Risk & Compliance

SEC Settles with Warnaco, Former CFO

The commission sends a message that ''getting the numbers right'' is not enough.
Stephen TaubMay 12, 2004

The Securities and Exchange Commission settled charges it made against The Warnaco Group for securities fraud and against the company’s former chief financial officer, William Finkelstein, for aiding the fraud. The charges stemmed from misleading disclosures concerning the clothing company’s 1998 financial results.

The commission also settled allegations of reporting violations with former chief executive officer Linda Wachner and former general counsel Stanley Silverstein. The SEC also settled charges of abetting reporting violations with Warnaco’s former auditor, PricewaterhouseCoopers. None of the settlements included admissions or denials of the commission’s findings or charges.

The charge against Warnaco resulted from the company’s alleged issuance of a false and misleading press release about its financial results on March 2, 1999, and Finkelstein with aiding and abetting the company’s fraud.

The SEC cited Warnaco, Finkelstein, Wachner, and Silverstein for their roles in connection with Warnaco’s misleading disclosure in its annual report for 1998. PwC was charged with aiding and abetting Warnaco’s reporting violations in the 1998 annual report.

According to the commission, Warnaco’s March 1999 press release, which reported “record” results for 1998, failed to inform investors that Warnaco had discovered a $145 million inventory overstatement that would require the company to restate and significantly lower its financial results for the prior three years. Instead, Warnaco falsely portrayed the inventory restatement as the write-off of deferred start-up costs under a new accounting pronouncement.

The SEC asserted, however, that the overstatement had, in fact, “been caused by serious defects in Warnaco’s inventory accounting and internal control systems and did not involve deferred start-up costs.”

The commission also accused Warnaco of filing a misleading annual report one month after issuing the fraudulent press release. Although the annual report correctly accounted for the $145 million restatement, Warnaco failed to inform investors of the true cause of the restatement, instead claiming that the restatement resulted from the write-off of “start-up related” costs, it added.

The SEC also asserted that Wachner, Finkelstein, and Silverstein knew or should have known that the restatement resulted from material flaws in the company’s cost accounting and internal control systems at one of its divisions. Wachner and Finkelstein signed the report, it pointed out.

The commission accused PwC, which audited the consolidated financial statements contained in Warnaco’s 1998 annual report, of failing to object to Warnaco’s mischaracterization of the inventory overstatement as “start-up related” costs and incorporated the misleading description of the restatement into its audit report.

According to the terms of the agreement, Warnaco must hire an independent consultant to perform a complete review of the company’s internal controls and policies concerning its inventory systems, internal auditing, and financial reporting and other accounting functions. Warnaco also agreed to adopt the recommendations of the independent consultant within 180 days.

As part of the settlement, PwC agreed to pay a $2.4 million penalty. For his part, Finkelstein agreed to disgorge about $189,000 of his bonus for 1998 and prejudgment interest and to pay a $75,000 civil penalty. He also has consented to an order barring him from acting as an officer or director of a public company for four years.

Wachner agreed to pay more than $1.3 million in 1998 bonus money, while Silverstein will shell out a total of $165,772.

The SEC wants the settlement to send a message to companies and their auditors. “With the action taken today, the commission has reiterated to issuers, their management, and audit firms that simply ‘getting the numbers right’ is not enough. An issuer’s filings cannot give misleading reasons for its financial results and must disclose material information to investors,” said Antonia Chion, an associate director of the commission’s division of enforcement.