U.S. SECURITIES AND EXCHANGE COMMISSION
Litigation Release No. 18437 / October 30, 2003
Accounting and Auditing Enforcement
Release No. 1908 / October 30, 2003
SEC v. Sport-Haley, Inc., Robert G. Tomlinson, Steve S. Auger, Kenneth R. LeCrone, Civ. Action No. 03-N-1917 (CBS) (District of Colorado)
The Securities and Exchange Commission ("Commission") announced the filing of an Amended Complaint in the United States District Court for the District of Colorado against Kenneth R. LeCrone, former auditor of Sport-Haley, Inc., for violations of the antifraud and periodic reporting 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 Amended Complaint, LeCrone, a certified public accountant formerly employed by the audit firm of Levine, Hughes, and Mithuen, Inc. ("LHM"), supervised LHM's 1998 and 1999 audits of Sport-Haley, serving as the "in-charge" staff accountant in 1998 and senior manager in 1999. The Commission alleges that LeCrone permitted LHM to issue unqualified audit opinions on Sport-Haley's financial statements even though he knew or was reckless in not knowing that the company's quarterly and annual 1998, 1999, and first quarter 2000 financial statements materially misstated work-in-process ("WIP") inventory, improperly capitalize period costs and materially misstated losses on the sale of headwear equipment.
The Commission's complaint alleges that Sport-Haley materially overstated WIP inventory in its financial statements during its 1998 and 1999 fiscal years. The complaint further alleges that LeCrone knew or was reckless in not knowing that LHM failed to perform sufficient audit procedures on the company's 1998 and 1999 WIP inventory accounts. According to the Amended Complaint, LeCrone agreed with Sport-Haley management to a solution to adjust the overstated WIP inventory account that minimized the impact on the company's gross margin, kept the 1998 financial statements intact, and ratably eliminated $1.2 million of overstated WIP inventory during the company's 2000 fiscal year. The Commission alleges that Sport-Haley failed to disclose the WIP inventory overstatement or the company's measures to adjust the financial statements for the overstatement. According to the Amended Complaint, LeCrone also recklessly allowed Sport-Haley to improperly capitalize period costs in financial statements filed with the Commission during its 1998 and 1999 fiscal years. In addition, the Commission alleges that LeCrone 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. The Complaint asserts that LeCrone knew or was reckless in not knowing that Sport-Haley's financial statements were materially false or misleading, did not comply with generally accepted accounting principles, and that the audits were not performed in accordance with generally accepted auditing standards.
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 LeCrone 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). LeCrone is also charged with aiding and abetting Sport-Haley's violations of Section 15(d) of the Exchange Act and Exchange Act Rules 12b-20, 15d-1, and 15d-13 thereunder (reporting provisions). The Commission's Complaint seeks injunctive relief and civil penalties from LeCrone.
On September 26, 2003, the Commission filed suit in the United States District Court for the District of Colorado against 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 in connection with the company's materially misstated financial statements.