Fraud--S. Sugawara, The Post: "SEC Sues Sirena for Financial Fraud"
Great coverage, Sandy. Many thanks ;-).
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washingtonpost.com
>>> SEC Sues Sirena for Financial Reporting Fraud
By Sandra Sugawara
Washington Post Staff Writer
Thursday , September 28, 2000
Officials at Sirena Apparel Group, a California-based swimwear manufacturer and distributor, last year had a problem faced by many executives: They weren't going to meet analysts' expectations for the quarter.
The solution they arrived at, according to federal prosecutors, was to simply stop the clock.
Federal authorities allege that the chief executive, Maurice B. Newman, and the chief financial officer, Richard A. Gerhart, told employees to keep resetting the date on the Sirena computer network's clock until the sales targets were met for the quarter – which ended on March 31, 1999. Employees started an office pool to place bets on how long the quarter would be kept "open," according to federal prosecutors.
Finally, on about April 12, 1999, Sirena closed the quarter, said federal prosecutors, who allege that the scheme allowed Sirena to inflate its quarterly revenue by approximately $4.4 million. But in a matter of weeks, prosecutors say, the scheme fell apart. On June 7, Newman and Gerhart were fired from Sirena.
U.S. Attorney Alejandro N. Mayorkas of the Central District of California announced yesterday that Newman and Gerhart have been named in a 10-count indictment that accuses them of conspiring to commit securities fraud.
Gerhart's attorney, Paul Horgan of Los Angeles, declined comment.
Newman's attorney, Leonard Sharenow of Los Angeles, said that Newman "denies he committed any crime." Sharenow said Newman recently agreed to settle a lawsuit brought by the SEC on these matters. The SEC said Newman agreed to pay a $30,000 penalty without admitting or denying the allegations of securities fraud and financial reporting abuse.
"He thought that was the end of it," Sharenow said. "He was flabbergasted when he was arrested."
The Sirena case was one of six lawsuits in California, Nevada and Washington state that were announced yesterday in Los Angeles by federal prosecutors and the SEC. In another case, the SEC sued YourBankOnline, a Seattle software company, which allegedly claimed in March 1999 that it purchased software for $10 million in cash and stock, when it had only $138 in cash at the time. After the announcement, the company's stock rose from $1 to $32 over a two-week period in trading on the OTC Bulletin Board. Its president, Pakie V. Plastino, said the company had no comment on the SEC action.
The lawsuits are part of a concerted effort by the SEC to focus more attention on cases of financial-reporting fraud, which enforcement officials say is the agency's top priority, especially with the number of individual investors getting into the stock market.
The SEC and the U.S. attorney's office, in particular, are trying to speed up actions on financial-fraud investigations, which often drag on for years, by changing the way they are conducted, said Valerie Caproni, director of the SEC's Pacific region. In the past, the SEC would work out the securities and financial fraud scheme, and then pass it on to the U.S. attorney's office to develop the criminal charges. Now the prosecutors become involved much earlier in the process, she said.
Caproni said that financial fraud appears to be rising. "Some of that is driven by the fact that the market reacts so harshly when a company misses analysts' expectations," she said. "That seems to result in more book-cooking to meet those numbers."
In the case of Sirena, the indictment and SEC complaint allege that Newman stated at a management meeting on about March 23, 1999, that the company would not meet analysts' estimates, and that the quarter would be kept open. When the vice president of distribution later objected, saying he would not go to jail for Newman, he was fired, according to the indictment.
Gerhart allegedly instructed Sirena's computer personnel to reset the date on Sirena's computer clocks, which controlled the date printed on the invoices of goods that were shipped. When an invoice was generated, Sirena's computer system automatically recorded revenue as earned as of that date. That information was used to prepare financial statements.
Each day until about April 12, Sirena's computer staff allegedly reset the clocks to read March 30 or March 31.
Around April 27, Sirena issued a news release announcing its seventh consecutive quarter of sales and growth. It also held a conference call with analysts, who reacted to the news by reiterating their "strong buy" recommendations. One analyst stated that Sirena was a potential "home run" stock.
Everything started falling apart when one of the customers that had been falsely recorded as having bought in March, filed for bankruptcy, according to the indictment. An emergency management meeting was held, and Newman and Gerhart learned that auditors would inspect the books and then report to the board of directors on June 2.
Gerhart and Newman allegedly caused false documents to be created to back up their scheme. But at the June 2 meeting, the auditors raised significant questions about the actions of Newman and Gerhart. Newman allegedly offered another employee a raise if he placed all the blame on Gerhart.
On June 7, the board fired both men and disclosed that Sirena expected to restate earnings for the previous three quarters. Nasdaq halted trading in the stock that day, and it was later delisted. The company filed for Chapter 11 bankruptcy. It emerged from bankruptcy as a privately held company on Aug. 6.
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