Glen Andrew Folck
Securities Act Of 1933
Release No. 8196 / February 26, 2003
Securities Exchange Act of 1934
Release No. 47404 / February 26, 2003
Accounting and Auditing Enforcement
Release No. 1721 / February 26, 2003
Administrative Proceeding
File No. 3-11046
In the Matter of GLEN ANDREW FOLCK, Respondent. |
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ORDER INSTITUTING PROCEEDINGS PURSUANT TO SECTION 8A OF THE SECURITIES ACT OF 1933 AND SECTION 21C OF THE SECURITIES EXCHANGE ACT OF 1934, MAKING FINDINGS AND IMPOSING A CEASE-AND-DESIST ORDER |
I.
The Securities and Exchange Commission ("Commission") deems it appropriate that cease-and-desist proceedings be, and hereby are, instituted pursuant to Section 8A of the Securities Act of 1933 ("Securities Act") and Section 21C of the Securities Exchange Act of 1934 ("Exchange Act") against Glen Andrew Folck ("Folck" or "Respondent").
II.
In anticipation of the institution of these proceedings, Respondent has submitted an Offer of Settlement ("Offer") which the Commission has determined to accept. Solely for the purpose of these proceedings and any other proceedings brought by or on behalf of the Commission, or to which the Commission is a party, and without admitting or denying the findings herein, except as to the Commission's jurisdiction over him and the subject matter of these proceedings, Respondent consents to the entry of this Order Instituting Proceedings Pursuant to Section 8A of the Securities Act of 1933 and Section 21C of the Securities Exchange Act of 1934, Making Findings and Imposing a Cease-and-Desist Order ("Order"), as set forth below.
III.
On the basis of this Order and Respondent's Offer, the Commission finds1 that:
Respondent
1. Glen Andrew Folck was at all relevant times Chief Financial Officer of SmarTalk TeleServices, Inc. ("SmarTalk") and assistant secretary to SmarTalk's board of directors. During the relevant period, Folck helped prepare and signed the company's filings with the Commission. Folck's job responsibilities also included preparation of the company's financial statements and supervising the accounting department. Folck attended board meetings, had frequent contacts with other upper management at SmarTalk and was the primary liaison with SmarTalk's auditors. Folck is licensed as a CPA in the state of Ohio, but was on inactive status during his employment with SmarTalk. Folck, currently age 38, is a resident of North Carolina.
Other Relevant Entity
2. SmarTalk was a provider of pre-paid telephone cards and wireless services and went public in October 1996. During the relevant period, SmarTalk's stock was registered with the Commission pursuant to Section 12(g) of the Exchange Act and was listed on the NASDAQ National Market. In November 1998, as a result of the accounting issues discussed in this Order, as well as other issues, SmarTalk restated its financial statements for its year ended December 31, 1997 and its first two quarters of 1998. When all of the restated items are taken into consideration, net income of $478,000 for the third quarter of 1997 changed to a net loss of $2.3 million, net losses at year-end 1997 decreased from $61.9 million to $25.7 million, net losses for the first quarter of 1998 increased from $3.4 million to $15.2 million, and net income of $2.2 million for the second quarter of 1998 changed to a net loss of $29.2 million.
3. On January 19, 1999, SmarTalk filed for Chapter 11 bankruptcy and trading in SmarTalk stock was halted. In March 1999, SmarTalk sold substantially all of its assets to AT&T. Since that time, SmarTalk has been liquidating its remaining assets in the bankruptcy proceeding.
Facts
Summary
4. These proceedings arise from materially false and misleading financial statements that SmarTalk filed with the Commission from the third quarter of 1997 through the second quarter of 1998. Some of SmarTalk's false and misleading financial statements were also incorporated in registration statements for offerings of stock filed with the Commission in September and December 1997, and May 1998.
5. SmarTalk falsely reported net income of $478,000 in its quarterly report for the third quarter of 1997. In fact, SmarTalk had losses that period. As Folck knew or should have known, SmarTalk hid the losses by improperly capitalizing ordinary operating expenses. The expenses were improperly treated as an asset.
