PERSISTENCE YIELDS THE SEC A SETTLEMENT WITH A LAWYER

Nobody will ever claim that, once on the trail, the SEC is not persistent. Nine years after the complaint was filed, and following an acquittal on parallel criminal charges, attorney Jay Lapine settled fraud and books and records charges with the Commission. SEC v. Lapine, Case No. C-0103650 (N.D. Cal. Filed Sept. 27, 2001). Mr. Lapine served as General Counsel to HBOC from 1997 through 1999. After that company merged with McKesson in 1999, he was named vice president and General Counsel of the HBOC division of McKesson HBOC and served in that position through June 1999.

The SEC’s complaint centers on events from 1998 to 1999. Prior to that time, the company had an unbroken series of increases in revenue from product sales. The company consistently announced results that met or exceeded analysts’ predictions with only one exception. As revenue began to dwindle, senior management engaged in a scheme to boost the numbers. According to the complaint, senior management caused the company to negotiate and execute sales agreements which were contingent on future events. The contingencies were put in side letters. The revenue from these agreements was recognized, despite company policies to the contrary.

By June 1998, Mr. Lapine became aware of these improper practices. Rather than report them to the accounting department, he became a participant, according to the SEC. Mr. Lapine helped prepare the agreements and side letters. The revenue from those agreements was reported in filings made with the Commission.

The next year, Mr. Lapine drafted agreements which were crafted to improperly permit revenue recognition. In the transaction, McKesson HBOC entered into a contract with Data General for an exchange of product and services. The agreement was broken into to parts. The first appeared to be a reseller license and distribution agreement backdated to the end of the quarter and fiscal year. Under this agreement, Data General purchased a license for McKesson HBOC software that Data General would resell to other customers. Data General agreed to pay $20 million. The second, dated the first month of the next fiscal year and written as an amendment to the first, provided for McKesson HBOC to purchase hardware from Data General that would be resold. The purchase price was $25 million. McKesson was also to assist Data General in reselling the software it had purchased. The right of return, and the duty to assist, precluded revenue recognition. The revenue, however, was recognized. Without the revenue from this transaction, the company would not have made the consensus estimate for the year.

To resolve the case with the Commission, Mr. Lapine consented to the entry of a permanent injunction prohibiting future violations of the antifraud and reporting provisions. He also agreed to the entry of a five-year officer/director bar and to pay a $60,000 civil fine. In 2007, other officers of the company settled with the SEC as discussed here. See also Litig. Rel. 21444 (Mar. 10, 2010).

REG FD – A NEW ENFORCEMENT PRIORITY?

In what may signal a new enforcement priority, the SEC filed another Regulation FD case this week. SEC v. Presstek, Inc., Civil Action No. 10-1058 (E.D.N.Y. Filed March 9, 2010). Last year, the Commission brought its first Reg FD case in a considerable period of time, In the Matter of Christopher A. Black discussed here. There, the SEC did not bring an action against the company, only the individual who made the disclosures.

Presstek is an action against the company, a Connecticut based manufacturer, and the former chairman of its audit committee, Edward Marino. According to the complaint, Mr. Marino received an e-mail from the company controller on September 10, 2006. The e-mail stated that performance in both North America and Europe for August was weak and had a negative impact on margin and operating income relative to plan. No announcement of financial performance was planned before early October.

On September 28, 2006, Mr. Marino received a telephone call from Michael Barone, a managing partner of Sidus, a registered investment adviser. The funds managed by the adviser owned almost half a million shares of Presstek. During the telephone call, Mr. Marino told the adviser that the summer had not been as vibrant as expected in North America and Europe, according to notes of the conversation prepared by Mr. Barone and quoted in the complaint. The notes go on to record Mr. Marino as saying, in substance, that “’overall a mixed picture’” for the company emerged for the quarter.

Mr. Barone began selling Presstek shares immediately, sending an e-mail during the call and by the end of the day, had liquidated most of its holdings. The share price closed down about 19%.

The next day Presstek issued a preliminary announcement. It reported that quarterly financial performance was below prior estimates.

The Commission’s complaint alleges violations of Exchange Act Section 13(a) and Regulation FD. The company settled with the SEC, consenting to the entry of a permanent injunction prohibiting future violations of the sections cited in the complaint. As part of the settlement the company agreed to pay a $400,000 civil penalty. In an unusual step the Commission, in its complaint, acknowledged the cooperation of the company citing its remedial measures. Those included revising its corporate communications policies and governance principles, replacing its management team, appointing new independent board members and creating a whistleblower’s hotline.

Mr. Marino is litigating the case. See also Litig. Rel. 21443 (Mar. 9, 2010).