Accounting and Auditing Enforcement Release No. 2611 / May 23, 2007
SEC v. The BISYS Group, Inc., 07-Civ-4010 (KMK)(S.D.N.Y.) BISYS to Pay $25 Million to Settle Financial Reporting and Related Charges by SEC
On May 23, 2007, the Securities and Exchange Commission filed a civil injunctive action in United States District Court for the Southern District of New York charging The BISYS Group, Inc., a leading provider of financial products and support services, with violating the financial reporting, books-and-records, and internal control provisions of the Securities Exchange Act of 1934. BISYS has agreed to settle the case, without admitting or denying the Commission's allegations, and has agreed pay approximately $25 million in disgorgement and prejudgment interest.
The Commission's complaint, filed in federal court in Manhattan, alleges that from July 2000 through December 2003, former BISYS officers and employees engaged in a variety of improper accounting practices that resulted in an overstatement of the company's reported financial results for the fiscal years ended June 30, 2001, 2002, and 2003 by roughly $180 million. The improper accounting practices were primarily based in the company's Insurance Services division, but also occurred in other divisions of the company.
The Commission's complaint alleges that the improper accounting practices were a product of a corporate focus by former management on meeting aggressive, short-term earnings targets and a lax internal control environment.
Throughout the relevant period, the Insurance Services division was a major factor in the company's success in achieving its earnings targets. The division's finance department allegedly responded to the corporate focus on making numbers by engaging in improper accounting practices.
Although Insurance Services had grown rapidly through a series of acquisitions, during the relevant period, the company failed to adopt and implement adequate controls over the accounting function of the acquired companies as they were integrated. Among other things, the company lacked adequate controls for reconciling account balances or tracking receivables and lacked controls adequate to ensure that the assumptions used in estimating revenue and renewal commissions were valid.
With respect to Insurance Services, the complaint alleges that BISYS improperly recorded as its own revenue commissions earned by companies acquired by BISYS before they were acquired; failed adequately to reserve against a substantial aging receivable balance; improperly accounted for renewal and bonus commissions; and made other improper accounting entries that overstated revenue or reduced expenses. The Commission's complaint further alleges that BISYS also engaged in improper accounting practices in other divisions of the company. The complaint alleges that the improper accounting practices within the Insurance Services division resulted in an overstatement of BISYS's reported pre-tax earnings by roughly $118 million for the fiscal years ended June 30, 2001, 2002, and 2003, and by 34.3%, 38.9%, and 20.6%, respectively, in each of those fiscal years. The improper accounting practices in BISYS's other divisions overstated the company's pre-tax earnings by an additional $60.9 million for the same period.
The complaint alleges that as a result of these and other improper accounting practices, BISYS filed annual and quarterly reports with the Commission that included financial statements that were inaccurate and misleading. In addition, the company's overstated financial results were incorporated in annual reports to shareholders, press releases, and offering documents including registration statements.
The complaint alleges that by engaging in this conduct, BISYS violated the financial reporting, books-and-records, and internal controls provisions of the Exchange Act. Specifically, the complaint alleges that BISYS violated Sections 13(a), 13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act, and Rules 12b-20, 13a-1, 13a-11 and 13a-13 thereunder. The complaint further alleges that BISYS received approximately $20 million in ill-gotten gains as a result of its issuance of convertible debt, stock, and options at prices that were inflated as a result of its violations.
Without admitting or denying the Commission's allegations, BISYS has agreed to settle the charges by consenting to a permanent injunction against further violations of the relevant reporting, books-and-records, and internal controls provisions of the federal securities laws, and it has agreed pay disgorgement and prejudgment interest totaling approximately $25 million.
Accounting and Auditing Enforcement Release No. 2612 / May 23, 2007
Securities and Exchange Commission v. Arthur A. Goodwin, Civil Action No. 02-11913-JTL (D. Mass.)
