Securities Act of 1933
Release No. 7782 / December 3, 1999
Securities Exchange Act of 1934
Release No. 42199 / December 3, 1999
Accounting and Auditing Enforcement
Release No. 1211 / December 3, 1999
Administrative Proceeding
File No. 3-10045
| ____________________________________ | |
| : | |
| : | |
| In the Matter of | : OPINION AND ORDER |
| : PURSUANT TO RULE 102(e) OF | |
| Paul Thomas Fink, C.P.A., | : THE COMMISSION'S RULES |
| : OF PRACTICE AND ORDER | |
| Respondent. | : MAKING FINDINGS, |
| : IMPOSING SANCTIONS AND | |
| : ISSUING CEASE-AND-DESIST | |
| : ORDER | |
| ____________________________________ | : |
In connection with a public administrative proceeding instituted against him on September 28, 1999, pursuant to Section 8A of the Securities Act of 1933 ("Securities Act"), Section 21C of the Securities Exchange Act of 1934 ("Exchange Act"), and Rule 102(e) of the Commission's Rules of Practice1, Paul Thomas Fink ("Respondent" or "Fink") has submitted an Offer of Settlement ("Offer") to the Securities and Exchange Commission ("Commission"), which the Commission has determined to accept. Solely for the purpose of this proceeding and any other proceeding brought by or on behalf of the Commission or in which the Commission is a party, and without admitting or denying the findings contained herein, except as to jurisdiction, which he admits, Fink consents to the entry of the findings and remedial sanctions set forth below.
On the basis of this Order and the Offer submitted by Fink, the Commission makes the following findings. 2
1. Photran Corp. ("Photran") is a Minnesota corporation that developed, manufactured and marketed high-performance, film-coated glass used in such products as computer screens, photocopiers, and projection televisions. Photran's common stock was registered with the Commission pursuant to Section 12(g) of the Exchange Act in May 1996 and quoted on the NASDAQ. In its last quarterly filing with the Commission, Photran had outstanding 5,230,303 shares of common stock and reported revenues of $2,775,007 for nine months ended September 30, 1998. Photran is headquartered in Lakeville, Minnesota.
2. For almost a year, Photran and two of its top officers engaged in a fraudulent scheme that overstated revenue and inflated earnings. From at least December 1995 through the third quarter of 1996, Photran reported fictitious sales and prematurely recognized revenue.
3. The fictitious and premature revenue kept Photran from recording losses on its books and records and from reporting losses in financial statements contained in certain filings with the Commission. Accordingly, Photran's registration statement and its second and third quarter periodic reports filed with the Commission during 1996 were materially false and misleading.
4. Fink, Photran's chief financial officer ("CFO"), signed the registration statement and periodic reports filed with the Commission when he knew or was reckless in not knowing that they materially overstated revenues and earnings. He repeatedly ignored obvious red flags and recurring conduct that demonstrated the lack of any internal accounting controls. He did not take any affirmative steps to determine the validity of fraudulent transactions or establish controls which might reasonably prevent them from being recorded in Photran's books and records and in its financial statements. He misled Photran's independent auditors when he signed the second quarter management representation letter which falsely represented, among other things, that revenue was properly recorded for the quarter. In addition, on at least one occasion, Fink personally participated in backdating documents to support premature revenue recognition.
5. Fink, age 44, was at all relevant times Photran's second in command. He served as Photran's controller from January 1995 until he was named CFO in February 1996. In March 1996, he was elected a Photran director. As CFO, Fink was responsible for all of Photran's accounting functions and procedures, including approving transactions to be posted to the company's general ledger, revenue recognition policies, and for the company's financial reporting to the Commission. He reported directly to the company's chief executive officer ("CEO") until he was named the company's CEO in August 1997. Fink is a CPA licensed in Minnesota and holds an MBA in financial management from the University of St. Thomas. Fink resides in Eagan, Minnesota.
