Gary H. Klein, CPA
SECURITIES ACT OF 1933
Release No. 8405 / March 29, 2004
SECURITIES EXCHANGE ACT OF 1934
Release No. 49494 / March 29, 2004
ACCOUNTING AND AUDITING ENFORCEMENT
Release No. 1980 / March 29, 2004
ADMINISTRATIVE PROCEEDING File No. 3-11444
In the Matter of GARY H. KLEIN, CPA, Respondent. |
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ORDER INSTITUTING ADMINISTRATIVE PROCEEDINGS PURSUANT TO RULE 102(e) OF THE COMMISSION'S RULES OF PRACTICE, MAKING FINDINGS, AND IMPOSING REMEDIAL SANCTIONS |
I.
The Securities and Exchange Commission ("Commission") deems it appropriate and in the public interest that public administrative proceedings be, and hereby are, instituted against Gary H. Klein ("Respondent" or "Klein") pursuant to Rule 102(e)(3)(i) the Commission's Rules of Practice.1
II.
In anticipation of the institution of these administrative proceedings, Klein 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, and the findings contained in Section III.C. below, which are admitted, Klein consents to the entry of this Order Instituting Administrative Proceedings Pursuant to Rule 102(e) of the Commission's Rules of Practice, Making Findings, and Imposing Remedial Sanctions ("Order") and to the entry of the findings and imposition of the remedial sanctions set forth below.
III.
On the basis of this Order and Respondent's Offer, the Commission finds that:
A. Klein, age 49, was a certified public accountant licensed to practice in the State of New York from November 23, 1987 to May 25, 1990, when he voluntarily allowed his license to lapse. Klein served as Candie's, Inc.'s ("Candie's") Vice President of Finance and Principal Accounting Officer during fiscal year 1998 and part of fiscal year 1999, and as Vice President of Investor Relations until Candie's terminated his employment in October 1998.
B. Candie's was, at all relevant times, a Delaware corporation with its principal executive offices in Purchase, New York. Candie's is currently headquartered in Valhalla, New York. Candie's primary business is designing, marketing, and distributing moderately priced women's shoes, handbags, and other accessories. At all relevant times, Candie's common stock was registered with the Commission pursuant to Section 12(g) of the Securities Exchange Act of 1934 ("Exchange Act"), and traded on the Nasdaq National Market. Candie's reports quarterly and annual results based on a fiscal year end of January 31.
C. On March 16, 2004, a final judgment was entered against Klein, permanently enjoining him from future violations of Section 17(a) of the Securities Act of 1933 ("Securities Act"), and Sections 10(b) and 13(b)(5) of the Exchange Act and Rules 10b-5 and 13b2-1 thereunder, and aiding and abetting violations of Sections 13(a), 13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act and Rules 12b-20, 13a-1 and 13a-13 thereunder, in the civil action entitled Securities and Exchange Commission v. Lawrence O'Shaughnessy, et al., Civil Action No. 03 CV 3022 (RMB), in the United States District Court for the Southern District of New York. Klein was ordered to pay $39,375 in disgorgement of ill-gotten gains, and $14,472.32 in prejudgment interest, and a $75,000 civil money penalty.
D. The Commission's complaint alleged, among other things, the following:
(1) Candie's senior management, including Klein, employed various fraudulent accounting practices designed to improve Candie's publicly reported financial condition and results of operations. As a result of these fraudulent accounting practices, Candie's falsely and materially inflated its reported financial results for the fiscal third quarter ended October 31, 1997, the fiscal year ended January 31, 1998, and for the quarters ended April 30, 1998 and July 31, 1998, as well as in corresponding press releases announcing results for those periods.
(2) Klein negotiated an agreement with a barter company in August 1997, and signed the agreement on behalf of Candie's. Klein then arranged for Candie's to record a journal entry to recognize $1.3 million in revenue during the third quarter of fiscal year 1998 reflecting the purported sale of 133,000 pairs of shoes pursuant to the August 1997 agreement. Recognizing this revenue violated Generally Accepted Accounting Principles ("GAAP") and Candie's own revenue recognition policy because Candie's did not ship the 133,000 pairs of shoes to the barter company until July 1999. Klein knew or was reckless in not knowing that Candie's did not ship the 133,000 pairs of shoes to the barter company during the third quarter of fiscal year 1998. Candie's also improperly recognized $474,760 in revenue from the August 1997 barter agreement during the first quarter of fiscal year 1999, and improperly recognized $209,160 of revenue from the August 1997 barter agreement during the second quarter of fiscal year 1999, because Candie's recognized this revenue prior to shipping the shoes to the barter company.