The Commission announced today that a final judgment by consent was entered by the United States District Court for the District of Massachusetts against Arthur A. Goodwin, former senior vice-president of worldwide sales of Interspeed, Inc., a now-defunct North Andover, Massachusetts Internet equipment provider. The final judgment against Goodwin, age 45, of Plano, Texas, entered on May 21, 2007, permanently enjoins Goodwin from violating antifraud provisions of the federal securities laws and permanently bars him from serving as an officer or director of a public company.
The Commission's Complaint, filed on September 30, 2002, alleges that during 2000, Goodwin, the company's senior vice president of world-wide sales, orchestrated a scheme to inflate Interspeed's revenue in order to meet analysts' revenue expectations and to boost his own bonus. The Complaint alleges that Goodwin arranged transactions containing secret side letters, arranged "round-trip" transactions in which funds were funneled to a customer to use to pay for Interspeed products, and forged a signature and falsified the terms of a contract. In November 2000, Interspeed filed amended Forms 10-Q with the Commission restating revenue for the first three quarters of fiscal year 2000. According to the Complaint, Interspeed's reported revenue for the period decreased 60% from $14.1 million to $5.4 million, and its net loss increased from $8.5 million to $12 million. According to the restatement, Interspeed had overstated its revenue by between 25% and 93% for each of the three affected filing periods. Interspeed's fraudulent quarterly reports were also incorporated by reference in a Form S-8 registration statement, filed with the Commission on August 24, 2000.
To settle the Commission's charges, Goodwin consented, without admitting or denying the allegations of the Complaint, to entry of a final judgment permanently enjoining him from violations of Section 17(a) of the Securities Act of 1933, Sections 10(b) and 13(b)(5) of the Securities Exchange Act of 1934 and Rules 10b-5, 13b2-1 and 13b2-2 thereunder and from aiding and abetting violations of Section 13(a) and 13(b)(2)(A) of the Exchange Act and Rules 12b-20 and 13a-13 thereunder. The judgment imposes a permanent officer and director bar. The judgment further orders that Goodwin is liable for disgorgement of his performance-based bonus of $70,500, plus pre-judgment interest of $30,021, but waives payment based on sworn representations by Goodwin in his statement of financial condition and other documents and information submitted to the Commission.
In a related criminal proceeding, on June 9, 2006, Goodwin was convicted of eight counts of securities and wire fraud following a nine day jury trial prosecuted by the U.S. Attorney's office for the District of Massachusetts. On October 13, 2006, Goodwin was sentenced to serve a prison term of 30 months, followed by supervised release for three years.
For further information, see Litigation Release No. 18758 (June 22, 2004), Litigation Release No. 18468 (November 17, 2003), Litigation Release No. 18180 (June 6, 2003), and Litigation Release No. 17758 (October 1, 2002).
SEC v. Universo FoneClub Corporation, et al., Civil Action No. 06-10940-MLW (D.Mass. May 30, 2006)
Federal Court Issues Judgments in Fraudulent Pyramid Scheme Targeting Brazilian Community
The Securities and Exchange Commission ("Commission") announced today that, on May 16, 2007, the Honorable Mark L. Wolf of the United States District Court for the District of Massachusetts entered Final Judgments against Universo FoneClub Corporation, Sanderley R. De Vasconcelos and Victor Sales in connection with a pyramid scheme targeting members of the Brazilian-American community that raised approximately $3.2 million. The final judgments, entered by consent, enjoin De Vasconcelos and Sales from violating Sections 5(a), 5(c) and 17(a) of the Securities Act of 1933 as well as Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder. In addition, the final judgments hold De Vasconcelos and Universo FoneClub jointly and severally liable for $3,269,459 in disgorgement plus $151,928.49 in prejudgment interest but waive payment of all but $1,805,612.66 of that sum and do not impose a civil monetary penalty against De Vasconcelos or Universo FoneClub based on the sworn representations made in their Statements of Financial Condition and other documents and information submitted by them to the Commission. The final judgments also require Sales to pay, over a seven month period, $9,423.80 in disgorgement plus $437.92 in prejudgment interest and a $25,000 civil penalty.