6. Additionally, in SmarTalk's year-end 1997 annual report, which included audited financial statements, SmarTalk reported a one-time charge, a $25 million restructuring reserve, purportedly for anticipated 1998 costs, after its purchase of several other prepaid telephone card businesses. As Folck knew or should have known, the entire restructuring reserve did not conform to Generally Accepted Accounting Principles ("GAAP") because the anticipated costs were not proper restructuring costs and the company had failed to properly establish a plan of restructuring in conformity with Emerging Issues Task Force Issue No. 94-3, Liability Recognition for Certain Employee Termination Benefits and other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring) ("EITF 94-3").
7. Also, as Folck knew or should have known, SmarTalk improperly understated current period operating expenses by charging 1997 operating expenses (including most of the above described expenses improperly capitalized as of the third quarter of 1997) and 1998 operating expenses against the non-GAAP restructuring reserve. This enabled SmarTalk to falsely inflate earnings (or earnings before one-time charges) at year-end 1997 and the first two quarters of 1998.
8. On August 10, 1998, SmarTalk announced that its auditors had informed management about potentially significant issues with SmarTalk's accounting treatment for acquisitions that occurred during 1997 and certain other items relating to fiscal year 1997. On August 19, 1998, SmarTalk filed its Form 10-Q for the second quarter of 1998. The Form 10-Q noted that the company's auditors had informed management of significant issues with some of SmarTalk's accounting, and as a result, its 1997 and 1998 financial statements would require adjustment, but the amounts of the adjustments had not yet been determined. On August 11, after the press release, SmarTalk's stock price fell 57%, from $16 5/8 to $7 5/32. Folck had sold some stock in January 1998, prior to the time that the stock price fell in August 1998.
9. In November 1998, SmarTalk restated its audited financial statements for year-end 1997 and its first two quarters of 1998. In the restatement, SmarTalk reversed the entire $25 million restructuring reserve that had been recorded at year-end 1997. In addition, SmarTalk expensed most of the operating costs that had previously been charged against the restructuring reserve in 1997 and 1998.
Third Quarter 1997: Folck Causes SmarTalk to Falsely Report Net Income of $478,000 Instead of Losses
10. For the third quarter 1997, SmarTalk falsely reported net income of $478,000 in a November 12, 1997 press release and Form 10-Q, filed November 14, 1997. In fact, SmarTalk had losses that period. SmarTalk incorporated its third quarter financial statements in a registration statement on Form S-4 filed December 2, 1997, which Folck signed. Folck knew or should have known that the overstated net income was accomplished by the improper capitalization of ordinary operating expenses.
11. Beginning in August 1997, Folck began directing that operating expenses be reclassified to a so-called "restructuring reserve" account when the company had not yet established a restructuring reserve. As of the end of the third quarter 1997, there were about 41 such expense items totaling $1.1 million, including executive travel and entertainment costs, employee relocation expenses (associated with moving the finance department from California to Florida in 1997), various consulting and legal fees, telephone expenses, costs associated with employee terminations in mid-1997, and costs of preparing SmarTalk's annual report.
12. In connection with preparing the third quarter 1997 Form 10-Q, Folck directed the $1.1 million of expenses to be added to prepaid expenses, an asset on the balance sheet. A prepaid expense is an expense with benefits that extend into the future, but which is paid for in advance. In contrast, the third quarter expenses were payments for services that had already been rendered. The addition of operating expenses to prepaid expenses created a fictitious asset. If the expenses had been properly classified as operating expenses, SmarTalk would have reported losses for the third quarter of up to $622,000.
Year-End 1997: Folck Causes SmarTalk To Establish a Non-GAAP Restructuring Reserve and To Overstate Net Income Before One-Time Charges
13. In its year-end 1997 financial statements, which were audited, SmarTalk recorded a one-time charge, a $25 million restructuring reserve. In 1997, Folck had compiled an initial list of potential restructuring reserve costs. Folck further prepared draft and final restructuring reserve schedules in early 1998, made presentations to the board regarding the restructuring reserve, was responsible for calculating the amounts to be included in the restructuring reserve and provided the rationale for including certain costs in the restructuring reserve.