INFLATE QUARTERLY EARNINGS
6. In the first quarter of 1996, just prior to Photran's public offering, Fink caused Photran to prematurely recognize revenue from a glass sale to Wintek Corp. that actually occurred in the second quarter. Fink directed a Photran employee and an outside freight forwarder to backdate documents and had the revenue from the shipment recorded in March 1996, although the transaction actually took place in April 1996. As a result of this premature revenue recognition, Photran's first quarter 1996 revenues were overstated by $168,000, or 15 percent. These results were reflected in Photran's registration statement and allowed the company to show a profit prior to its initial public offering.
7. Fink also allowed revenue from two fictitious transactions to be recorded in the first quarter of 1996 despite the fact that neither was documented in the manner usually required by Photran for foreign shipments. Both of these transactions were reversed by credit memos on the same day after quarterly earnings were reported. Although these fraudulent sales accounted for over 26 percent of first quarter revenues, Fink took no steps to determine why the sales were reversed, which reasonably would have disclosed that the sales never were made.
8. In the third quarter of 1996, Photran recorded a fictional $329,544 glass sale to Quing Dao Dong Fong ("Quing Dao"). Although Fink was suspicious of the transaction because of its large size and its materiality to the quarter, he allowed the revenue to be recorded on Photran's books without a purchase order, letter of credit, invoice, or any other documentation. Based on his concerns about the transaction, Fink refused to sign the management representation letter for the auditors' third quarter review which stated that all revenues were appropriately recorded, but he did not alert Photran's audit committee or the outside auditors. The revenue from the Quing Dao transaction allowed Photran to overstate its third quarter revenue by 15 percent.
9. Photran also improperly recognized revenue from glass sales to its Asian distributor. Photran shipped the glass to its distributor's warehouse as consigned inventory and, therefore, should not have recognized any revenue until the glass was sold to customers. Although the glass was not sold until the third and fourth quarters of 1996, Photran recognized the revenue in the second quarter, when the glass was shipped to the distributor. The consigned sales also lacked purchase orders, letters of credit or any other documentation. Fink never asked for a purchase order or any other documentation for these transactions, despite subsequent reversals of the accounting for the original sale and re-recording of revenue.
10. As a result of these fraudulent transactions, Photran materially misstated its quarterly net income and earnings in financial statements contained in its registration statement and second and third quarter 1996 periodic reports. Photran's books and records were also inaccurate. Revenue for fiscal year 1995 was overstated by $951,000, or 28 percent. First quarter 1996 revenue was overstated by $460,491, or 40 percent. Second quarter revenue was overstated by $417,944, or 25 percent. Third quarter revenue was overstated by $329,539, or 16 percent. Photran initially reported a profit of $391,000 for the first three quarters of 1996. However, after restatement, the company reported a loss of over $1 million. The fraudulent transactions accounted for over 46 percent of the revenue adjustments. Accordingly, Photran's registration statement and 1996 second and third quarter periodic filings were materially misleading because the company was recognizing fictitious or premature revenue.
11. Fink knew or was reckless in not knowing that Photran's practice of allowing revenue from undocumented and/or unsupported transactions to be recorded on the company's books and records would result in financial statements that were not in conformity with generally accepted accounting principles ("GAAP"). Moreover, Fink caused Photran's books to be falsified. He instructed a Photran employee to backdate various Photran shipping documents to falsely reflect an earlier shipment date and also requested that Photran's freight forwarder backdate its bill of lading to correlate with Photran's documents resulting in premature revenue recognition.
12. Fink willfully violated Section 17(a) of the Securities Act, Section 10(b) of the Exchange Act and Rule 10b-5 thereunder when he prepared Photran's financial statements and signed the company's registration statement and periodic reports filed with the Commission when he knew or was reckless in not knowing that they contained materially false and misleading financial information.
13. Fink willfully violated Section 13(b)(5) of the Exchange Act and Rule 13b2-1 thereunder by knowingly falsifying and directly causing false entries to be made in Photran's books and records when he directed a Photran employee to backdate various Photran documents to report a false shipment date that resulted in premature revenue recognition. Fink also circumvented existing internal accounting controls at Photran by allowing fictitious and premature revenue to be recorded without proper documentation.
