Robert W. Armstrong, III Carol Fox Foelak, Administrative Law Judge

SECURITIES EXCHANGE ACT OF 1934
Release No. 47416 / February 27, 2003

ACCOUNTING AND AUDITING ENFORCEMENT
Release No. 1724 / February 27, 2003

ADMINISTRATIVE PROCEEDING
File No. 3-9793

In the Matter of J.P. Bolduc, Brian J. Smith, C.P.A., Richard N. Sukenik, C.P.A., Philip J. Ryan III, Constantine L. Hampers, A. Miles Nogelo, and Robert W. Armstrong III, C.P.A., Respondents.

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ORDER MAKING FINDINGS AND IMPOSING CEASE-AND-DESIST ORDER AGAINST J. P. BOLDUC

I.

The Securities and Exchange Commission ("Commission") deems it appropriate to accept the Offer of Settlement ("Offer") submitted by J.P. Bolduc ("Bolduc" or "Respondent") pursuant to Rule 240(a) of the Rules of Practice of the Commission, 17 C.F.R. § 201.240(a), for the purpose of settlement of this public administrative and cease-and-desist proceeding instituted by the Commission against him on December 22, 1998, pursuant to Section 21C of the Securities Exchange Act of 1934 ("Exchange Act").

II.

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 any of the findings contained herein, except as to the jurisdiction of the Commission over him and over the subject matter of these proceedings, which is admitted, Bolduc consents to the entry by the Commission of this Order.

III.

On the basis of this Order and the Respondent's Offer, the Commission finds that:¹

BACKGROUND

1. Respondent Bolduc was the president and chief operating officer of W.R. Grace & Co. ("Grace") from 1990 through 1992 and was the president and chief executive officer of Grace from 1993 until his resignation in March 1995. Bolduc was also a member of Grace's board of directors during at least 1991 through 1995. During this period, Bolduc sold none of the substantial number of Grace shares that he owned.

2. Grace was a New York corporation with its principal executive offices in Boca Raton, Florida during at least 1991 through 1996. Grace's primary businesses were packaging, specialty chemicals and health care services. During the relevant time period, Grace had a December 31 fiscal year end.

3. Between at least 1991 and 1995, National Medical Care Inc. ("NMC") was Grace's main health care subsidiary, with its headquarters in Waltham, Massachusetts. NMC provided kidney dialysis and home health services and manufactured specialized medical products. During the relevant period, NMC comprised the bulk of Grace's Health Care Group, which group was, until the first quarter of 1995, one of Grace's core businesses and was reported as a segment in Grace's consolidated financial statements. The Health Care Group contributed a significant portion of the consolidated pretax earnings of Grace during the majority of the period 1991-1995.

EXCESS RESERVES AT NMC

4. As described in greater detail below, during the fiscal years 1991 through 1995 ("relevant period"), both while Bolduc was an officer and continuing after his resignation, Grace engaged in fraudulent conduct by deferring income earned by NMC primarily to smooth the earnings of the Health Care Group. Grace deferred reporting income by increasing or establishing "excess reserves" that were not in conformity with generally accepted accounting principles ("GAAP"). Grace used the reserves to manipulate the reported quarterly and annual earnings of the Health Care Group and Grace.²

5. Bolduc, first as the president and chief operating officer of Grace and later as the president and chief executive officer of Grace and a member of Grace's board of directors, through his actions or omissions, was a cause of (i) this fraudulent conduct, which resulted in Grace's filing false and misleading periodic reports with the Commission and making false and misleading statements in press releases and at analyst teleconferences; (ii) Grace's failure to make and keep books and records which accurately reflected its transactions; and (iii) Grace's failure to maintain a system of internal accounting controls sufficient to provide assurances that transactions were recorded as necessary to permit the proper preparation of financial statements in conformity with GAAP.

Creation of the Excess Reserves

6. Beginning in 1990 or 1991, NMC experienced a significant and unanticipated increase in revenues and earnings, in excess of Grace's internal forecasts, due to changes in Medicare reimbursement procedures. During the first half of 1991, members of NMC senior management deferred some of the unanticipated income by increasing or establishing reserves (an expense), often referred to as "excess reserves." Thus, rather than report its actual earnings, NMC, at the direction of at least one of Grace's senior officers, and with the knowledge of Bolduc and other senior officers of Grace, underreported its earnings for 1991 and 1992.

