UNITED STATES OF AMERICA Before the
SECURITIES AND EXCHANGE COMMISSION
SECURITIES EXCHANGE ACT OF 1934
Release No. 39144 / September 29, 1997
ACCOUNTING AND AUDITING ENFORCEMENT
Release No. 967 / September 29, 1997 ADMINISTRATIVE PROCEEDING
File No. 3-9447
:
In the Matter of : ORDER INSTITUTING CEASE-
: AND-DESIST PROCEEDINGS
Curtis L. Dally : PURSUANT TO SECTION 21C
: OF THE SECURITIES EXCHANGE
: ACT OF 1934, MAKING FINDINGS
Respondent. : AND ORDERING RESPONDENT
: TO CEASE AND DESIST
: I.
The Securities and Exchange Commission (Commission) deems it
appropriate and in the public interest that cease-and-desist proceedings be
instituted pursuant to Section 21C of the Securities Exchange Act of 1934
(Exchange Act) against Curtis L. Dally (Dally).
In anticipation of the institution of these cease-and-desist
proceedings, Dally has submitted an Offer of Settlement (Offer) which the
Commission has determined to accept. In determining to accept the Offer,
the Commission considered remedial acts promptly undertaken by Respondent
and cooperation afforded the Commission staff. Solely for the purpose of
this proceeding and any other proceeding brought by or on behalf of the
Commission, or to which the Commission is a party, and without admitting or
denying the Commission's findings, except as to jurisdiction and those
findings contained in paragraph III.A. below, which are admitted, Dally, by
his Offer, consents to the entry of this Order Instituting Cease-and-Desist
Proceedings Pursuant To Section 21C of the Securities Exchange Act of 1934,
Making Findings And Ordering Respondent To Cease And Desist (Order).
II.
Accordingly, IT IS ORDERED that cease-and-desist proceedings pursuant
to Section 21C of Exchange Act be, and hereby are, instituted. III.
On the basis of this Order and the Offer submitted by Dally, the
Commission finds that<(1)>: Respondent
A. Dally, age 45, resides in Portage, Michigan. He is a certified
public accountant, certified in the State of Michigan. At all relevant
times, he was the Director of Accounting for International Research and
Development Corp. (IRDC). As such, he was responsible for preparing IRDC's
consolidated financial statements and its periodic reports filed with the
Commission.
B. At all relevant times, Dally was also the de facto Chief
Financial Officer (CFO) of IRDC.
Entities Involved
C. IRDC was incorporated under Delaware law in 1970. Its principal
offices were located in Mattawan, Michigan. During the relevant period,
IRDC was engaged in pre-clinical and clinical safety evaluation studies of
drugs. IRDC also owned Carme, Inc. (Carme) and two other subsidiaries. At
all relevant times, IRDC's common stock was registered with the Commission
under Section 12(g) of the Exchange Act and traded over-the-counter on
NASDAQ until May 1995, when it was delisted. During the relevant period,
IRDC filed periodic reports with the Commission on Forms 10-Q and 10-K
pursuant to Section 13 of the Exchange Act and the rules and regulations
promulgated thereunder. These periodic reports contained IRDC s
consolidated financial statements. IRDC filed for bankruptcy in 1995 as a
result of the fraudulent scheme discussed below.
D. Carme was incorporated in 1975 under Nevada law. Its principal
offices are located in Novato, California. The company is engaged in the
manufacture and sale of specialty natural skin care products through
wholesalers for distribution to retail outlets. Carme was acquired by IRDC
in January 1990. It was sold to an unrelated entity on or about September
27, 1995. Carme is not registered with the Commission in any capacity.
E. Axel Kraft International, Ltd. (Axel Kraft) is a Canadian
corporation formed in 1982 and wholly owned by one individual. Its
principal offices are located in Ontario, Canada. Axel Kraft is not
registered with the Commission in any capacity. Background
<(1)> The findings herein are made pursuant to Respondent's Offer
of Settlement and are not binding on any other person or entity
in this or any other proceeding.
======END OF PAGE 2======
F. From at least June 1993 through at least September 1994, the
President of Carme and IRDC, and the Executive Vice President, Sales
Manager and CFO of Carme engaged in a scheme to defraud by booking millions
of dollars in fictitious sales to various customers of Carme, including
Axel Kraft. As a result of these activities, Carme s accounts receivable,
sales and earnings were materially overstated during the relevant period.
Those figures were included in IRDC s consolidated financial statements,
thereby causing IRDC to materially overstate its accounts receivable,
revenue, net earnings and earnings per share in IRDC s Forms 10-Q and 10-K
filed with the Commission during the period of June 1993 through September
1994.