14. Fink willfully violated Exchange Act Rule 13b2-2 when he signed the false second quarter management representation letter in connection with the auditors' review for that quarter. The letter was false because, among other things, it failed to disclose that the company was recognizing fictitious and premature revenue, falsely represented that the unaudited financial statements were fair and accurate presentations of the information they purported to disclose, and falsely represented that unaudited quarterly financial information had been prepared in conformity with GAAP.
15. Fink engaged in improper professional conduct, within the meaning of Rule 102(e) of the Commission's Rules of Practice, in connection with his role in Photran's fraudulent transactions. Fink prepared Photran's financial statements and signed the company's registration statement and periodic reports filed with the Commission when he knew or was reckless in not knowing that they contained materially false and misleading financial information. Fink also engaged in improper professional conduct in connection with his role in the falsification of Photran's books and records and circumventing internal accounting controls. Fink knew or was reckless in not knowing that Photran's practice of allowing undocumented entries to be recorded on the company's books would result in financial statements that were not in conformity with GAAP. Finally, Fink failed to report the fraudulent transactions, or the questionable accounting for them, to the company's audit committee or its independent auditors.
Based on the foregoing, the Commission finds that Respondent willfully violated Section 17(a) of the Securities Act and Sections 10(b) and 13(b)(5) of the Exchange Act and Rules 10b-5, 13b2-1, and 13b2-2 thereunder.
Based on the foregoing, the Commission deems it appropriate to accept the Offer submitted by the Respondent and to impose the following sanctions as agreed to in the Offer.
Accordingly, IT IS HEREBY ORDERED, that:
A. Fink cease and desist from committing or causing any violation and any future violation, of Section 17(a) of the Securities Act, Sections 10(b) and 13(b)(5) of the Exchange Act and Exchange Act Rules 10b-5, 13b2-1, and 13b2-2; and
B. Fink is denied the privilege of appearing or practicing before the Commission as an accountant.
C. After three years from the date of this Order, Fink may request that the Commission consider his reinstatement by submitting an application (attention: Office of the Chief Accountant) to resume appearing or practicing before the Commission as:
1. a preparer or reviewer, or a person responsible for the preparation or review, of any public company's financial statements that are filed with the Commission. Such an application must satisfy the Commission that Fink's work in his practice before the Commission will be reviewed either by the independent audit committee of the public company for which he works or in some other acceptable manner, as long as he practices before the Commission in this capacity; and/or
2. an independent accountant. Such an application must satisfy the Commission that:
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(a) Fink, or any firm with which he is associated, is a member of the SEC Practice Section of the American Institute of Certified Public Accountants Division for CPA Firms ("SEC Practice Section");
(b) Fink, or the firm, has received an unqualified report relating to his, or the firm's, most recent peer review conducted in accordance with the guidelines adopted by the SEC Practice Section; and
(c) As long as Fink appears or practices before the Commission as an independent accountant he will remain either a member of the SEC Practice Section or associated with a member firm of the SEC Practice Section, and will comply with all applicable SEC Practice Section requirements, including all requirements for periodic peer reviews, concurring partner reviews, and continuing professional education.
D. The Commission's review of an application by Fink to resume appearing or practicing before the Commission may include consideration of, in addition to the matters referenced above, any other matters relating to Fink's character, integrity, professional conduct, or qualifications to appear or practice before the Commission.
By the Commission.
Jonathan G. Katz
Secretary
FOOTNOTES
1 Paragraph (1) of Rule 102(e) provides, in relevant part, that:
(1) The Commission may...deny, temporarily or permanently, the privilege of appearing or practicing before it in any way to any person who is found by the Commission after notice and opportunity for a hearing in the matter... (ii) [t]o be lacking in character or integrity or to have engaged in unethical or improper professional conduct; or (iii) [t]o have willfully violated, or willfully aided and abetted the violation of any provision of the Federal securities laws or the rules and regulations thereunder.
2 The findings herein are not binding on anyone other than the respondent.