U.S. SECURITIES AND EXCHANGE COMMISSION
Litigation Release No. 17934 / January 15, 2003
S.E.C. v. ClearOne Communications, Inc., Frances M. Flood and Susie Strohm, Docket No. 2:03 CV-0055 DAK (U.S.D.C., D.Ut.)
The Securities and Exchange Commission filed a complaint in the United States District Court for the District of Utah, on January 15, 2003, seeking a temporary restraining order and preliminary and permanent injunctions against ClearOne Communications, Inc., Frances M. Flood, ClearOne's Chairman, CEO and President, and Susie Strohm, ClearOne's CFO and Vice President of Finance. The complaint alleges that ClearOne, Flood and Strohm violated the antifraud, reporting, issuer books and records and lying to auditors provisions of the federal securities laws. The complaint also seeks, among other relief, disgorgement, civil money penalties, officer-director bars against Flood and Strohm, an order prohibiting the destruction of documents and appointment of a special monitor to oversee ClearOne's sales, billing and collection operations.
The complaint alleges that from the quarter ended March 31, 2001, through the quarter ended September 30, 2002, ClearOne, Flood and Strohm have engaged in a program of inflating the company's revenues, net income and accounts receivable by engaging in improper revenue recognition. It is alleged that this course of conduct, covering two annual reporting periods and five separate quarterly reporting periods, was effected primarily through a program of channel stuffing conceived and directed by Flood, assisted by Strohm. It is further alleged that Flood and Strohm shipped large amounts of inventory to the company's distributors at the end of each quarter with the understanding that the distributors did not have to pay for these products until the distributors resold the products to their own customers, and that in some instances the distributors were given the right to return or exchange unwanted ClearOne products the distributors were unable to sell. In addition, it is alleged that on December 11, 2001, while this conduct was ongoing, ClearOne closed a $25.5 million private placement of common stock.
It is alleged that by engaging in such conduct ClearOne, Flood and Strohm violated 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. It is also alleged that ClearOne violated Sections 13(a) and 13(b)(2)(A) and (B) of the Exchange Act and Rules 12b-20, 13a-1, 13a-13 and 13b2-1 thereunder, that Flood and Strohm aided and abetted ClearOne's violations of Sections 13(a) and 13(b)(2)(A) and (B) of the Exchange Act and Rules 12b-20, 13a-1, and 13a-13 thereunder, and violated Rule 13b2-2 under the Exchange Act.