Accounting & Tax

Hard Landing for Former Raytheon Execs

Three finance executives agree to pay a total of more than $1.5 million in a settlement with the SEC.
Stephen TaubMarch 15, 2007

The Securities and Exchange Commission announced that it settled charges against three former Raytheon finance executives for failing to disclose the deteriorating prospects of its commercial aircraft manufacturing subsidiary.

Without admitting or denying the allegations, the three finance executives — former chief financial officer Franklyn A. Caine, former controller and lead auditor Edward S. Pliner, and James E. Gray, former CFO of the subsidiary, Raytheon Aircraft — agreed to pay a total of more than $1.5 million.

According to the SEC, between 1997 and 1999, Raytheon improperly recognized revenue on the subsidiary’s sale of unfinished aircraft through “bill and hold” sales transactions that did not comply with generally accepted accounting principles. These practices resulted in material overstatements of the aircraft unit’s revenue and operating income in 1997 and 1998, enabling both the subsidiary and Raytheon itself to meet certain internal and external earnings targets.

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The commission asserted that Gray was personally involved in these premature revenue recognition practices, and that Pliner was aware of them as the company’s lead outside auditor.

The SEC also alleged that between 1997 and 2001, Raytheon’s filings failed to adequately disclose material risks, trends, and uncertainties associated with the deterioration of the Raytheon Aircraft business. These practices resulted in the failure to recognize between $67 million and $240 million in losses that were inherent in a planned “soft landing” of the commuter aircraft line at the end of 2000, which would have reduced Raytheon’s 2000 profit before taxes by between 8 percent and 27 percent.

According to the commission, Caine was personally involved in and aware of these practices throughout 2000 and 2001. In addition, as Raytheon’s lead auditor between 1997 and 1999 and as controller in 2000 and 2001, Pliner was aware of and later personally involved in these improper practices.

Under the settlement, Caine agreed to pay $706,072 in disgorgement and interest, plus a $125,000 civil penalty. Pliner agreed to pay $415,042 in disgorgement and interest, plus a $150,000 civil penalty; he also consented to a three-year suspension from practicing before the commission as an accountant. Gray agreed to pay $105,753 in disgorgement and interest.

In June 2006, to settle similar charges, Raytheon agreed to pay the Securities and Exchange Commission $13 million in penalties and disgorgement; chairman and chief executive officer Daniel P. Burnham agreed to pay $1,238,344; and Aldo R. Servello, former deputy CFO and controller of Raytheon Aircraft, agreed to pay $34,628.

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