U.S. Securities and Exchange Commission
Litigation Release No. 18387 / October 2, 2003
Accounting and Auditing Enforcement Release No. 1886 / October 2, 2003
SEC v. Sidney V. Corder, Randal J. Sage and Brian J. Yates, Civil Action No. 1:03-CV-1436-JDT-TAB (S.D. IN)(filed October 1, 2003)
SEC Sues Three Former Officers of Analytical Surveys, Inc. for Financial Fraud
On October 1, 2003, the U.S. Securities and Exchange Commission (SEC) filed a complaint in the United States District Court for the Southern District of Indiana against Sidney V. Corder, age 61, of Zionsville, Indiana, Randal J. Sage, age 46, of Carmel, Indiana and Brian J. Yates, age 39, of Colorado Springs, Colorado, former officers of Analytical Surveys, Inc. (ASI), a Colorado corporation that provides computerized maps to customers under long-term contracts. During the relevant time period, Corder was ASI's President, Chairman and CEO, Sage was ASI's Chief Operations Officer, and Yates was ASI's Controller.
According to the complaint, Corder, Sage, and Yates engaged in a fraudulent scheme that caused ASI's 1999 fiscal year revenue and net earnings to be materially inflated in press releases and periodic reports filed with the SEC through the use of several improper accounting methods. The SEC alleges that Sage caused ASI to improperly recognize revenue on long-term contracts by directing employees to: (1) "finish contracts on indirect," where employees misallocated direct costs properly attributable to contracts to indirect, or overhead, accounts; (2) engage in "cost-shifting," where employees improperly shifted future direct costs from one contract to another, when the work performed related to the first contract and did not reflect progress on the second contract; and (3) improperly lower estimates of total direct costs on certain contracts or not increase cost estimates as necessary. All of these methods were impermissible under the percentage of completion method for recognizing revenue used by ASI. Generally accepted accounting principles (GAAP) require that, under the percentage of completion method, estimated contract costs be periodically reviewed and revised to reflect accurate information. The SEC further alleges that Corder: (1) knew or was reckless in not knowing that Sage and other employees had engaged in these fraudulent accounting practices; and (2) directed employees to, among other things, finish contracts on indirect to avoid reducing revenue. Finally, the SEC alleges that Yates: (1) also knew or was reckless in not knowing about this conduct described above; and (2) approved or acquiesced in finishing contracts on indirect, including Corder's direction to employees to finish contracts on indirect.
The SEC alleges that defendants' fraudulent conduct caused ASI's revenue and earnings to be materially overstated in ASI's 1999 Forms 10-Q by approximately: 5% and 60% for the 1st quarter; 7% and 89% for the 2nd quarter; and 5% and 51% for the 3rd quarter and in ASI's 1999 Form 10-K by 10% and 232%. ASI's inflated revenue and earnings figures were also included in press releases issued to the public. Thus, the SEC alleges that defendants violated the antifraud, periodic reporting, record keeping, internal controls and lying to the auditors provisions of the federal securities laws and seeks a Court order to permanently enjoin (1) defendants from violating Sections 10(b) and 13(b)(5) of the Securities Exchange Act of 1934 ("Exchange Act") and Rules 10b-5, 13b2-1 and 13b2-2 thereunder; and (2) Corder and Yates from violating Section 13(a) of the Exchange Act and Rules 12b-20, 13a-1 and 13a-13 thereunder and Sage from aiding and abetting violations of these provisions. The SEC also seeks an order against defendants imposing civil monetary penalties, disgorgement of ill-gotten gains and bars from serving as officers and directors of any public company.
In a related administrative proceeding, on September 26, 2003, the SEC ordered ASI to cease and desist from committing violations of Sections 13(a) and 13(b)(2) of the Exchange Act and Rules 12b-20, 13a-1, and 13a-13 thereunder (reporting, books and records and internal controls provisions of the federal securities laws). ASI consented to the entry of the Order without admitting or denying the findings of the SEC. In the Order, the SEC found that ASI violated reporting, books and records, and internal controls provisions of the federal securities laws.