U.S. Securities and Exchange Commission
Litigation Release No. 18732 / June 1, 2004
Accounting and Auditing Enforcement Release No. 2027 / June 1, 2004
Securities and Exchange Commission v. Del Global Technologies Corp., Inc., Leonard A. Trugman, Michael H. Taber, David Engel, Seymour Rubin, and David Michael, 04 CV 4092 (S.D.N.Y.)
SEC Sues Del Global Technologies Corp., Inc. and Former Officers and Directors in Accounting Fraud Case
Del Global Agrees to Pay $400,000 Penalty
On June 1, 2004, the Commission filed a Complaint in the United States District Court for the Southern District of New York against Del Global Technologies Corp., Inc. ("Del"), a company headquartered in Valhalla, New York, and five of its former officers and directors. The Commission charged Del, Leonard A. Trugman (Del's former chairman and chief executive officer), Michael H. Taber (Del's former chief financial officer), David Engel (Del's former executive vice president and chief financial officer), Seymour Rubin (a former Del executive and director), and David Michael (a former Del director and former chairman of Del's audit committee) (collectively, the "Defendants") with participating in a multi-year accounting fraud at Del between 1997 and 2000. As detailed below, defendants Del, Taber, Engel and Rubin have agreed to settle this matter without admitting or denying the allegations in the Commission's Complaint.
The Commission's Complaint alleges, among other things, that Trugman orchestrated, and Taber, Engel and Rubin carried out a financial fraud at Del that resulted in Del materially overstating its reported revenues and caused Del to make numerous material misrepresentations in Commission filings and in press releases. According to the Complaint, Del routinely engaged in improper revenue recognition when it held open quarters, prematurely shipped products to third-party warehouses, and recorded sales on products that Del had not yet manufactured. The Complaint also alleges that Del improperly accounted for inventory by recording obsolete inventory at full value and overstating certain engineering work in process values. In addition, the Complaint alleges that Del improperly characterized certain ordinary expenses as capital expenditures. As alleged in the Complaint, these actions contravened Generally Accepted Accounting Principles and resulted in the overstatement of Del's reported pre-tax income by at least $3.7 million (110%) in fiscal year 1997, $5.2 million (161%) in fiscal year 1998, and $7.9 million (466%) in fiscal year 1999 - and allowed Del to represent that its' performance was on par with internal and external expectations in the first three quarters of fiscal year 2000, when in fact those expectations outpaced the company's actual performance by a wide margin.
The Complaint further alleges that the Defendants engaged in a cover-up to prevent Del's outside auditors from discovering the fraud. Del kept two sets of books (one set for its auditors and one correct set) and falsified documents such as shipping logs, quality control records, and accounts receivable documents to hide its fraudulent accounting practices from its outside auditors. The Complaint alleges that defendants Rubin and Michael participated in some of these practices. Specifically, the Complaint alleges that in October 2000, they submitted phony invoices to Del to support Taber's attempt to improperly capitalize costs related to a Del acquisition. Michael was previously suspended from appearing or practicing as an accountant before the Commission, pursuant to Rule 102(e) of the Commission's Rules of Practice. See In the Matter of Michael, Adest & Blumenkrantz, et al., Securities Exchange Act of 1934 Rel. No. 41284, Accounting and Auditing Enforcement Rel. No. 1125 (April 14, 1999).
The Commission's Complaint alleges that by engaging in the foregoing conduct: (i) defendant Del violated the antifraud provisions of the federal securities laws (Section 17(a) of the Securities Act of 1933 ("Securities Act"), Section 10(b) of the Securities Exchange Act of 1934 ("Exchange Act") and Exchange Act Rule 10b-5), as well as the reporting, books and records, and internal controls provisions of the Exchange Act (Sections 13(a), 13(b)(2)(A) and 13(b)(2)(B), and Exchange Act Rules 12b-20, 13a-1, and 13a-13); (ii) defendants Trugman, Engel, Taber and Rubin violated the antifraud provisions of the federal securities laws (Section 17(a) of the Securities Act, Section 10(b) of the Exchange Act and Exchange Act Rule 10b-5), the internal control and books and records provisions of the Exchange Act (Section 13(b)(5) and Exchange Act Rule 13b2-1), and the provisions of the Exchange Act that prohibit an officer or director from making misleading statements to accountants (Exchange Act Rule 13b2-2), and (iii) defendant Michael violated the internal control and books and records provisions of the Exchange Act (Section 13(b)(5) and Exchange Act Rule 13b2-1), as well as the provisions of the Exchange Act that prohibit an officer or director from making misleading statements to accountants (Exchange Act Rule 13b2-2). The Complaint additionally charges Trugman with (i) aiding and abetting Del's violations of Sections 10(b), 13(a), 13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act, and Exchange Act Rules 10b-5, 12b-20, 13a-1, and 13a-13, and (ii) acting as a control person of Del, pursuant to Exchange Act Section 20(a).
Defendants Del, Engel, Taber and Rubin have consented to the entry of final judgments against them, without admitting or denying the allegations in the Commission's Complaint. The Commission expects the penalties from the settling defendants to be distributed pursuant to the Fair Fund provisions of Section 308(a) of the Sarbanes-Oxley Act of 2002. The settlement terms are subject to court approval.
Del consented to entry of a final judgment against the company that permanently enjoins it from further violations of Section 17(a) of the Securities Act, Sections 10(b), 13(a), 13(b)(2)(A), and 13(b)(2)(B) of the Exchange Act, and Exchange Act Rules 12b-20, 13a-1, and 13a-13. Del will also pay a civil penalty of $400,000 and $1 in disgorgement. The $400,000 civil penalty was imposed, in part, because the company, upon the discovery of the fraudulent accounting scheme by the firm's auditors, commissioned an internal investigation that sought to shield the architect of the fraud, former Del Chairman and CEO defendant Leanord A. Trugman ("Trugman"), from liability. For example, Del's Audit Committee hired Trugman's close personal friend to conduct the investigation. Moreover, during the internal investigation, Trugman and his associate were permitted to speak to (and intimidate) witnesses prior to their interviews. After the Commission commenced its' inquiry in this matter, Del hired independent outside counsel who cooperated with the staff's investigation.
Taber, Engel and Rubin consented to entry of final judgments against them that permanently enjoin them from further violations of Section 17(a) of the Securities Act, Sections 10(b) and 13(b)(5) of the Exchange Act, and Exchange Act Rules 13b2-1 and 13b2-2 -- and permanently bar each of them from acting as an officer or director of a public company. Additionally, Engel has agreed to pay $50,000 in disgorgement of ill-gotten gains, $15,940 in prejudgment interest thereon, and a $50,000 civil penalty. Rubin has agreed to pay $32,162.97 in disgorgement of ill-gotten gains, $8,941.69 in prejudgment interest thereon, and a $75,000 civil penalty. Taber has also agreed to entry of a Commission order, pursuant to Rule 102(e) of the Commission's Rules of Practice, that will bar him from appearing or practicing before the Commission as an accountant. The judgment against Taber waives his disgorgement obligation and does not impose a civil penalty, based on Taber's sworn statement of financial condition and other information furnished to the Commission.
With respect to the two remaining defendants -- Trugman and Michael -- the Commission's Complaint seeks a final judgment permanently enjoining them from future violations of the federal securities laws, barring them from serving as officers or directors of a public company, and ordering them to pay civil penalties. The Complaint also seeks to have Trugman disgorge his ill-gotten gains obtained from the foregoing conduct, and prejudgment interest thereon.