From today's SEC Digest:
FRAUD CHARGED IN SABRATEK EARNINGS MANAGEMENT SCHEME: TWO OFFICERS SETTLE CLAIMS
The SEC filed a civil complaint on September 27th in the United States District Court for the Northern District of Illinois against former senior officers of Sabratek Corporation, an Illinois manufacturer of infusion pumps and flush syringes. The complaint alleges that Kuldarshan S. Padda (CEO) of Chicago, Illinois, Stephen L. Holden (President) of Deerfield, Illinois, Stephan C. Beal (VP of Sales) of Norwell, Massachusetts, and Scott P. Skooglund (VP of Finance) of Woodridge, Illinois, engaged in a fraudulent earnings management scheme. Two of the officers, Padda and Beal, have consented, without admitting or denying the allegations against them, to the entry of permanent injunctions barring future violations of anti-fraud, record-keeping, and reporting provisions of the federal securities laws. Padda has agreed to pay a $125,000 civil penalty and Beal has agreed to pay $35,430 in disgorgement, reflecting bonuses and commissions, and a $60,000 civil penalty.
The complaint alleges that from the first quarter of 1998 through the first quarter of 1999, the defendants engaged in a scheme to defraud and caused Sabratek, whose stock was formerly traded on Nasdaq, to make material misstatements to investors and to file false periodic reports with the Commission. The defendants used fictitious sales of infusion pumps, inventory parking arrangements, improper revenue recognition, and billings for consulting services that were not performed to overstate net sales by 62% and operating income by 229%. The complaint further alleges that the defendants each knew, or was reckless in not knowing, that the revenue from these fraudulent sales could not be recognized under generally accepted accounting principles. The defendants allegedly reported inflated revenue to protect Sabratek's stock price and to conceal reduced revenues resulting from lower demand for infusion pumps and from a halt in the sales of flush syringes due to safety concerns. In the second half of 1999, when news of Sabratek's inflated operating results began to emerge, its market capitalization declined by $202.5 million, or approximately by 95%. [SEC v. Holden, Skooglund, Padda, and Beal, N.D. Ill., Civil Action No. 01-C-7463] (LR-17156; AAE Rel. 1458)
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