Accounting & Tax

Symbol Settles Probes for $138 Million

Seven former executives and the company's former legal counsel are indicted in ''a textbook example of a company cooking the books.''
Stephen TaubJune 4, 2004

Symbol Technologies Inc. is close to putting its years-long accounting scandal behind it. The world’s largest seller of barcode scanners agreed to shell out $138 million to settle criminal and civil investigations as well as shareholder lawsuits.

Matters are far from over, however, for former general counsel Leonard Goldner and seven former Symbol executives who were indicted for their alleged roles in inflating the company’s reported earnings. The indicted executives include former chief executive officer Tomo Razmilovic, former chief financial officer Kenneth Jaeggi, ex-finance director James Heuschneider, and ex-vice presidents Brian Burke, Michael DeGennaro, Frank Borghese, and Christopher DeSantis. A number of the individuals were reportedly awaiting arraignment in federal court as of late yesterday.

In its agreement with the U.S. Attorney’s Office for the Eastern District of New York, Symbol acknowledged responsibility for previous misconduct by certain former employees. The Holtsville, New York-based company will pay $3 million to the U.S. Postal Inspection Service Consumer Fraud Fund and an additional $98 million, mostly in stock, to investors.

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Symbol agreed to continue cooperating with the U.S. Attorney’s investigation; to retain an independent, government-approved examiner to review Symbol’s internal controls, financial reporting practices, and compliance with the settlement agreement; and to establish and maintain an annual training and education program designed to diminish the possibility that the company would violate federal securities laws in the future.

Symbol also reached a settlement with Jerome Swartz, the company’s co-founder and former chairman. The agreement calls for Swartz to pay $4 million in cash to settle class action lawsuits. Swartz also agreed to pay $7.2 million in cash to Symbol and to forfeit stock options having a value of $2.9 million, or to exercise those options and pay approximately $2.9 million in cash or stock to the company. The settlement with Swartz is in addition to his July 2003 agreement to relinquish approximately two years of salary, bonus, and stock options remaining under his prior employment agreement.

“This is a textbook example of a company cooking the books,” U.S. Postal Service Inspector William Kezer reportedly stated at a press conference in Brooklyn. “What’s significant about this case is the number of cooks in the kitchen.” Symbol committed fraud in order to meet analyst projections for 32 straight quarters, inflating revenue by $230 million between 1998 and 2002, according to Bloomberg, citing U.S. Attorney Roslynn Mauskopf.

In its agreement with the Securities and Exchange Commission, Symbol agreed to pay $37 million to settle civil securities fraud charges; the SEC also settled related charges with 11 former Symbol executives. The SEC noted that in assessing its penalty, it considered Symbol’s initial efforts to cover up the misconduct and impede two internal investigations and the commission’s own investigation.

The commission alleged that the individuals engaged in a fraudulent scheme to inflate revenue, earnings and other measures of financial performance in order to create the false appearance that Symbol had met or exceeded its financial projections.

The SEC singled out a number of fraudulent schemes to align Symbol’s reported financial results with market expectations. They include a process through which baseless accounting entries were made to conform the unadjusted quarterly results to management’s projections; the fabrication and misuse of restructuring and other non-recurring charges to artificially reduce operating expenses; channel stuffing and other revenue recognition schemes; and the manipulation of inventory levels and accounts receivable data to conceal the adverse side effects of the revenue recognition schemes.

In its civil complaint, the SEC singled out Razmilovic, Jaeggi, Burke, DeGennaro, and Borghese, noting that they composed most of Symbol’s senior management team while they directed the fraud. The commission added that executives DeSantis, Heuschneider, Gregory Mortenson, James Dean, and Robert Donlon “implemented the schemes.”

The SEC also asserted that while the accounting fraud was occurring, Goldner manipulated stock option exercise dates to enable certain senior executives, including himself, to profit unfairly at the company’s expense.