into sales agreements containing consignment or right-of-return provisions. In still other instances, they allegedly agreed to significant seller's obligations, including promises that Sabratek's sales force would assist Sabratek's customers in the resale of these pumps to end-users.
The Commission also alleged that throughout 1998 and the first quarter of 1999, the defendants inflated Sabratek's sales by billing another company a total of $4.5 million for "consulting services" that Sabratek executives in fact largely never provided.
The Commission alleged that over the five quarters from the first quarter of 1998 through the first quarter of 1999, Sabratek, through the defendants' actions, overstated net sales by $30.7 million, or more than 60%. The Commission also alleges that through the defendants' actions, Sabratek reported total operating income of $10.3 million, when in fact had experienced an operating loss of $8 million over the five quarters in question.
The Commission's complaint also charged that in press releases and the MD&A sections of Sabratek's periodic reports filed during 1998 and early 1999, Padda and Holden touted the company's sales growth without disclosing that the sales growth had been achieved through the fraudulent "consulting services" billings and through special inducements and concessions, including extended payment terms, consignment arrangements, rights of return, and other significant seller's obligations.
According to the complaint, in the second half of 1999, when news of Sabratek's inflated operating results began to emerge, the company's market capitalization declined by $202.5 million, or 98%. On December 17, 1999, Sabratek filed a petition to reorganize under Chapter 11 of the Bankruptcy Code.
In related proceedings, the Commission issued an administrative order against Paul Jurewicz, who had replaced Holden as Chief Financial Officer of Sabratek in 1998 after Holden was promoted to President. That order directs Jurewicz to cease and desist from committing or causing any violation or any future violations of Sections 10(b), 13(a), 13(b)(2)(A), 13(b)(2)(B) of the Exchange Act, and Rules 10b-5, 12b-20, 13a-1, 13a-13, 13b2-1, and 13b2-2 thereunder, and to pay disgorgement of $14,838 and prejudgment interest thereon of $2,718. For more information regarding the administrative proceeding against Jurewicz, see Admin. Rel. No. 3-10591.