FOR IMMEDIATE RELEASE 99-124 SEC Charges 68 Individuals and Entities with Fraud and/or Abuses of the Financial Reporting Process 30 Actions Represent First Ever Coordinated Assault on Financial Reporting Misdeeds Washington, DC, September 28, 1999 - Today the Securities and Exchange Commission announced the filing of 30 enforcement actions against 68 individuals and companies for engaging in fraud and related misconduct in the accounting, reporting, and disclosure of financial results by 15 different public companies. Among those named by the Commission are the current or former chief executive officers at 11 of the 15 companies. This coordinated filing, the first aimed at financial reporting, reflects the Commission's continued commitment to ensuring the integrity of our financial reporting system. The SEC's Director of Enforcement, Richard H. Walker, said: "The SEC will vigorously protect the bedrock of our securities markets: full, fair and accurate financial reporting. We will prosecute the most senior officials of companies that fail to live up to that standard, because they are the ones who set the tone and create the culture for the company. Even where senior management hasn't actively participated in a fraudulent scheme, we look at whether they were responsible for a deficient system of internal accounting controls or books and records that allowed the fraud to occur." The SEC's Chief Accountant, Lynn E. Turner, said: "The vast majority of public companies provide investors with transparent, high-quality financial reporting. However, when people cross over the boundaries of legitimate reporting, the Commission will take appropriate action to ensure the fairness and integrity that investors need and depend on every day." These actions come exactly one year after SEC Chairman Arthur Levitt first raised serious concerns about the erosion in the quality of financial reporting in a speech he delivered at New York University. In that speech, Chairman Levitt said, "Our enforcement team will continue to root out and aggressively act on abuses of the financial reporting process." Since then, the Commission has brought 88 actions involving such abuses, including today's cases. Together, these actions allege a veritable cookbook of recipes for fraudulent accounting and reporting, including: * recognition of revenue on shipments that never occurred * hidden "side letters" giving customers an irrevocable right to return product * characterization of consignment sales as final sales * early recognition of sales that occurred after the end of the fiscal period * shipment of unfinished product * shipment of product before customers wanted or agreed to delivery * creation of fictitious invoices * backdating of agreements * reporting of expenses as capital assets * overvaluations of inventory Several of today's cases also charge companies with having deficient internal controls and charge individuals with concealing the fraud by lying to auditors. The individuals charged in today's cases include CEOs, CFOs, vice-presidents, mid-level managers, accountants, sales managers, and non-employees who participated in the schemes. A chart detailing the names and titles of those charged, the nature of the cases and charges, and other information, including SEC contacts for each case, can be obtained by calling (202) 942-0020. For example: * The Commission charges eight company employees, ranging from the CEO to a sales manager, with having participated in a scheme that resulted in over 240 falsified transactions that materially boosted quarterly income. The Commission alleges that the company had a pervasive practice of reporting sales before products were actually sold. SEC v. Computone Corp., et al.; * Francis A. Tarkenton, who was the CEO and Chairman of a computer software and consulting company, is charged with having helped direct a multi-million dollar financial fraud that resulted in overstatements of net income exceeding 200 percent. A total of 11 individuals, including corporate officers and software sales executives, were implicated in the fraud. Without admitting or denying the civil fraud charges, Mr. Tarkenton has agreed to pay $54,187 in disgorgement and a $100,000 penalty. (See chart for details of the other ten defendants and respondents.) SEC v. Francis Tarkenton, et al.; and * In two cases, the Commission is suing both the issuer's employees and a representative of one of the issuer's suppliers or customers. In one case, the president of one of the issuer's suppliers is charged with having falsely denied to the issuer's auditors his knowledge of an improper arrangement(SEC v. Robert M. Cankes). In the other, the president of one of the issuer's customers is charged with having instructed a subordinate to sign and return a confirmation request to the issuer's auditors which falsely stated that the customer's records showed it owed the issuer money in connection with a product purchase. (In the Matter of James D. Montgomery, II, et al.) The companies involved in today's cases are engaged in businesses ranging from manufacturing to computer software to secured lending to wholesale distribution. In addition, the fraudulent conduct charged ranges from classic forms of fabricating income and earnings to new and more sophisticated methods of cooking the books. For example: * Two cases concern financial frauds involving so-called "sub prime lenders" that financed automobile purchases for persons who could not qualify for financing from conventional sources. In both cases, company