SECURITIES AND EXCHANGE COMMISSION
Litigation Release No. 18306 /August 25, 2003
Accounting and Auditing Enforcement Release No. 1849 /August 25, 2003
SECURITIES AND EXCHANGE COMMISSION v. SOLUCORP INDUSTRIES LTD., ET AL., 99 Civ. 11965 (S.D.N.Y.) (WCC)
SOLUCORP INDUSTRIES LTD. EXECUTIVES
FOUND LIABLE FOR FRAUD
Two Permanently Barred from Serving as Officers and Directors
Company and Three Other Former Officers and/or Directors Settle SEC Claims Against Them and are Permanently Enjoined
On July 25, 2003, the United States District Court for the Southern District of New York entered an opinion and order in a civil injunctive action brought by the Securities and Exchange Commission finding that the following three defendants had violated the antifraud provisions of the federal securities laws: Joseph S. Kemprowski, a purported consultant who performed duties on behalf of Solucorp Industries Ltd. analogous to those of an officer; Peter R. Mantia, the company's president; and Victor Herman, the former chief financial officer of Solucorp's principal operating subsidiaries and the preparer of Solucorp's consolidated financial statements. The Court's opinion and order, which was entered after a full trial on the merits in March 2003, provides for permanent injunctions against Kemprowski and Mantia and a permanent bar on their serving as an officer or director of any publicly traded company. The opinion and order also provide that Kemprowski, Mantia and Herman shall disgorge their illicit gains from selling Solucorp shares while in possession of material, non-public information about the fraudulent conduct. The final judgment has yet to be entered.
Of the six other defendants named in this action, five--including Solucorp, other former officers and/or directors, Arle Pierro, James G. Spartz, and W. Bryan Fair, and the company's former outside auditor, Glenn R. Ohlhauser--entered into settlements with the Commission prior to the commencement of the six-day trial pursuant to which they consented to the entry of final judgments permanently enjoining them from future violations of the federal securities laws.
The Commission's Complaint, filed on December 13, 1999, as amended, alleged that, over a four year period, from mid-1995 through early 1999, Solucorp's senior management, including Kemprowski, who acted as the de facto head of Solucorp, claimed in press releases and other publicly disseminated materials to have contracts that either did not exist or were subject to undisclosed material contingencies, or that provided for revenues materially below those announced by the company. The Complaint also alleged that senior management falsified Solucorp's financial statements by improperly recognizing as revenue license fees that were subject to material contingencies. Solucorp's improper recognition of license fees resulted in its filing with the Commission periodic, transition and interim reports, including financial statements, on at least five occasions from December 1997 through April 1999, which materially overstated revenue. See Lit. Rel. No. 16388 (Dec. 13, 1999).
In its July 25, 2003 opinion and order, the Court found that, "[o]ver a number of years, Solucorp and its executives engaged in a course of deception through the issuance of false and misleading press releases and financial statements in which, in a number of cases, they reported that the Company had entered into contracts that did not exist, in one case backdated a contract to increase the accrued revenue recognizable thereunder, and in many other cases reported that the minimum revenues to be derived from such contracts far exceeded the actual minimums." The Court found that this "pattern of deception was so consistent and pervasive that it cannot logically be attributed to mere negligence." Accordingly, "the executives responsible for the issuance of these press releases and financial statements, specifically Kemprowski, Mantia and Herman, knowingly and deliberately falsified them with the intention of deceiving shareholders and potential investors or, at the very least, were guilty of reckless disregard for the truth or falsity of the disclosures."
The Court found that Kemprowski, Mantia and Herman had violated the antifraud provisions of Section 10(b) of the Securities Exchange Act of 1934 ("Exchange Act") and Rule 10b-5 thereunder and Section 17(a) of the Securities Act of 1933 ("Securities Act"), and that Mantia and Herman had knowingly falsified the company's books, records and/or accounts, or were reckless in preparing or certifying them, and circumvented or failed to implement internal controls in violation of Exchange Act Section 13(b)(5) and Rule 13b2-1, and Mantia misinformed the company's outside auditors in violation of Exchange Act Rule 13b2-2. The Court also found that Kemprowski and Mantia failed to disclose their equity ownership in Solucorp as of February 20, 1998, the effective date of Solucorp's registration of its stock with the Commission, and to timely disclose changes in that ownership, in violation of Exchange Act Section 16(a).
Each of the five defendants who settled the Commission's action prior to the commencement of the trial in March 2003 consented, without admitting or denying the Commission's allegations, to the entry of a final judgment providing for the full injunctive relief sought by the Commission. On March 12, 2003, the Court signed the final judgments against Solucorp, James G. Spartz, a former vice president and a director of Solucorp, Arle Pierro, a former senior vice president and director of Solucorp, and W. Bryan Fair, a former director of Solucorp. The final judgment against Solucorp permanently enjoined the company from violating the antifraud provisions of Exchange Act Section 10(b) and Rule 10b-5 and Securities Act Section 17(a), the reporting requirements of Exchange Act Section 13(a) and Rules 12b-20, 13a-1, 13a-10 and 13a-13 thereunder, and the books and records and internal controls provisions of Exchange Act Sections 13(b)(2)(A) and 13(b)(2)(B). The final judgment against Spartz permanently enjoined him from violating the antifraud provisions of Exchange Act Section 10(b) and Rule 10b-5 thereunder, and the insider reporting requirements of Exchange Act Section 16(a) and Rules 16a-2 and 16a-3, but did not impose a civil penalty based on Spartz's sworn representations concerning his financial inability to pay. The final judgments against Pierro and Fair permanently enjoined them from violating the disclosure rules for insiders, Exchange Act Section 16(a) and Rules 16a-2 and 16a-3 thereunder, and imposed a $10,000 civil penalty on Pierro for allegedly failing to timely disclose her equity ownership in Solucorp and changes in that ownership.
On January 16, 2003, the Court entered a final judgment against another settling defendant, the company's former outside auditor, Glenn R. Ohlhauser, that permanently enjoined Ohlhauser from future violations of Exchange Act Section 10A. See Lit. Rel. 16785 (October 31, 2000); Lit. Rel. 17951 (January 27, 2003).
In its July 25, 2003 opinion and order, the Court dismissed the claims against Robert Kuhn, a former vice president of Solucorp, on the grounds that the evidence did not establish that he had committed any violation of the federal securities laws.