14. The $25 million restructuring reserve consisted of five types of costs purportedly to be incurred in 1998 in order to exit certain activities: contract termination fees; write-down of prepaid card inventory that would be recalled in 1998; certain asset write-downs; severance benefits associated with personnel reductions in 1998; and various general reserves. As described in detail below, the entire restructuring reserve did not comply with GAAP. Folck knew or should have known that SmarTalk's management had failed to execute a properly detailed and approved plan of restructuring prior to year-end 1997. Folck also knew or should have known that a number of costs were not estimable by year-end and that the anticipated costs were not proper restructuring costs. In SmarTalk's restated financial statements, the entire $25 million restructuring reserve was reversed.
15. As set forth below, Folck knew or should have known that SmarTalk improperly understated 1997 operating expenses by charging them against the non-GAAP restructuring reserve. This enabled SmarTalk, in a February 26, 1998 press release to falsely announce that its 1997 year-end earnings, before one-time charges, were $2.3 million.
16. SmarTalk's year-end 1997 materially false and misleading financial statements, which were audited, were included in SmarTalk's annual report on Form 10-K filed March 31, 1998, that Folck reviewed and signed. The materially false and misleading financial statements were also incorporated in a registration statement on Form S-8 filed in September 19972 and May 7, 1998, which Folck signed.
Folck Knew or Should Have Known that Management Failed to Commit to a Detailed Exit Plan Prior to Year-end 1997
17. To establish a restructuring reserve, EITF 94-3 required SmarTalk management to approve and commit the enterprise to an exit plan by the date of the financial statements (in this case, December 31, 1997). An exit plan must specifically identify all significant actions to be taken to complete the exit plan, activities that will not be continued, including the method of disposition and location of those activities, and the expected date of completion. EITF 94-3 also provides that a liability should be recognized at the commitment date (by December 31, 1997) for only those exit costs that can be reasonably estimated. In late-1997, Folck was provided a copy of EITF 94-3. Folck read it and made notes on it.
18. As Folck knew or should have known, SmarTalk had no detailed plan or proper approval in 1997. At the end of October 1997, some elements of a plan, but not the details or the amounts, were discussed at a board of directors meeting. By late December 1997, Folck developed a list of potential restructuring reserve costs. Nevertheless, that list was not finalized and the amounts and other details, including the timing of activities to be discontinued, were not determined in 1997. Rather, in January 1998, Folck began getting input from SmarTalk employees to prepare a more detailed schedule of restructuring reserve items and to derive amounts. In January 1998, Folck compiled a first draft schedule of restructuring reserve amounts and presented the draft schedule to SmarTalk's auditors.
19. Even in 1998, Folck's schedule of restructuring items went through subsequent revisions, when the exit plan should have been completed and amounts estimated by December 31, 1997. There were material changes in the nature, amounts and timing of many items in the several versions of the restructuring reserve schedules in 1998. The changes to the plan in 1998 reflect SmarTalk's failure to commit to a restructuring plan in conformity with EITF 94-3 and inability to make reliable estimates by year-end 1997. In view of the failure to commit to a detailed exit plan prior to year-end, any approval in 1997 would have been too limited and any approval in 1998 would have been too late.
Folck Knew or Should Have Known that SmarTalk Improperly Reserved for Contract Termination Fees
20. The largest component of the reserve was $13.5 million for commitments and penalties pertaining to contracts that were ostensibly to be terminated in 1998. Most of this component was for amounts due upon termination of SmarTalk's carrier services with WorldCom and MCI.3 SmarTalk intended to switch its carrier traffic to Frontier Communications at some point in 1998, due to more favorable rates on the Frontier contract. However, only some traffic was ever switched to Frontier, in part, because of technical difficulties in 1998 and it occurred later in 1998 than had been reflected in SmarTalk's restructuring schedules. SmarTalk continued to use the MCI contract through its bankruptcy in 1999 and assigned its interest in the WorldCom contract to another company in mid-1998.
21. As Folck knew or should have known, the contract termination costs were not exit costs under EITF 94-3 because SmarTalk was switching one contract for another and thus, the termination costs were associated with activities that would be continued.
