Does playing with the numbers ever really pay off? The Securities & Exchange Commission (SEC) is working hard to make sure we all know that it doesn't.
Yesterday, the SEC announced that it has filed its first enforcement action using Regulation G against SafeNet, Inc. and several of its former officers and accountants.
The SEC filed its complaint in the United States District Court for the District of Columbia and it includes a laundry list of allegations and fines, which the parties have settled without admitting or denying allegations. All are subject to court approval.
The SEC complaint alleges that SafeNet engaged in two fraudulent schemes from late 2000 through May 2006, including backdating of options and the other improper earnings management. In each scheme, SafeNet is alleged to have materially misstated financial results and disseminated materially false and misleading information to investors about its financial status. Senior officers of the company were involved in these schemes and accounting executives are alleged to have been involved in the earnings management scheme.
In addition to many other violations, the SEC makes its first enforcement use of Regulation G against SafeNet. The SEC instructs that: "Regulation G applies whenever a company subject to the periodic reporting requirements under Section 13(a) or 15(d) of the Exchange Act of 1934, or a person acting on the company's behalf, discloses publicly any material information that includes a 'non-GAAP financial measure.' "
According to the SEC, non-GAAP financial measures, those not calculated in conformity with Generally Accepted Accounting Principles, frequently exclude non-recurring, infrequent, or unusual expenses. Companies are required to reconcile these with the most directly comparable GAAP financial measure. The regulation also prohibits companies and their employees from disseminating false or misleading non-GAAP financial measures or presenting the non-GAAP financial measures in such a manner.
The complaint against the company and individuals alleges that in order to meet earnings targets improper accounting adjustments were made to expenses that included such things as: the improper classification of ordinary operating expenses as non-recurring integration expenses (costs incurred to integrate acquired companies into current operations), and the improper reduction of accruals and reserves.
SafeNet is alleged to have issued materially false and misleading securities filings and press releases with regard to earnings specifics. Backdating of option grants for senior executives and employees is also alleged to have occurred resulting in substantial profit-taking by those receiving these option grants.
The parties are enjoined from violating a long list of antifraud and other Securities Act and Securities Exchange Act provisions. SafeNet is ordered to pay a civil penalty of $1,000,000.
The complaint provides more specifics regarding the settlements, fines and penalties imposed on the parties. Their cooperation with the SEC was taken into account in the matter.
Related Web Resources
For additional information on SEC enforcement activities, visit www.sec.gov.
The lawyers of Gusrae, Kaplan, Nusbaum & Bruno, PLLC represent brokers and firms involved in regulatory and enforcement actions. Please contact the firm for more information about our expertise in securities law and litigation.
