The Securities and Exchange Commission filed a civil lawsuit against five former top executives at Sunbeam Corp., including former chief executive Albert “Chainsaw Al” Dunlap and former chief financial officer Russell Kersh for fraud, resulting in billions of dollars of investor losses.
“This case is the latest in our ongoing fight against fraudulent earnings management practices that have caused investors billions of dollars in losses and threaten to undermine the integrity of our markets,” SEC Enforcement Director Richard Walker said in a statement.
The defendants are: Sunbeam’s former CEO and chairman Albert J. Dunlap; former principal financial officer Russell A. Kersh; former controller Robert J. Gluck; former vice-presidents Donald R. Uzzi; and Lee B. Griffith.
It also named Arthur Andersen LLP partner Phillip Harlow in the suit.
Two weeks ago , Andersen agreed to pay $110 million as part of a settlement agreement resolving the claims by the common stock class plaintiff, without admitting fault or liability. “We are pleased to be able to resolve this matter,” said Andrew Pincus, General Counsel of Arthur Andersen, in a press release announcing the settlement. “Even though we believe we had very strong defenses to the claims asserted by the class, the firm made this business decision to allow us to apply resources and management time to our core business of providing value to our clients.”
In related matters, the Commission instituted settled administrative proceedings against Sunbeam and its former General Counsel, David Fannin.
The SEC alleges in its civil suit that “senior management of Sunbeam, led by Dunlap and Kersh, engaged in a fraudulent scheme to create the illusion of a successful restructuring of Sunbeam and thus facilitate a sale of the company at an inflated price.” According to the complaint, the defendants employed a laundry list of fraudulent techniques, including creating “cookie jar” revenues, recording revenue on contingent sales, accelerating sales from later periods into the present quarter, and using improper bill and hold transactions.
Walker stated in the SEC’s release: “Accurate and reliable financial reporting is the bedrock of our capital markets. This case is the latest in our ongoing fight against fraudulent earnings management practices that have caused investors billions of dollars in losses and threaten to undermine the integrity of our markets. As the case makes clear, we will attack such conduct aggressively in whatever guise it may appear (in this case, practices ranging from “cookie jar” reserves to channel stuffing) and against whomever may be involved (here, senior company management and the outside auditor).”
According to the Commission’s complaint, Dunlap, a turnaround specialist, was hired by Sunbeam’s Board in July 1996 to restructure the financially ailing company. He placed Kersh in charge of Sunbeam’s finance organization. Soon after their arrival, Dunlap and Kersh promised a rapid turnaround to enable Sunbeam to substantially improve its financial performance.
Together with Sunbeam senior executives Gluck, Uzzi, and Griffith, they then employed improper accounting techniques and undisclosed non- recurring transactions to meet promised sales and earnings figures, according to the SEC. These actions inflated the price of Sunbeam shares to a high of $52 per share in March 1998, it adds. “If the company had been sold at an inflated share price, Dunlap and Kersh could have reaped tens of millions of dollars from the sale of their Sunbeam securities,” notes the SEC.
On Tuesday, Sunbeam’s shares were trading for 7.5 cents on the Bulletin Board, down from an all-time high of $52 hit in 1998.
As CFO.com pointed out in a Nov. 30, 2000 article, during his reign, Kersh called himself Sunbeam’s “biggest profit center.”
In the 1999 tell-all book Chainsaw: The Notorious Career of Al Dunlap in the Era of Profit-at-Any-Price (HarperBusiness, October 1999), about Dunlap’s relentless, unforgiving management style, BusinessWeek writer John A. Byrne describes Kersh’s deft accounting techniques, which included shifting $21.5 million from reserves into income in 1996— a move investors were unaware of until the following year, when the company restated its financials. The move “enabled Kersh to disguise the company’s calamitous erosion in profit margins. It helped to cover up the deep discounts given to customers by Sunbeam to stuff and load the retail channels. Auditors later concluded that grill sales made under massive discounts, extended credit terms, and ‘bill-and-hold’ transactions inflated fourth-quarter sales by $50 million. Instead of reporting revenues that were up 26 percent, to $338.1 million, Sunbeam sales would have increased by only 7 percent.”
The SEC alleges that the illegal conduct began at year-end 1996 with the creation by Kersh and Gluck of inappropriate accounting reserves, which increased Sunbeam’s reported loss for 1996. These “cookie-jar” reserves were then used to inflate income in 1997, thus contributing to the false picture of a rapid turnaround, it adds.
In addition, to further boost income in 1997, and to create the impression that Sunbeam was experiencing significant revenue growth, Dunlap, Kersh, Gluck, Uzzi, and Griffith caused the company to recognize revenue for sales that did not meet applicable accounting rules, according to the complaint. As a result, for fiscal 1997, at least $60 million of Sunbeam’s reported $189 million in earnings from continuing operations came from accounting fraud, it adds.
The SEC adds that in 1997, the Sunbeam officers failed to disclose that Sunbeam’s 1997 revenue growth was, in part, achieved at the expense of future results. The company had offered discounts and other inducements to customers to sell merchandise immediately that otherwise would have been sold in later periods, a practice also known as “channel stuffing.” The resulting revenue shift threatened to suppress Sunbeam’s future results of operations, the SEC states.
“Phillip E. Harlow, a partner at Arthur Andersen, Sunbeam’s outside auditing firm, authorized unqualified audit opinions on Sunbeam’s 1996 and 1997 financial statements although he was aware of many of the Company’s accounting improprieties and disclosure failures,” according to the SEC.
In early 1998, the Sunbeam officers took increasingly desperate measures to conceal the company’s mounting financial problems, meanwhile, attempting to finance the acquisition of three other companies, in part through a bond offering, says the SEC. “The Sunbeam officers again engaged in, and recognized revenue for, sales that did not meet the applicable accounting rules; again caused Sunbeam to engage in acceleration of sales revenue from later periods; deleted certain corporate records to conceal pending returns of merchandise; and misrepresented the company’s performance and future prospects in its filing on Form 10-Q for the first quarter of 1998, its offering materials in connection with the bond offering, its press releases, and its communications with analysts,” according to the SEC.
In June 1998, negative statements in the press about the quality of the company’s earnings prompted Sunbeam’s board of directors to begin an internal investigation. This resulted in the termination of Dunlap, Kersh and other members of company management and, eventually, to an extensive restatement of Sunbeam’s financial statements from the fourth quarter of 1996 through the first quarter of 1998.
Sunbeam is presently in reorganizing under Chapter 11 of the U.S. Bankruptcy Code.
According to the Commission’s complaint, through this conduct, Dunlap, Kersh, Gluck, Uzzi, and Griffith violated the anti-fraud, reporting and other provisions of the federal securities laws. The Commission seeks, as to all defendants, permanent injunctions against future violations and civil penalties and, in the case of Dunlap, Kersh, Gluck, and Uzzi, permanent bars from acting as an officer or director of any public company.