22. In addition, as Folck knew or should have known, SmarTalk had no reasonable basis for accrual of these costs under Statement of Financial Accounting Standards ("SFAS") No. 5, Accounting for Contingencies. SFAS No. 5 requires that losses associated with contingencies be accrued only if it is probable that a liability had been incurred at the date of the financial statements and the amount of loss can be reasonably estimated. Folck knew or should have known that no events had occurred that would have obligated SmarTalk as of year-end 1997 to pay termination costs. Moreover, by year-end, SmarTalk management had not determined the timing of the contract terminations and the timing of those events would and did affect the amount reserved for the WorldCom contract. Accordingly, at year-end, Folck knew or should have known that management was unable to reasonably estimate how much the penalties under that contract would be.
Folck Knew or Should Have Known that SmarTalk Improperly Reserved for Inventory Write-Downs
23. Another component of the reserve was $4.5 million for inventory of prepaid telephone cards that were to be replaced some time in 1998 with cards containing a new SmarTalk logo. SmarTalk was working on developing a new logo during 1998. The prepaid card inventory, however, was not recalled or destroyed and SmarTalk continued selling some of it.
24. Inventory write-downs are specifically addressed in Emerging Issues Task Force Issue No. 96-9, Classification of Inventory Markdowns and Other Costs Associated with a Restructuring, which contains the Commission's view that write-downs of inventory should be reflected as costs of goods sold. Folck knew or should have known that the inventory write-down for prepaid telephone cards should not have been shown as a restructuring cost. Folck also knew or should have known that SmarTalk had no reasonable basis for accruing these costs as a loss at year-end under SFAS No. 5. SmarTalk continued to sell its inventory on hand throughout 1998. SmarTalk was unable to replace its existing inventory until it had developed a new logo and that did not occur until mid-1998. Indeed, some of the inventory that was ultimately to be discarded had not even been manufactured by year-end. Thus, the assets had not been impaired by the end of 1997. In addition, the amount of anticipated losses from the eventual destruction of inventory was not reasonably estimable by December 31.
Folck Knew or Should Have Known that SmarTalk Improperly Reserved for Asset Write-Downs Associated with Offices Purportedly to be Closed in 1998
25. The reserve also improperly included $3.5 million for write-downs of assets to be disposed of when SmarTalk closed certain offices in 1998. For such losses on asset impairments, EITF 94-3 defers to SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of ("SFAS No. 121"). Folck knew or should have known that SmarTalk's reserve was improper because under SFAS No. 121, losses for asset write-downs are to be reported as a component of income from continuing operations, not as a reserve, and furthermore, these assets did not meet the criteria for asset impairments or asset disposals.
Folck Knew or Should Have Known that SmarTalk Improperly Reserved for Severance Benefits
26. The fourth component of the reserve included $1.1 million for severance benefits for employees, at offices to be closed and at SmarTalk's new headquarters, whose employments were to be terminated in 1998. For involuntary severance benefits to be included in the reserves as of December 31, 1997, EITF 94-3 requires management, prior to year-end, to identify the number of employees to be terminated, their job classifications and locations, establish the benefits employees will receive upon termination and communicate the benefit arrangement to employees. Folck knew or should have known that SmarTalk did not comply with these requirements. The severance benefit arrangement for most employees was not decided upon until 1998 and employees did not learn the amount of their severance benefits until they were actually terminated (which for most employees was in 1998). In addition, there was no determination in 1997 of the total number of employees to be terminated.
Folck Knew or Should Have Known that SmarTalk Improperly Included General Reserves
27. The restructuring reserve also improperly included $1.8 million of general reserves. The general reserves consisted of: $575,000 for computer conformity, utilities and taxes; $625,000 for travel and telephone expenses related to employee terminations; an overstatement by $180,000 of the MCI contract termination amount; an overstatement by $180,000 of the amount set aside for inventory write-downs; and $250,000 for "various employee severances," for which SmarTalk management failed to identify the number of employees, their job classifications and their locations, as is required under EITF 94-3. As Folck knew or should have known, SFAS No. 5, paragraph 14, prohibits the accrual of general reserves. Accordingly, these items were operating expenses that should not have been recorded until they were incurred.