officials took part in schemes to hide increased delinquent and eventually non-performing loans by falsifying accounting records. The accounting irregularities were uncovered by the companies (First Merchants and Mercury Finance), both of which later filed for bankruptcy. SEC v. Mitchell C. Kahn, et al. and SEC v. Lawrence Borowiak.; and * Four cases involve abuses of "barter" transactions -- an increasingly used technique in which companies generate revenue on gains by trading non-cash assets for other non-cash assets. In each case, the company used one or more such transactions to inflate its net worth and/or earnings. In one, barter exchange was the company's principal business. See SEC v. Itex Corp. et al., SEC v. C.E.C. Industries, et al., SEC v. Harold Ickovics, et al. and SEC v. Mar-Jeanne Tendler et al. The sanctions and other relief sought in today's cases include the full range of remedies available to combat financial fraud. The Commission is seeking total disgorgement of more than $9 million, officer-and-director bars, bars from practicing before the Commission and civil money penalties. To date, defendants have agreed to pay an aggregate of $630,000 in penalties. For example: * The Commission is seeking to bar 10 of the named individuals associated or formerly associated with five of the companies involved in these actions from serving as officers or directors of public companies. See SEC v. Computone Corp., et al., SEC v. Mar-Jeanne Tendler, et al., SEC v. C.E.C. Industries, et al., SEC v. Itex Corp., et al. and SEC v. David E. Stevenson, et al.; * The relief obtained by the Commission in one of the cases includes an undertaking by the company to have certain senior personnel attend educational classes and seminars relating to accounting policies and procedures and internal accounting controls. In the Matter of Material Sciences Corporation; and * In five cases, the Commission also seeks the recovery of profits or losses avoided by senior management who, in addition to carrying out a reporting fraud, also made illegal profits by trading on insider information. In one case, the Commission is seeking disgorgement of over $7.7 million in trading profits. SEC v. Itex Corp., et al. List of cases and SEC contacts: 1. SEC v. Mitchell C. Kahn, Paul M. Van Eyl and Thomas R. Ehmann (contact: Daniel R. Gregus 312/353-7423) 2. In the Matter of Steven R. Zemaitis and Julie Freisinger (contact: Daniel R. Gregus 312/353-7423) 3. SEC v. Robert H. Sutton (contact: Richard Weber 312/353- 7429) 4. In the Matter of Material Sciences Corporation (contact: Richard Weber 312/353-7429) 5. SEC v. Lawrence Borowiak and Joanne Borowiak (as relief defendant) (contact: Jennifer L. Wilson 312/353-7412) 6. SEC v. Computone Corporation, Thomas J. Anderson, Gregory A. Alba, Donald A. Pearce, Brian D. Kretschman and Duncan E. Hume (contact: William P. Hicks 404/842-7675) 7. In the Matter of Ricky D. Barkley (contact: William P. Hicks 404/842-7675) 8. In the Matter of James D. Montgomery, II, Danny R. Auerbach and Michael L. Glaser (contact: William P. Hicks 404/842-7675) 9. SEC v. Mar-Jeanne Tendler, Arthur S. Tendler and Billie M. Jolson (contact: Helane Morrison 415/705-2450) 10. SEC v. Francis A. Tarkenton, Donald P. Addington, Rick W. Gossett, Lee R. Fontaine, William E. Hammersla, III, Eladio Alvarez and Edward Welch (contact: Andrew J. Geist 212/748-8186, Robert Knuts 212/748-8192 or Scott York 212/748-8242) 11. In the Matter of Laura M. Drews (contact: Andrew J. Geist 212/748-8186, Robert Knuts 212/748-8192 or Scott York 212/748- 8242) 12. In the Matter of Stephen J. Pace (contact: Andrew J. Geist 212/748-8186, Robert Knuts 212/748-8192 or Scott York 212/748- 8242) 13. In the Matter of Robert S. Chamberlain (contact: Andrew J. Geist 212/748-8186, Robert Knuts 212/748-8192 or Scott York 212/748-8242) 14. In the Matter of Joseph A. Mathes (contact: Andrew J. Geist 212/748-8186, Robert Knuts 212/748-8192 or Scott York 212/748- 8242) 15. SEC v. FastComm Communications Corp. (contact: Richard C. Sauer 202/942-4777) 16. SEC v. Charles L. DesLaurier (contact: Richard C. Sauer 202/942-4777) 17. In the Matter of Peter Madsen and Mark Rafferty (contact: Richard C. Sauer 202/942-4777) 18. SEC v. C.E.C. Industries Corp., Gerald H. Levine and Marie A. Levine (contact: Gregory S. Bruch 202/942-4548) 19. SEC v. Itex Corp., Terry L. Neal, Michael T. Baer, Graham H. Norris, Cynthia Pfaltzgraff and Joseph M. Morris (contact: Gregory S. Bruch 202/942-4548) 20. SEC v. David E. Stevenson and Mark A. Stevenson (contact: Antonia Chion 202/942-4567) 21. In the Matter of Paul T. Fink (contact Antonia Chion 202/942- 4567) 22. SEC v. Harold M. Ickovics and Steven J. Kesh (contact: Richard C. Sauer 202/942-4777) 23. SEC v. Robert M. Cankes (contact: Richard C. Sauer 202/942- 4777) 24. In the Matter of Kenneth Schwartz and Joel Steinberg (contact: Richard C. Sauer 202/942-4777) 25. In the Matter of Model Imperial, Inc. (contact: Richard C. Sauer 202/942-4777) 26. SEC v. Bradley J. Buchanan (contact: James T. Coffman 202/942-4574) 27. SEC v. Jerry M. Walker and Craig R. Clark (contact: Jerry A. Isenberg 202/942-4652) 28. In the Matter of Lisa M. Beuche and Raintree Healthcare Corp. (contact: Jerry A. Isenberg 202/942-4652) 29. SEC v. Jose Carlos Villares, Jose E. Rivera and Guillermo Quinones (contact: William R. Baker, III 202/942-4570) 30. SEC v. Noah Steinberg, Enriquez Reyes Carrion, Gershon Tannenbaum and Jay Vermonty and Carmen Vermonty (as relief defendant) (contact: Paul Berger 202/942-4854) # # #