U.S. Securities and Exchange Commission
Litigation Release No. 18701 / May 11, 2004
Accounting and Auditing Enforcement Release No. 2009 / May 11, 2004
Securities and Exchange Commission v. William S. Finkelstein, 04 CV 3574 (May 11, 2004 S.D.N.Y.) (SS)
Securities and Exchange Commission v. PricewaterhouseCoopers LLP, 04 CV 3573 (May 11, 2004 S.D.N.Y.) (HB)
In the Matter of The Warnaco Group, Inc., Rel. No. 34-49675 (May 11, 2004)
In the Matter of Linda J. Wachner, Rel. No. 34-49677 (May 11, 2004)
In the Matter of Stanley P. Silverstein, Rel. No. 34-49676 (May 11, 2004)
In the Matter of PricewaterhouseCoopers LLP, Rel. No. 34-49678 (May 11, 2004)
SEC Brings Settled Action Against Warnaco's Former CFO for Aiding and Abetting Warnaco's Securities Fraud and Other Violations
PricewaterhouseCoopers LLP Settles Related SEC Enforcement Action and Agrees to Pay $2.4 Million Penalty
On May 11, 2004, the Securities and Exchange Commission filed a settled injunctive action against William S. Finkelstein, the former chief financial officer of The Warnaco Group, Inc., for aiding and abetting Warnaco's violations of the antifraud, issuer reporting, books and records, and internal control provisions of the federal securities laws. Also on May 11, the Commission filed a settled action for a civil money penalty against PricewaterhouseCoopers LLP ("PwC"), Warnaco's former auditors, for aiding and abetting Warnaco's violation of the issuer reporting provisions in connection with Warnaco's 1998 annual report. Finkelstein has agreed to pay $189,464 in disgorgement and prejudgment interest and a civil penalty of $75,000 and to be barred for four years from serving as an officer or director of a public company. PwC has agreed to pay a $2.4 million civil penalty. In related administrative proceedings, the Commission issued cease-and-desist orders against Warnaco, former chief executive officer Linda J. Wachner, and former general counsel Stanley P. Silverstein, and censured Silverstein and PwC under Rule 102(e) of the Commission's Rules of Practice.
The Commission's Complaints
The Commission's complaint against Finkelstein alleges that Warnaco issued a false and misleading press release on March 2, 1999, which announced "record results" for fourth quarter and fiscal 1998, but failed to disclose that Warnaco would be restating its financial results for the prior three years to correct a $145 million inventory overstatement. In the press release, Warnaco falsely portrayed the inventory write-down as a part of the company's write-off of deferred start-up costs under a new accounting pronouncement.
The complaint alleges that Finkelstein authorized the issuance of the press release almost immediately after he had participated in two days of meetings during which PwC, Warnaco's outside auditors, had insisted over the objections of Warnaco's senior management that Warnaco could not write off the inventory overstatement under the new accounting pronouncement. After the meetings, Finkelstein showed PwC the draft press release and was told that its description of the reason for the restatement was inconsistent with how the restatement would be described in Warnaco's upcoming annual report and was urged to consult with counsel regarding the content of the release. Finkelstein nevertheless issued the press release containing the misleading characterization of the restatement.
One month later, on April 2, 1999, Warnaco filed its fiscal 1998 annual report with the Commission. Although the annual report correctly accounted for the $145 million restatement, it failed to disclose that the true cause of the restatement was an inventory overstatement and incorrectly stated that the restatement resulted from the write-off of "start-up related" costs. Finkelstein approved and signed the annual report even though he knew there was no reasonable basis for describing the restatement as involving "start-up related" costs. The complaint also alleges that Finkelstein failed to ensure that Warnaco's books and records were accurate and that the company's internal controls were functioning properly. Finally, the complaint alleges that in November 2000, Warnaco improperly offset $190.5 million in cash against long-term debt in order to create the appearance that the company remained in compliance with a key financial covenant. The offset was not in compliance with generally accepted accounting principles. Finkelstein directed the offset and signed the misleading quarterly report that Warnaco filed with the Commission.
