SECURITIES AND EXCHANGE COMMISSION
Litigation Release No. 17760 / October 1, 2002
Accounting and Auditing Release No. 1639 / October 1, 2002
SEC v. J. Kenneth Stringer III, J. Mark Samper, William N. Martin, and Steven R. Eagleburger, (U.S. District Court for the District of Oregon, Civil Action No. CV02-1341 (ST))
SEC CHARGES FORMER MANAGEMENT OF FLIR SYSTEMS, INC. WITH SCHEME TO INFLATE REVENUE
The Securities and Exchange Commission announced the filing of a complaint on September 30, 2002 against four former senior executives of government contractor FLIR Systems, Inc. for engaging in a wide-ranging scheme to inflate earnings in 1998 and 1999. The former executives charged today are FLIR's former President and CEO, J. Kenneth Stringer III; its former Senior Vice President of Finance and CFO, J. Mark Samper; its former Vice President of Sales for Airborne Products Worldwide, William N. Martin; and its former Director of Sales Operations, Steven R. Eagleburger. Samper, Martin, and Eagleburger settled the Commission's action without admitting or denying the allegations in the complaint.
FLIR, based in Portland, Oregon, manufactures infrared imaging equipment. FLIR's customers include government and commercial users, and its products are used for surveillance and reconnaissance, among other things. Its stock is listed on Nasdaq's National Market. FLIR restated its 1998 and 1999 financial statements three times in 2000 and 2001 to correct its financials.
The Commission's complaint alleges that Stringer, Samper, Martin, and Eagleburger engaged in fraudulent accounting practices throughout 1998 and 1999 in order to meet revenue and earnings projections. The actions taken by these individuals caused FLIR to report false financial information in FLIR's annual and quarterly reports in 1998 and 1999. The complaint alleges that, as a result of this scheme, FLIR's pre-tax earnings in 1998 and 1999 were overstated by at least 25% to as much as 578%; in one quarter FLIR reported a profit of $411,000 when it actually had a loss of $325,000. In 1998, FLIR reported that it had earned $22.2 million before taxes for the year when in fact FLIR had earned less than half that amount.
The complaint alleges that as a result of pressure to meet earnings targets by Stringer, Samper, Martin, and Eagleburger caused FLIR's overstatement of earnings by engaging in six improper revenue recognition practices:
- False Sales FLIR recognized revenue on four transactions in which no customer placed an order.
- Placeholders FLIR recognized revenue on eight transactions in which it shipped units - termed "placeholders" at FLIR - that were not what the customer ordered. FLIR shipped placeholder units to a third party warehouse, recognized revenue on shipment, then brought the units back to be replaced or reworked per customer specifications.
- Side Agreements FLIR recognized revenue on three transactions in which it offered additional terms such as rights or return, special discounts, or extended payment terms documented in side agreements with the customer.
- Rentals FLIR recognized revenue on two transactions that were not sales in substance because title to the product had not passed to the customer.
- Contingent Orders and Consignment Sales FLIR recognized revenue on four transactions that contained unresolved contingencies or were consignment sales.
- Improper Bill and Hold Sales FLIR recognized revenue on six transactions based upon non-binding letters of intent or inadequate purchase commitments from the customer.
In addition to these improper revenue practices, the complaint also alleges that Samper caused FLIR to fraudulently overstate assets and understate expenses in each quarter in 1999 by improperly using suspense accounts and by double-booking accounts receivables.
The defendants are:
- J. Kenneth Stringer III, 49, of Lake Oswego, Oregon, FLIR's former CEO and President. The SEC seeks an injunction, disgorgement of ill-gotten gains, civil money penalties, and an order prohibiting Stringer from acting as an officer or director of a publicly-traded company. The complaint alleges that Stringer participated in fraudulent sales transactions, that he knew or was reckless in not knowing about the revenue recognition schemes perpetrated by management, and that he lied about the schemes to FLIR's independent auditors. The complaint further alleges that Stringer received a 1998 bonus of $180,000 which he would not have received had FLIR accurately reported its earnings.
- J. Mark Samper, 41, of Portland, Oregon, FLIR's former CFO and Senior Vice President of Finance. Samper simultaneously settled the SEC's action without admitting or denying the allegations in the complaint. Samper agreed to the entry of a court order enjoining him from committing future violations of the charged federal securities laws, barring him from serving as an officer or director of a publicly-traded company, and ordering him to pay $52,500 in disgorgement (representing his 1998 bonus), $8,859 in prejudgment interest, and $110,000 as a civil money penalty. The complaint alleges that Samper was responsible for FLIR's financial record keeping and reporting, signed FLIR's periodic reports filed with the SEC, authorized revenue recognition for false sales, placeholders, rentals, consignment sales, and bill and hold sales with insufficient commitments from customers, caused the double-booking of two transactions, used suspense accounts to inflate FLIR's results, and lied to the auditors.
- William N. Martin, 46, of Lake Oswego, Oregon, FLIR's former Vice President of Sales for Airborne Products Worldwide. Martin simultaneously settled the SEC's action without admitting or denying the allegations in the complaint. Martin agreed to the entry of a court order enjoining him from committing future violations of the charged federal securities laws, barring him bar from serving as an officer or director of a publicly-traded company for a period of ten years, and ordering him to pay $40,000 in disgorgement (representing his 1998 bonus), $7,025 in prejudgment interest, and $40,000 as a civil money penalty. The complaint alleges that Martin authorized and directed sales personnel to obtain non-binding letters of intent, contingent purchase orders, side letters with rights of return, and rental agreements, and that he lied to FLIR's auditors about the scheme.
- Steven R. Eagleburger, 55, of West Linn, Oregon, FLIR's former Director of Sales Operations. Eagleburger simultaneously settled the SEC's action without admitting or denying the allegations in the complaint. Eagleburger agreed to the entry of a court order enjoining him from committing future violations of the charged federal securities laws and to pay a civil money penalty of $25,000. The complaint alleges that Eagleburger facilitated the fraudulent scheme by authorizing and ordering manufacturing personnel to ship placeholder units and directing the entry of sales orders with insufficient or no documentation.
The Commission charged Stringer, Samper, Martin, and Eagleburger with violating or aiding and abetting violations of numerous provisions of the federal securities laws, including the antifraud provisions (Section 10(b) of the Securities and Exchange Act of 1934 ("Exchange Act") and Rule 10b-5 thereunder, and additionally as to Samper and Stringer, Section 17(a) of the Securities Act of 1933), reporting provisions (Section 13(a) of the Exchange Act and Rules 12b-20 and 13a-1 thereunder, and additionally as to Stringer, Samper, and Martin, Rule 13a-13 of the Exchange Act), the record-keeping provisions (Section 13(b)(2)(A) of the Exchange Act, and Rule 13b2-1 thereunder), internal controls provisions (Sections 13(b)(2)(B) and 13(b)(5) of the Exchange Act) and as to Stringer, Samper, and Martin, the lying-to-an-accountant provision (Rule 13b2-2 of the Exchange Act).
SEC Complaint in this matter