U.S. SECURITIES AND EXCHANGE COMMISSION
Litigation Release No. 18371 / September 29, 2003
Accounting and Auditing Enforcement Release No. 1877 / September 29, 2001
SEC v. Sport-Haley, Inc., Robert G. Tomlinson, and Steve S. Auger, Civ. Action No. 03-Z-1917(CBS) (District of Colorado)
On Friday, September 26, 2003, the Securities and Exchange Commission ("Commission") filed suit in the United States District Court for the District of Colorado against Sport-Haley, Inc. ("Sport-Haley"), its chairman of the board, and former controller for violations of the antifraud, periodic reporting, record keeping, and internal controls provisions of the federal securities laws. Sport-Haley, located in Denver, Colorado, designs, markets, and contracts for the manufacture of golf apparel and outerwear under the Haley-Registered Trademark label. According to the Complaint, Sport-Haley materially misstated inventory, improperly capitalized period costs and materially misstated losses on the sale of headwear equipment in its quarterly and annual 1998, 1999, and 2000 financial statements.
Named as defendants in the Complaint are Sport-Haley, R.G. Tomlinson of Scottsdale, Arizona, the current chairman and former chief executive officer, and Steve S. Auger of Morrison, Colorado, the former controller of Sport-Haley.
The Commission asserts that Sport-Haley materially overstated inventory in its financial statements during its 1998 and 1999 fiscal years. According to the Complaint, Tomlinson and Auger knowingly concealed that inventory was materially overstated by $1.2 million at June 30, 1999 and agreed to eliminate the overstated inventory by writing the inventory off at the rate of $100,000 per month during its 2000 fiscal year. The Commission alleges Sport-Haley failed to disclose the inventory overstatement or the company's elaborate measures to adjust the financial statements for the overstatement. The Complaint asserts that Sport-Haley materially understated expenses related to period costs in financial statements filed with the Commission during its 1998 and 1999 fiscal years and first three quarters of 2000. The Commission also alleges that Tomlinson and Auger knowingly or recklessly allowed the company to materially misstate losses on the sale of headwear equipment in Sport-Haley's 1999 year-end financial statements and quarterly financial statements during the first three quarters of its 2000 fiscal year. The Complaint asserts that Tomlinson and Auger reviewed and signed filings with the Commission that they knew or were reckless in not knowing contained false financial statements.
According to the Complaint, as a result of these and other accounting errors, Sport-Haley filed with the Commission materially incorrect financial statements that overstated the company's 1998 fiscal year income by $1.5 million or 41 percent and its 1999 fiscal year income by $311,000 or 22 percent.
As a result of the conduct described in the Complaint, the Commission charged Sport-Haley, Tomlinson, and Auger with violations of Sections 10(b) of the Securities and Exchange Act of 1934 ("Exchange Act"), Exchange Act Rule 10b-5 thereunder, and Section 17(a) of the Securities Act of 1933 ("Securities Act") (antifraud provisions). The company is also charged with violating Section 13(b)(2) and Section 15(d) of the Exchange Act and Exchange Act Rules 12b-20, 15d-1, and 15d-13 thereunder (issuer reporting, books and records, and internal control provisions). Tomlinson and Auger are charged with aiding and abetting the company's violations of Section 15(d) of the Exchange Act and Exchange Act Rules 12b-20, 15d-1 and 15d-13 thereunder. In addition, Tomlinson and Auger are charged with aiding and abetting the company's violation of Section 13(b)(2) of the Exchange Act. Finally, Tomlinson and Auger are also charged with violating Section 13(b)(5) of the Exchange Act (prohibiting knowing falsification of issuer books and records and evasion of internal accounting controls) and violating Exchange Act Rule 13b2-1 (issuer books and records and internal accounting controls provisions).
The Commission's Complaint sought injunctive relief and civil penalties from Sport-Haley, Tomlinson, and Auger. According to the Complaint, the Commission also seeks an officer and director bar against Tomlinson and Auger as well as disgorgement from the company, Tomlinson, and Auger.