SEC Settles Financial Fraud Action

While the SEC continues to bring financial fraud actions periodically, they are no longer the staple of the Enforcement Division. While efforts have been made to reinvigorate the process of fretting out these types of actions, they have typically produced less than stellar results. Nevertheless, the agency does at times file a financial fraud case such as In the Matter of GT Advanced Technologies Inc., Adm. Proc. File No. 3-19156 (May 3, 2019) which centers on the efforts of a manufacturer to conceal is failures under a contact with Apple Inc.

GT Advanced is a manufacturer and supplier of a product known sapphire glass, used by Apple as a cover for its next generation iPhone. In October 2013 the company secured a coveted contract with Apple to supply the product. The agreement had two key components. One component set performance standards under which GT would supply the important iPhone component over a period of time. This part of the agreement contained certain manufacturing specifications that Apple required and specific milestones to be met by the manufacturer. The other component stipulated that Apple would make quarterly advances to the company to facilitate the process. The tech firm had the right to cancel the agreement if GT failed to meet the contract requirements. To accommodate the scale of sapphire manufacturing required by the agreement, Apple leased a facility in Arizona for GT.

Virtually from the beginning, GT had difficulty complying with the contract specifications as CEO Thomas Gutierrez and other officials knew. In November 2013 Apple made the first milestone payment to GT just fifteen days after contract execution. Fortunately for GT there were no associated manufacturing milestones tied to the payment. Since the Arizona manufacturing facility had not been completed at the time, the two firms reset future deadlines. GT never disclose this fact in its filings with the Commission.

In April 2014 Apple made another payment. Yet the next month an Apple supply executive warned Mr. Gutierrez in a text message that the low quantity of sapphire produced was a “major problem.” By June the executive emailed the CEO noting that he had “extremely limited confidence” that GT could meet the 2014 production requirements. In fact, the company continually revised its sapphire production projections downward. Apple advised the firm in July 2014 that it would not use sapphire glass for its iPhone 6 launch.

Despite the production problems and the revised schedule, in July Mr. Gutierrez requested that Apple make the next installment payment. The tech company rejected the claim. In addition, failing to meet the fourth milestone gave Apple the right to accelerate repayment of the advances. If that right was exercised it could have created going concern issues for GT. These facts were omitted by GT from its quarterly filing with the Commission, made in August 2014.

Although GT did not seek a waiver of its obligations, the firm did adopt a strategy regarding the sums owed Apple and the missed manufacturing deadlines amid concerns by its auditors. The company claimed falsely that Apple was in breach of the contract. Notice was not provided to Apple, although Mr. Gutierrez did request in an email that the company confirm that the parties were postponing the setting of revised criteria for the next milestone. Apple confirmed this fact.

In early August Mr. Gutierrez held an analyst call. During the call he stated that Apple was expected to make the fourth installment payment in October 2014. Several days later he made a similar statement in another all. Later GT sent Apple draft disclosures which contained essentially the same representations. The draft filings did not reiterate GT’s claim that Apple was in breach. Apple told the firm that the disclosures were not correct.

GT’s financial disclosures for the second quarter regarding sources of cash, liquidity, backlog and EPS projections included unsupported sales projections for sapphire glass furnaces. The projections assumed sales despite the fact that Apple had refused. The customers were also unable to authorize the sales.

Eight weeks after the second quarter filing containing these statements, GT filed for Chapter 11 bankruptcy. The Order alleges violations Securities Act Sections 17(a)(2) and (3) and Exchange Act Sections 13(a), 13(b)(2)(A) and 13(b)(2)(B).

To resolve the proceedings GT consented to the entry of a cease and desist order based on the sections cited in the Order. See also In the Matter of Thomas Gutierrez, Adm. Proc. File No. 85768 (May 3, 2019)(Proceeding against GT CEO based on same factual allegations; resolved with a similar cease and desist order excluding Section 13(b)(2)(B), and the payment of disgorgement of $15,510.00, prejudgment interest of $2,993.91 and a penalty of $125,000).

SEC 85th Anniversary Gala: On June 3, 2019, the SEC Historical Society will host a gala celebration to commemorate the 85th Anniversary of the founding of the U.S. Securities and Exchange Commission and its 20th Anniversary. The event will be held at the Building Museum, Washington, D.C. Following a brief program featuring SEC Chairman Jay Clayton, there will be cocktails and dinner. For further information regarding tables, tickets and advertisements in the program please contact the Society here (full disclosure Mr. Gorman is the President of the Society).

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