G. In furtherance of the scheme, the President of Carme and IRDC,
among other things, directed Carme's Executive Vice President to create
fictitious sales to Axel Kraft in order to inflate IRDC's accounts
receivable. Axel Kraft had, prior to November 1993, purchased on average
no more than $20,000 per month of product from Carme. However, in November
and December 1993, Carme's Executive Vice President and its Sales Manager
created or caused others to create twelve invoices reflecting more than
$800,000 in month-end purchases by Axel Kraft in each month, and included
these sales in Carme s quarterly sales figures and monthly accounts
receivable. Thereafter, they created or caused others to create invoices
reflecting $300,000 and $450,000 in additional fictitious sales to Axel
Kraft on the last days of March and June 1994, the end of the first and
second quarters of 1994 respectively. These additional fictitious sales
were also included in Carme s quarterly sales figures and monthly accounts
receivable.
H. Axel Kraft did not order the products in question from Carme and
never agreed to pay for them. Moreover, no products were ever shipped to
Axel Kraft as a result of these fictitious sales.
I. With knowledge that the above Axel Kraft sales were fictitious,
Carme's CFO made and caused to be made entries in Carme's books and records
reflecting that the sales had actually occurred. Carme's CFO also prepared
and sent to Dally at IRDC, among other things, monthly Aged Receivables
Reports and quarterly financial statements, which included these fictitious
Axel Kraft sales figures and the resulting inflated accounts receivable, to
be included in IRDC's periodic reports filed with the Commission.
J. In an attempt to prevent discovery and disclosure of the
fictitious Axel Kraft receivables, Carme's Executive Vice President and its
CFO, among other things, adjusted or caused others to adjust the aging of
the Axel Kraft receivable on Carme's monthly Aged Receivables Reports to
reflect that the Axel Kraft receivable was always current. As a result,
the $1.6 million in fictitious Axel Kraft sales that were first recorded as
accounts receivable in November and December 1993, were listed as current
receivables in January 1994 and again in February 1994. As of December 31,
1993, the Axel Kraft receivable already accounted for more than 20% of
IRDC's receivables. Moreover, in March 1994, the $300,000 in additional
fictitious sales were added to the "current" receivable due from Axel
Kraft. The resulting $1.9 million receivable was also reflected as current
======END OF PAGE 3======
at the end of March, April and May 1994. In June 1994, the $450,000 in
additional fictitious sales were also added to the "current" receivable,
bringing the total "current" Axel Kraft receivable to more than $2.4
million, more than 30% of IRDC's total receivables.
Dally's Conduct
K. Dally failed to review or cause the review of the aging detail
concerning the Axel Kraft receivable included in the Aged Receivables
Reports provided to IRDC by the CFO of Carme, and he included the
fictitious amounts created at Carme in, among other things, the accounts
receivable, revenue, earnings and earnings per share reported in the
consolidated financial statements of IRDC for the quarter ending March 31,
1994. As a result, IRDC's Form 10-Q for the quarter ending March 31, 1994
materially overstated IRDC's accounts receivable by $1.9 million, its
revenue by over $100,000, its net earnings by 56% and its net earnings per
share by 50%. Dally, among others, signed the Form 10-Q, which was filed
with the Commission.
L. Prior to June 30, 1994, IRDC's primary lender questioned Dally
and IRDC about the size and nature of the Axel Kraft receivable, which by
June 30, 1994, had increased to $2.4 million. Nevertheless, without
reasonable investigation or basis, Dally included the fictitious Axel Kraft
sales figures in, among other things, the accounts receivable, revenue,
earnings and earnings per share reported in IRDC's consolidated financial
statements for the quarter ending June 30, 1994. As a result, IRDC's Form
10-Q for the quarter ending June 30, 1994 materially overstated IRDC's
accounts receivable by $2.4 million, its revenue by nearly $450,000, its
net earnings by 134% and its net earnings per share by 100%. Dally, among
others, signed the Form 10-Q, which was filed with the Commission.
M. In August 1994, IRDC's primary lender undertook its own
investigation of the Axel Kraft receivable. Thereafter, prior to September
30, 1994, Dally was informed by IRDC's primary lender, among other things,
that: Axel Kraft did not appear to have the ability to pay for the goods
purportedly purchased by it from Carme; no written documentation existed
evidencing any legitimate sales to Axel Kraft by Carme; no goods had been
shipped to Axel Kraft for the purported purchases; and Carme did not have
the raw materials necessary to make the products purportedly purchased by
Axel Kraft. Nevertheless, despite this information and without reasonable
investigation or basis, Dally included the entire $2.4 million Axel Kraft
receivable as an other asset in IRDC's consolidated financial statements
for the quarter ending September 30, 1994. As a result, IRDC's Form 10-Q
for the quarter ending September 30, 1994 materially overstated IRDC's
prepaid expenses and other current assets by $2.4 million. Dally, among
others, signed the Form 10-Q, which was filed with the Commission.