Folck Causes SmarTalk to Overstate Year-End 1997 Net Income Before One-time Charges by Directing 1997 Operating Expenses to be Charged Against the 1998 Restructuring Reserve
28. SmarTalk's restructuring plan contemplated that SmarTalk would incur the previously described categories of costs in 1998. Nevertheless, beginning in about December 1997, Folck approved charging against the restructuring reserve most of the operating expenses that had been improperly added to prepaid expenses in the third quarter of 1997, and additional fourth quarter 1997 operating expenses. A total of $1.06 million of 1997 operating expenses were improperly charged to the restructuring reserve as of year-end. The expenses, which were not contemplated by the restructuring reserve, included executive travel and entertainment costs, telephone and moving expenses, and consulting fees. Some of the operating expenses charged in the fourth quarter were incurred in the third quarter of 1997 or even earlier. If the total operating expenses charged as of December 31, 1997 had been properly reflected on SmarTalk's financial statements, earnings before one-time charges would have been reduced by as much as 52% from $2.3 million to $1.2 million. In SmarTalk's restated financial statements, most 1997 charges against the restructuring reserve were reversed.
Folck Causes SmarTalk to Fail to Disclose the Types and Amounts of 1997 Costs Charged Against the 1998 Restructuring Reserve in its 1997 Form 10-K
29. Folck knew or should have known that SmarTalk's 1997 Form 10-K, which Folck signed, failed to describe the types and amounts of exit costs charged against the liability in 1997, as required by EITF 94-3. Instead, SmarTalk reflected the usage on its balance sheet by reducing the total restructuring reserves ($25 million) by the total amount charged as of year-end 1997 ($1.06 million). The reduced restructuring reserve amount on the balance sheet was not explained anywhere in the Form 10-K. Had the exit costs been described, as was required, the misuse of the restructuring reserve in 1997 would have been apparent.
Folck Sold Stock in January 1998
30. On January 5, 1998, Folck sold some shares of SmarTalk stock. Folck avoided losses of $16,250 by selling the shares prior to SmarTalk's August 10, 1998 public announcement of significant issues with SmarTalk's accounting treatment for acquisitions that occurred during 1997 and certain other items relating to 1997.
First and Second Quarters of 1998: Folck Knew or Should Have Known of the Continued Misuse of the Restructuring Reserve to Understate Losses and Overstate Earnings
31. SmarTalk failed to follow through on most of its restructuring plan and therefore incurred few of the costs for which it had reserved. Nevertheless, beginning in about March 1998 and continuing into the second quarter, the accounting staff, with Folck's knowledge, charged current period operating expenses against the restructuring reserve. In 1998, Folck received documents listing some of the expenses charged against the reserve and authorized accounting personnel to charge certain of the expenses against the reserve.
32. In the first quarter 1998, SmarTalk charged a total of $1.2 million of operating expenses against the restructuring reserve. The expenses included office rent and utilities, employee salaries and consultant fees. If the operating expenses had been properly reflected in SmarTalk's Form 10-Q, filed May 15, 1998, for its quarter ended March 31, 1998, losses would have increased from SmarTalk's reported $3.4 million to $4.6 million. Folck signed the first quarter Form 10-Q.
33. In its Form 10-Q for the second quarter of 1998, which ended June 30, SmarTalk reported net income of $2.2 million. Folck signed the second quarter Form 10-Q, which was filed on August 19, 1998. As of the second quarter, an additional $0.7 million of operating expenses were improperly charged against the restructuring reserve. The expenses included office rent and utilities, employee salaries, consulting fees and travel (including airfare for an officer's wife and minor child), Folck's travel expenses dating as far back as November 1996 and certain acquisition related expenses. Without these charges, net income would have decreased from SmarTalk's reported $2.2 million to $1.5 million.
34. For a company showing only marginal profits, at best, the effect of the improper charges to the reserves in the first two quarters of 1998 was material. In SmarTalk's restated financial statements, most 1998 charges against the restructuring reserve were reversed and charged against revenues as general and administrative expense, cost of sales, and sales and marketing expense.