On May 30, 2006, the Commission filed a complaint alleging that De Vasconcelos and Sales were promoting a pyramid scheme known as AFoneClub@ that targeted Brazilian-Americans. The complaint alleged that the defendants falsely promised members of the Brazilian community that they would earn substantial sums of money by paying approximately $2,000 to $5,000 to become members of a company (referred to as the FoneClub) that purportedly sold prepaid telephone calling cards through a multi-level marketing structure. However, the complaint alleged that the defendants, who had emphasized to potential investors that neither they nor the company would earn profits from the sale of phone cards, were in reality luring victims into a pyramid scheme in which its members would only make money through the recruitment of new members. The complaint further alleged that the defendants emphasized in their sales pitches, which were made in Portuguese, that God wanted the Brazilian community to prosper financially and that FoneClub would provide the opportunity for it to do so.
Simultaneously with the filing of its complaint on May 30, 2006, the Commission sought and obtained from the court an emergency order to halt this affinity fraud and to freeze the defendants' assets. This order froze approximately $1.8 million in assets, representing the bulk of the disgorgement and penalty payments set forth above. Under the terms of the final judgments, these payments will be transferred to the court's registry and the SEC may propose a plan, subject to the court's approval, to distribute these funds to the victims of the fraud.
For further information, see Lit. Rel. No. 19715 (June 1, 2006).
Securities and Exchange Commission v. Robert Goehring, Civil Action No. 3:05-CV-350 (AWT) (D.Conn.)
Robert Goehring Settles Insider Trading Charges
The Securities and Exchange Commission announced today that on May 18, 2007, the Honorable Alvin W. Thompson of the United States District Court for the District of Connecticut entered a final judgment against Robert Goehring, the former director of corporate communications of Gerber Scientific, Inc. In its complaint against Goehring, filed on February 28, 2005, the Commission alleged that Goehring traded Gerber Scientific stock nine times on the basis of material nonpublic information that he had received and also tipped a friend, who traded on three occasions.
Goehring consented to the entry of the final judgment without admitting or denying the allegations in the Commission's complaint. In the final judgment, the Court permanently enjoined Goehring from violating Section 10(b) of the Securities Exchange Act of 1934 and Exchange Act Rule 10b-5 and prohibited Goehring from serving as an officer or director of a public company. The Court further decreed that Goehring is liable for disgorgement and pre-judgment interest totaling $142,368.24 but waived payment of all but $50,000 of that amount, and did not impose a civil penalty, based on representations of financial condition that Goehring submitted.
Separately, in a related criminal action, Goehring pled guilty to three counts of insider trading involving several of the transactions charged in the Commission's complaint. On November 21, 2006, the United States District Court for the Southern District of New York sentenced Goehring to two years of probation for that conduct.
For further information, see Litigation Release No. 19105 (February 28, 2005).
SEC v. Frederick David Jones and Mark Godden, Civil Action No. 1:04-CV-4385 (RWS) (S.D.N.Y.)
Mark Godden Settles Insider Trading Charges
The Securities and Exchange Commission announced today that on May 17, 2007, the Honorable Robert W. Sweet, United States District Judge for the Southern District of New York entered a final judgment against Mark Godden, the former vice president of Marketing of Spandex PLC, the United Kingdom subsidiary of Gerber Scientific, Inc. In its complaint against Godden, filed on June 11, 2004, the Commission alleged that Godden sold Gerber Scientific stock on the basis of material nonpublic information relating to Gerber Scientific's subsequent announcement that its earnings would likely be lower than expected.