The Commission's complaint against PwC alleges that, during PwC's audit of the financial statements contained in Warnaco's fiscal 1998 annual report, PwC had determined that the $145 million inventory overvaluation could not be written off pursuant to Warnaco's adoption of the new accounting pronouncement and most likely resulted from a series of internal control deficiencies and accounting errors. The complaint further alleges that, although Warnaco's financial results were accurately reflected in the annual report, PwC failed to object to Warnaco's mischaracterization of the inventory overstatement as involving "start-up related" costs and incorporated the misleading description of the restatement into its own audit report.
The Commission's complaint against Finkelstein charges Finkelstein with aiding and abetting Warnaco's violations of Sections 10(b), 13(a), and 13(b)(2) of the Securities Exchange Act of 1934 ("Exchange Act") and Rules 10b-5, 12b-20, 13a-1, and 13a-13. Section 10(b) and Rule 10b-5 are general antifraud provisions of the federal securities laws. The Commission's complaint against PwC alleges that the firm aided and abetted Warnaco's violation of Section 13(a) and Rules 12b-20 and 13a-1 in connection with the incorrect disclosure in Warnaco's fiscal 1998 annual report.
Finkelstein and PwC have agreed to settle these matters without admitting or denying the allegations in their respective Complaints. The settlement terms are subject to court approval.
Finkelstein has consented to the entry of an order that would enjoin him from future violations of the relevant federal securities law provisions and rules, order him to pay $189,464 in disgorgement and prejudgment interest and a civil penalty of $75,000, and bar him from acting as an officer or director of a public company for four years.
PwC has consented to the entry of an order requiring the firm to pay a civil money penalty pursuant to Section 21(d)(3) of the Exchange Act in the amount of $2.4 million. The Commission also censured PwC for aiding and abetting Warnaco's reporting violations in a separate settled administrative proceeding brought under Rule 102(e)(1)(iii) of the Commission's Rules of Practice.
In related proceedings, on May 11, 2004, the Commission issued a settled cease-and-desist order against Warnaco for violating the antifraud provisions of the securities laws in connection with the March 1999 press release, and for violating the issuer reporting, books and records, and internal control provisions of the securities laws in connection with the company's annual report for fiscal 1998 and quarterly report for the third quarter of 2000. Warnaco also agreed to settle additional reporting, books and records, and internal control violations for two restatements the company made in April 2001 and July 2002. Warnaco agreed to hire an independent consultant to perform a complete review of the company's internal controls and policies relating to its inventory systems, internal audit, financial reporting, and other accounting functions and to adopt the recommendations of the independent consultant within 180 days.
The Commission also issued a settled cease-and-desist order against Warnaco's former chief executive officer, Linda J. Wachner, for causing Warnaco's violations of the reporting, books and records, and internal control provisions in connection with the fiscal 1998 annual report, and ordered her to pay $1,328,444 in disgorgement of a 1998 bonus amount and prejudgment interest. The Commission found that at the time she approved and signed the 1998 annual report, Wachner knew or should have known that the restatement of the company's financial results was caused by material flaws in the cost accounting and internal control systems at one of the company's largest divisions and was not related to the write-up of deferred start-up or start-up related costs. The Commission also found that Wachner knew or should have known that the division's inventory costing control system was inadequate to ensure the accuracy of Warnaco's books and records and failed to ensure that proper internal controls were in place.
The Commission also issued a settled cease-and-desist order against Warnaco's former general counsel (and current senior vice president and chief administrative officer), Stanley P. Silverstein, for aiding and abetting and causing Warnaco's violations of the reporting provisions of the Exchange Act by (i) approving an annual report for fiscal 1998 that he knew or should have known contained a materially inaccurate and misleading description of the reasons Warnaco had made a $145 million restatement of its financial results; and (ii) approving and signing a quarterly report for the third quarter of 2000 that he knew or should have known did not accurately represent Warnaco's debt and cash. The Commission ordered Silverstein to pay $165,772 in disgorgement and prejudgment interest and also censured Silverstein under Rule 102(e)(1)(iii) of the Commission's Rules of Practice.
SEC Complaint in this matter (PricewaterhouseCoopers LLP)
SEC Complaint in this matter (William S. Finkelstein)