N. During the week of January 3, 1995, Dally discovered that the
Axel Kraft transactions were fictitious and reported that fact to outside
counsel for IRDC and others, which led to IRDC's disclosure of the
falsification of its books, records, accounts and financial statements in a
January 30, 1995 press release.
======END OF PAGE 4======
Legal Analysis
Section 13(a) of the Exchange Act provides that every issuer of a
security registered pursuant to Section 12 of the Exchange Act shall file
such annual and quarterly reports as the Commission may proscribe. Rule
13a-13 promulgated under Section 13(a) requires such an issuer to file
quarterly reports on Form 10-Q. Compliance with the Exchange Act's
reporting provisions requires the filing of complete and accurate reports.
S.E.C. v. Savoy Industries, Inc., 587 F.2d 1149, 1165 cert. denied, 440
U.S. 913 (1979). Rule 12b-20 further requires that such reports include
any information necessary to make them not misleading. Section 13(b)(2) of
the Exchange Act requires, among other things, that issuers whose
securities are registered pursuant to Section 12 of the Exchange Act "make
and keep books, records, and accounts" which accurately and fairly reflect
the transactions and disposition of the issuers' assets. Rule 13b2-1
prohibits any person from, directly or indirectly, falsifying or causing to
be falsified any books, records or accounts required to be kept pursuant to
Section 13(b)(2). No showing of scienter is required to establish a
violation of Sections 13(a) and 13(b)(2) of the Exchange Act and Rules 12b-
20, 13a-13 and 13b2-1 promulgated thereunder.
Based on the facts and circumstances described in paragraphs III.A.
through III.M. above, IRDC violated Sections 13(a) and 13(b)(2) of the
Exchange Act and Rules 12b-20, 13a-13 and 13b2-1 promulgated thereunder.
Dally was IRDC's Director of Accounting and de facto CFO. As the
person responsible for preparing IRDC's consolidated financial statements
and its periodic reports filed with the Commission, he had a duty to take
sufficient steps to satisfy himself that there was a reasonable basis for
the entries included in IRDC's periodic reports. Diagnostek, Accounting
and Auditing Enforcement Release No. 762, 61 SEC Docket 1077 (February 23,
1996); See also Sulcus Computer Corporation, Accounting and Auditing
Enforcement Release No. 778, 61 SEC Docket 2406 (May 2, 1996). Dally also
had a responsibility to take sufficient steps to insure that IRDC's, books,
records and accounts were accurate. Diagnostek, 61 SEC Docket 1077.
Moreover, an accountant is required to be diligent in discharging his
responsibilities to clients, employers, and the public. AICPA Professional
Standards, ET Section 56.04. Among other things, diligence imposes the
responsibility to be thorough and to observe applicable technical and
ethical standards. Id.
Dally failed to take reasonable steps to assure himself that IRDC's
books, records and accounts and periodic reports filed with the Commission
were accurate. He failed to review the aging detail provided to him with
Carme's monthly Aged Receivables Report. Had he properly reviewed that
aging detail, it would have informed him that: Axel Kraft, who had
previously purchased no more than $20,000 per month from Carme, had
purportedly purchased more than $800,000 per month in November and December
of 1993 in two suspicious year-end transactions; the Axel Kraft receivable
grew to $2.4 million through June 30, 1994; and the Axel Kraft receivable
remained mysteriously current the entire time. These facts should have led
him to question the collectibility, if not the legitimacy, of the Axel
======END OF PAGE 5======
Kraft receivable. In addition, even after IRDC's primary lender notified
Dally of the unusual size of the Axel Kraft receivable, and then, of the
unlikelihood of its collection, he failed to undertake a reasonable
investigation of the nature and collectibility of the receivable. If he
would have undertaken such an investigation, he would have discovered that
the Axel Kraft receivable was uncollectible, if not fictitious.
Under these circumstances, Dally knew or should have known that his
actions would contribute to IRDC's violations of Sections 13(a) and
13(b)(2) of the Exchange Act and Rules 12b-20, 13a-13 and 13b2-1
promulgated thereunder. By engaging in such conduct, Dally caused IRDC's
violations of Sections 13(a) and 13(b)(2) of the Exchange Act and Rules
12b-20, 13a-13 and 13b2-1 promulgated thereunder. IV.
Accordingly, IT IS HEREBY ORDERED, pursuant to Section 21C of the
Exchange Act, that:
Dally cease and desist from committing or causing any violation or any
future violation of Rule 13b2-1 promulgated under Section 13(b) of the
Exchange Act and from causing any violation and any future violation of
Sections 13(a) and 13(b)(2) of the Exchange Act and Rules 12b-20 and 13a-13
promulgated thereunder. By the Commission.
Jonathan G. Katz
Secretary |