Godden, a citizen of the United Kingdom, consented to the entry of the final judgment without admitting or denying the allegations in the Commission's complaint. In the final judgment, the Court permanently enjoined Godden from violating Section 17(a) of the Securities Act of 1933, Section 10(b) of the Securities Exchange Act of 1934, and Exchange Act Rule 10b-5. The Court further ordered that Godden pay disgorgement of $39,000.
Previously, on April 21, 2005, the Court entered a final judgment against Godden's co-defendant Frederick David Jones. Jones consented to the entry of that final judgment.
For further information, see Litigation Release No. 18742 (June 10, 2004) and Litigation Release No. 19204 (April 27, 2005).
SEC Settles With Christian Blackwell for Illegal Insider Trading in Worthington Foods, Inc. Stock; Dismisses Dale Blackwell
On May 24, 2007, the United States District Court for the Southern District of Ohio entered Final Judgment against Defendant Christian Blackwell, a resident of Columbus, Ohio, for illegal insider trading in the stock of Worthington Foods, Inc. The Court entered a permanent injunction from future violations of Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder against Christian Blackwell, and ordered him to pay disgorgement of $4,317.01, prejudgment interest of $1,996.87 and a civil penalty of $4,317.01. Christian Blackwell settled the Commission's claim without admitting or denying the allegations in the Complaint.
In its Complaint, the Commission alleged Christian Blackwell purchased 388 shares of Worthington common stock after being tipped by his father, Roger D. Blackwell, about Kellogg Company's proposed acquisition of Worthington Foods, Inc. As a result, the Commission alleged that Christian Blackwell made $4,317.01 in ill-gotten profits by illegally trading on the inside information. (See Litigation Release No. 17944, January 21, 2003).
The Commission also separately dismissed its claim against Defendant Dale Blackwell, the father of Roger D. Blackwell. The Commission is continuing the litigation against the remaining defendants in this case.
SEC v. Raymond C. Chop and Nicholas F. Chop, Civil Action File No. 1:07-CV-1176 (N.D. Ga. May 23, 2007)
The Securities and Exchange Commission today announced the filing of an action against Raymond C. Chop and Nicholas F. Chop, residents of Florida, for engaging in insider trading in the securities of Serologicals, Inc. (Serologicals). The Commission's complaint, filed on May 23, 2007, in the United States District Court for the Northern District of Georgia, alleges that the defendants purchased securities of Serologicals while in possession of material nonpublic information in connection with an impending acquisition of Serologicals by Millipore Corporation (Millipore).
The Commission's complaint alleges that on April 23, 2006, the defendants met with a Serologicals employee who informed the defendants that Serologicals was in the process of being sold. The complaint further alleges that on April 24, 2006, the morning after learning of Serologicals' impending merger and based upon that knowledge, defendant Raymond C. Chop purchased 500 shares of Serologicals stock and defendant Nicholas F. Chop purchased 400 shares of Serologicals stock. On April 25, 2006, before the market opened, Millipore publicly announced its agreement to acquire Serologicals at $31.55 per share. Serologicals' stock subsequently closed up $7.83 from the previous day to $31.55 per share (a more than 34% increase). Defendant Raymond Chop reaped a profit of approximately $3,785 and defendant Nicholas Chop gained $2,897.
The complaint alleges that by their conduct, Raymond C. Chop and Nicholas F. Chop violated Section 10(b) of the Securities Exchange Act of 1934 (Exchange Act) and Rule 10b-5 thereunder.
In a consent filed with the complaint, Raymond C. Chop and Nicholas F. Chop agreed, without admitting or denying the allegations in the complaint, to the entry of a final judgment permanently enjoining them from future violations of Section 10(b) of the Exchange Act and Rule 10b-5 thereunder. In addition, defendant Raymond C. Chop consented to pay disgorgement of $3,785.12, plus prejudgment interest of $172.83, and a civil penalty of $3,785.12. Further, defendant Nicholas F. Chop consented to pay disgorgement of $2,897.61, plus prejudgment interest of $132.31, and a civil penalty of $2,897.61.
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