FRAUD ALLEGATIONS Overview #3
Following are excerpts from the law suit filed against SBTK.
We believe the sources for these allegation include persons directly involved in the transactions, including persons who may have been under oath during deposition. We also believe these allegations have been corroborated by several sources.
We are substantially impressed by the detailed nature of the allegations, which include times, dates, persons involved and equipment involved.
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8. Sabratek's improper revenue recognition activities (detailed herein at 39-41 and 104-114) included, inter alia, (a) reporting revenue on “sales” of products to entities that had not ordered Sabratek products; (b) engaging in fraudulent “inventory parking” arrangements, whereby Sabratek reported revenue on phony “sales” to distributors or bogus “dealers” who, as part of defendants' fraudulent scheme, placed “orders” for Sabratek products and/or accepted the receipt of (or “parked”) Sabratek inventory which they had not, in fact, bona fide ordered; and (c) improperly reporting revenue on consignment sales.
9. Because the Company had a general practice of recognizing revenue upon shipment of product to its distributors and institutional customers, defendants were also able to-and did-help conceal the increasing weakness in the demand for Sabratek pump products by inducing the Company'' distributors and institutional customers to purchase more product than they needed and for which they had no current demand. These improper “channel stuffing" activities included, inter alia, promising its distributors that they could return their shipments of Sabratek product if they were not sold, and significantly reducing prices and/or offering its customers rebates or unusual extended payment terms on pumps in a concerted effort to further inflate its reported Class Period sales figures. Indeed, Sabratek;s desire to “goose” its reported sales was so great that it even violated its distributorship arrangements by, inter alia, stuffing large quantities of product into newly “authorized” distributors who-in consideration for taking this product-were then allowed to sell into territories of pre-existing Sabratek distributors who had been given exclusive sale rights in such territories.
10. The foregoing practices, which were not publicly disclosed, effectively permitted Sabratek to convert what would otherwise have been sharply increasing levels of unsold inventory into millions of dollars of “sales” that Sabratek reported as revenue, thereby artificially inflating Sabratek's reported revenue, income and earnings per share during the Class Period. Through these and other fraudulent practices (which also included deliberate manipulation of the Company's publicly reported inventory figures), defendants manipulated Sabratek's true operating results to “achieve” or “beat” Company-generated Wall Street expectations regarding the Company's financial performers and to artificially inflate the prices of Sabratek's stock, all to the detriment of unsuspecting investors.
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