Folck Knew or Should Have Known that SmarTalk's Disclosures in 1998 of Charges Against the Restructuring Reserve were Materially False and Misleading
35. In its Forms 10-Q for the first two quarters of 1998, which Folck reviewed and signed, SmarTalk described the types and amounts of costs charged against the restructuring reserve in 1997 and 1998. SmarTalk grouped the costs into the following three categories: "personnel reductions," "facilities and equipment realignment," and "product conformity and sole branding." In view of the fact that the costs actually consisted of office rent and utilities, employee salaries, consultant fees, travel expenses and other non-restructuring operating expenses, Folck knew or should have known that the descriptions in the filings were materially false and misleading.
Legal Analysis
Applicable Law
36. Section 17(a)(2) of the Securities Act prohibits obtaining money or property by means of untrue statements of material fact or omissions to state material facts in the offer or sale of securities. Section 17(a)(3) of the Securities Act prohibits engaging in transactions, practices, or courses of business which operate as a fraud or deceit upon the purchaser in the offer or sale of securities.
37. Section 13(a) of the Exchange Act requires all issuers with securities registered under Section 12 of the Exchange Act to file such periodic reports as the Commission shall prescribe by its rules and regulations. Exchange Act Rules 13a-1 and 13a-13, respectively, require issuers to file annual reports and quarterly reports. Exchange Act Rule 12b-20 requires that periodic reports contain such further information as is necessary to make the required statements, in light of the circumstances under which they are made, not misleading.
38. Section 13(b)(2)(A) of the Exchange Act requires that reporting companies registered pursuant to Section 12 of the Exchange Act make and keep books, records, and accounts, which, in reasonable detail, accurately and fairly reflect its transactions and disposition of assets.
Exchange Act Rule 13b2-1 states that no person shall, directly or indirectly, falsify or cause to be falsified, any book, record or account subject to Section 13(b)(2)(A) of the Exchange Act.
39. Section 13(b)(2)(B) of the Exchange Act requires reporting companies to devise and maintain a system of internal accounting controls sufficient to provide reasonable assurances that transactions are recorded as necessary to permit preparation of financial statements in conformity with GAAP.
Folck's Violations
40. As a result of the conduct described above, SmarTalk violated Sections 17(a)(2) and 17(a)(3) of the Securities Act by filing registration statements on Form S-4 in December 1997, and Form S-8 in September 1997 and May 1998, for offerings of securities that incorporated materially false and misleading financial statements for the third quarter of 1997 and year-end 1998. SmarTalk also violated Section 13(a) of the Exchange Act and Exchange Act Rules 13a-1, 13a-13 and 12b-20 by filing a materially false and misleading annual report on Form 10-K for year-end 1997 and by filing materially false quarterly reports on Form 10-Q for the third quarter of 1997 and the first two quarters of 1998. Finally, SmarTalk violated Sections 13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act.
41. As discussed above, Folck, as SmarTalk's Chief Financial Officer, was responsible for the preparation of SmarTalk's financial statements and signed all relevant annual and quarterly reports and registration statements and supervised the accounting department. Folck directed that third quarter operating expenses be improperly capitalized as of the third quarter of 1997. Folck compiled an initial list of potential restructuring costs, prepared the restructuring reserve schedules, made presentations to the board regarding the restructuring reserve and provided the rationale for including certain costs in the restructuring reserve. Folck approved charging against the $25 million restructuring reserve at year-end 1997, the previously capitalized third quarter 1997 operating expenses and additional fourth quarter 1997 operating expenses, when the restructuring reserve had been established purportedly for costs to be incurred in 1998. Folck also was aware that SmarTalk improperly charged current period operating expenses against the restructuring reserve as of the first two quarters of 1998.
