Litigation Release No. 18002 / February 27, 2003
Accounting and Auditing Enforcement
Release No. 1723 / February 27, 2003
Securities and Exchange Commission v. Glen Andrew Folck, Civil Action No. 1:03CV00386 (D.D.C.) (February 26, 2003)
Glen Andrew Folck Consents to Pay a $50,000 Civil Penalty Relating to Improper Accounting at Smartalk Teleservices, Inc.
The Securities and Exchange Commission announced the filing of a civil action in federal court against Glen Andrew Folck, the former Chief Financial Officer of SmarTalk TeleServices, Inc., a now-bankrupt provider of pre-paid telephone cards and wireless services. The civil action arises from SmarTalk's filing with the Commission materially false and misleading financial statements, which were also incorporated in registration statements for offerings of stock. According to the Commission's Complaint, Folck, as CFO, was responsible for the preparation of the financial statements that were included in SmarTalk's periodic reports and registration statements. Folck consented, without admitting or denying the allegations in the Commission's complaint, to pay a civil penalty of $50,000.
On February 26, 2003, the Commission also issued a cease-and-desist order ("Order") against Folck in a related administrative proceeding. (In the Matter of Glen Andrew Folck, Administrative Proceeding File No. 3-11046) The Order finds that Folck violated or caused violations of certain antifraud, reporting, and books and records provisions of the federal securities laws. Folck also agreed to settle the cease-and-desist proceeding, without admitting or denying the findings in the Order.
In its Complaint the Commission alleges the following:
As of the third quarter of 1997 and year-end 1998, SmarTalk filed with the Commission materially false and misleading financial statements, which were also incorporated in registration statements for offerings of stock filed with the Commission in September and December 1997, and May 1998. Folck, as CFO, was responsible for the preparation of SmarTalk's financial statements and signed all relevant annual and quarterly reports and registration statements and supervised the accounting department.
SmarTalk falsely reported net income of $478,000 in its quarterly report for the third quarter of 1997. In fact, SmarTalk had losses that period. As Folck knew or should have known, SmarTalk hid the losses by improperly capitalizing ordinary operating expenses. The expenses were improperly treated as an asset.
Additionally, in SmarTalk's annual report for its fiscal year ended December 31, 1997, which included audited financial statements, SmarTalk reported a one-time charge, a $25 million restructuring reserve, purportedly for anticipated 1998 costs, after its purchase of several other prepaid telephone card businesses. As Folck knew or should have known, the entire restructuring reserve did not conform to Generally Accepted Accounting Principles ("GAAP") because the anticipated costs were not proper restructuring costs and the company had failed to properly establish a plan of restructuring. Also, as Folck knew or should have known, SmarTalk improperly understated current period operating expenses by charging 1997 operating expenses (including most of the above described expenses improperly capitalized as of the third quarter of 1997) against the non-GAAP restructuring reserve. This enabled SmarTalk to falsely inflate earnings before one-time charges at year-end 1997. In November 1998, SmarTalk restated its financial statements for year-end 1997 and its first two quarters of 1998.
By engaging in the above conduct, Folck caused SmarTalk's books and records to be falsified as of the third quarter of 1997 and year-end 1997 and thus, violated Exchange Act Rule 13b2-1.
In addition to payment of a civil penalty, Folck agreed to the following sanctions ordered by the Commission in the administrative proceeding: Folck was ordered to cease and desist from committing or causing violations of Sections 17(a)(2) and 17(a)(3) of the Securities Act of 1933 and Exchange Act Rule 13b2-1; Folck was ordered to cease and desist from causing violations of Sections 13(a), 13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act and Exchange Act Rules 13a-1, 13a-13 and 12b-20; and Folck was ordered to pay disgorgement and prejudgment interest totaling $22,844.68 relating to his stock sales in January 1998.