(3) On October 31, 1997, Klein improperly recorded a $1.6 million sales credit from Candie's buying agent on Candie's books and records. Klein recorded the sales credit knowing that it reduced Candie's expenses by $1.6 million and correspondingly increased pretax income by the same amount for the third quarter of fiscal year 1998.
(4) Candie's former Chief Operating Officer directed employees to engage in a practice known as "bill and hold" that allowed Candie's prematurely to record revenue from various purchase orders calling for future delivery of shoes, by recording the orders as final sales prior to shipping the shoes to customers. As a result of the bill and hold practice (and other irregular shipping practices), Candie's prematurely recognized approximately $1.8 million in revenue on its books and records during the fourth quarter and fiscal year 1998. For its fiscal first quarter ended April 30, 1998, Candie's overstated the revenue and income figure by prematurely recognizing $991,573 of revenue through the bill and hold practice. Candie's prematurely recorded revenue of $1,698,000 through the bill and hold practice in Candie's fiscal second quarter ended July 31, 1998. Klein was aware that Candie's was engaged in the bill and hold practice. Employees questioned Klein about the bill and hold practice and distributed to Klein a schedule listing bill and hold invoices, but Klein failed to investigate the practice, stop the practice, or otherwise prevent Candie's from prematurely recognizing revenue from this practice.
(5) During the audit of Candie's January 31, 1998 financial statements, Klein represented to the auditors that the financial statements had been prepared in conformity with GAAP when, in fact, they had not been.
(6) Klein created false and misleading books and records by, among other things, permitting Candie's to recognize revenue prematurely through the bill and hold practice and by recognizing revenue from the sales transaction with the barter company.
(7) Candie's failed to file with the Commission, in accordance with the Commission's rules and regulations, such annual and quarterly reports as the Commission has prescribed, and Candie's failed to include, in addition to the information expressly required to be stated in such reports, such further material information as was necessary to make the statements made therein, not misleading. Klein substantially assisted Candie's violations by, among other things, permitting Candie's to record revenue from the August 1997 sales transaction with the barter company and the bill and hold practice.
(8) Klein signed Candie's Form 10-Q for the fiscal third quarter ended October 31, 1997, Form 10-K for the fiscal year ended January 31, 1998, Form 10-Q for the fiscal first quarter ended April 30, 1998, and Form 10-Q for the fiscal second quarter ended July 31, 1998 on behalf of Candie's. Klein also signed a Form S-4 dated May 4, 1998 to register the issuance of 2.9 million shares of Candie's stock, which contained Candie's fiscal year 1998 financial statements and incorporated by reference Candie's October 31, 1997 Form 10-Q. Klein improperly inflated Candie's reported financial results in press releases, Candie's Form S-4, Candie's Form 10-Q for the third quarter 1998, Candie's Form 10-K for fiscal year 1998, and Forms 10-Q for the first and second quarters of fiscal year 1999 by enabling Candie's to recognize improperly revenue and income from the bill and hold practice and the August 1997 sales transactions with the barter company. The Form S-4, Form 10-K and Forms 10-Q identified above, and the accompanying press releases announcing Candie's earnings, contained material misstatements of revenue and income. Klein knew, or was reckless in not knowing, that Candie's press releases, Form S-4, and periodic filings were materially false and misleading.
IV.
In view of the foregoing, the Commission deems it appropriate and in the public interest to impose the sanction agreed to in Respondent Klein's Offer.
Accordingly, it is hereby ORDERED, effective immediately, that:
Klein is suspended from appearing or practicing before the Commission as an accountant.
By the Commission.
Secretary
Endnotes
The Commission, with due regard to the public interest and without preliminary hearing, may, by order, . . . suspend from appearing or practicing before it any . . . accountant . . . who has been by name . . . permanently enjoined by any court of competent jurisdiction, by reason of his or her misconduct in an action brought by the Commission, from violating or aiding and abetting the violation of any provision of the Federal securities laws or of the rules and regulations thereunder.