42. As a result of the conduct described above, Folck, therefore, knew or should have known that SmarTalk's Form 10-Q for the third quarter of 1997 was materially false and misleading because it falsely reported net income by improperly capitalizing the $1.1 million of operating expenses. Folck, therefore, also knew or should have known that SmarTalk's Form 10-K for year-end 1997 was materially false and misleading in that SmarTalk: improperly established a $25 million non-GAAP restructuring reserve; improperly charged third and fourth quarter 1997 operating expenses against the restructuring reserve that was purportedly established for anticipated 1998 costs; and improperly failed to disclose the types and amounts of the charges against the restructuring reserve. Furthermore, Folck, therefore, knew or should have known that SmarTalk's Forms 10-Q for the first and second quarters of 1998 were materially false and misleading because they inflated net income and/or understated losses when SmarTalk continued to improperly charge operating expenses against the restructuring reserve and included descriptions of the improper charges that were false and misleading. As a result, Folck was a cause of SmarTalk's violations of Section 13(a) of the Exchange Act, and Rules 13a-1, 13a-13 and 12b-20 of the Exchange Act. As a result, Folck also was a cause of SmarTalk's violations of Sections 17(a)(2) and 17(a)(3) of the Securities Act in connection with SmarTalk's materially false and misleading financial statements for the third quarter 1997 and year-end 1997 that were incorporated in registration statements on Form S-4 filed in December 1997, and Form S-8 filed in September 1997 and May 1998.
43. As a result of the conduct described above, Folck was a cause of SmarTalk's violations of Sections 13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act. In 1997 and the first two quarters of 1998, Folck failed to maintain true and accurate books and records and adequate internal controls to assure that SmarTalk accounted for its expenses and assets correctly.
44. As discussed above, Folck caused SmarTalk's books and records to be falsified when, as of the third quarter of 1997, he directed operating expenses to be reclassified as restructuring reserve expenses, but SmarTalk had not yet established a restructuring reserve, and then he directed those expenses to be capitalized by adding them to prepaid expenses, thereby creating a fictitious asset. As discussed above, Folck further caused SmarTalk's books and records to be falsified by approving charging against the $25 million restructuring reserve at year-end 1997 the previously capitalized third quarter 1997 operating expenses and additional fourth quarter 1997 operating expenses, when the restructuring reserve had been established for costs purportedly to be incurred in 1998. As a result of this conduct, Folck also violated Exchange Act Rule 13b2-1.
IV.
In view of the foregoing, the Commission deems it appropriate to impose the sanctions agreed to in Respondent Folck's Offer.
ACCORDINGLY, IT IS HEREBY ORDERED:
A. Pursuant to Section 8A of the Securities Act and Section 21C of the Exchange Act, Respondent Folck shall cease and desist from committing or causing any violations, and any future violations, of Section 17(a)(2) and (3) of the Securities Act and Rule 13b2-1 under the Exchange Act and Respondent Folck shall further cease and desist from causing any violations, and any future violations, of Sections 13(a), 13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act and Rules 13a-1, 13a-13 and 12b-20 thereunder.
B. IT IS FURTHERED ORDERED that Respondent shall, within 10 days of the entry of this Order, pay disgorgement and prejudgment interest in the total amount of $22,844.68 to the United States Treasury. Such payment shall be: (A) made by United States postal money order, certified check, bank cashier's check or bank money order; (B) made payable to the Securities and Exchange Commission; (C) hand-delivered or mailed to the Office of Financial Management, Securities and Exchange Commission, Operations Center, 6432 General Green Way, Alexandria, Stop 0-3, VA 22312; and (D) submitted under cover letter that identifies Glen Andrew Folck as a Respondent in these proceedings, the file number of these proceedings, a copy of which cover letter and money order or check shall be sent to Antonia Chion, Division of Enforcement, Securities and Exchange Commission, 450 5th Street N.W., Washington, D.C. 20549-0801.
By the Commission.
Jonathan G. Katz
Secretary
Endnotes
1 The findings herein are made pursuant to Respondent's Offer and are not binding on any other person or entity in this or any other proceeding.
2 The registration statement on Form S-8 filed in September 1997 expressly incorporated all subsequently filed periodic reports.
3 A small portion of this component ($800,000) also related to SmarTalk's intention to terminate a contract with Polaroid in 1998, which was to produce holographic images on prepaid cards. The analysis of why the Polaroid contract termination fees were improper restructuring costs is similar to the analysis of the carrier contract termination costs.