7. At some point in mid-1991, as the reserves reached a level of between $10 and $20 million, certain members of NMC senior management realized that the reserves were going to be significant by year end and contacted Grace's chief financial officer to determine how Grace wanted NMC to account for the excess reserves. Grace's chief financial officer, with the knowledge and approval of Bolduc, directed that NMC keep the excess reserves and report Health Care Group earnings consistent with Grace's targeted levels (specifically a 24% growth rate for 1991) because Grace would not be credited by the investing public for growth rates beyond the targeted levels. Bolduc, after discussions with and advice from Grace's financial officers, approved the direction to keep the excess reserves.

8. The final reported 1991 growth rate for the Health Care Group was 24%. Grace directed NMC to report a 27-28% growth rate for the Health Care Group's net income for 1992. The final reported 1992 growth rate was 27.5%.

Use of the Excess Reserves

9. During the relevant period, the excess reserves were primarily used for profit planning purposes, i.e., to bring the Health Care Group's quarterly reported results of operations in line with Grace's targets for the Health Care Group. In general, from 1991 through the first quarter of 1995, the reported Health Care Group growth rates remained relatively steady - from about 23% to 37% -- whereas the actual growth rates fluctuated from about an 8% decline in growth to a 61% increase.

10. However, at various times, Grace also directed NMC to release some of the excess reserves to increase Grace's earnings per share. For example, Grace requested NMC to report an additional $1.5 million in income for the fourth quarter of 1994 because Grace needed the additional income for its consolidated results of operations.

11. During the relevant period, Grace also discussed the creation and use of the excess reserves with Price Waterhouse LLP ("PW"), Grace's independent auditors (PW merged with Coopers & Lybrand L.L.P. on July 1, 1998 to form PricewaterhouseCoopers LLP). Also during the relevant time period, PW performed audits of Grace's consolidated financial statements. Although PW proposed adjustments to eliminate the excess reserves, Grace management declined to make the adjustments. Nonetheless, PW issued audit reports containing unqualified opinions on Grace's consolidated financial statements.³

12. Grace's chief financial officer, with the knowledge and approval of other members of Grace's management, including Bolduc, directed NMC to use the excess reserves to control Grace's consolidated earnings. Bolduc knew or should have known that the use of the excess reserves to control Grace's consolidated earnings was improper.

FALSE AND MISLEADING FILINGS AND STATEMENTS

13. During the relevant period, Grace issued a press release and conducted an analyst teleconference at or about the same time it filed each of its Forms 10-Q and 10-K. Throughout the relevant period, the Health Care Group and Grace income amounts discussed in the teleconferences and reported in the press releases and filings included the effects of the excess reserves. Therefore, every filing, press release and teleconference was false and misleading because it included manipulated earnings amounts for the Health Care Group and Grace. Moreover, the earnings figures were materially misstated in one or more of Grace's Forms 10-K, Forms 10-Q, press releases and teleconferences.

14. Another aspect of the false and misleading nature of Grace's filings and press releases resulted from the failure to disclose the excess reserves. During the relevant period, the Management Discussion & Analysis section of Forms 10-Q and 10-K and the press releases included discussions of the results of operations for the Health Care Group and Grace. These discussions were misleading because they did not provide complete and accurate disclosure of all factors relevant to an assessment of the Health Care Group's and Grace's results of operations.

15. A third facet of the false and misleading nature of Grace's filings and press releases related to the distortion of the Health Care Group's earnings trends during the relevant period. The Health Care Group growth rates reported by Grace from 1991 through the first quarter of 1995 fluctuated less than the actual growth rates. In addition, over the 1991 through 1993 period, Grace reported steadily increasing growth in annual pretax earnings for the Health Care Group. However, the actual trend was a steady decline in the growth rate for the Health Care Group.

16. Bolduc knew, or should have known, that Grace's filings, press releases and analyst teleconferences during the relevant time period contained the misstatements and omissions described above. Moreover, as the president and chief operating officer or chief executive officer of Grace, Bolduc, through his actions or omissions, was a cause of Grace's failure to make and keep books and records which accurately reflected its transactions, and its failure to maintain a system of internal accounting controls sufficient to provide reasonable assurances that transactions were recorded as necessary to permit the preparation of financial statements in conformity with GAAP.

VIOLATIONS

17. Based upon the aforesaid conduct, Respondent Bolduc was a cause of Grace's violations of Sections 10(b), 13(a), 13(b)(2) and 13(b)(5) of the Exchange Act and Rules 10b-5, 12b-20, 13a-1, 13a-13 and 13b2-1 thereunder.

IV.

>Respondent Bolduc has submitted an Offer of Settlement in which, without admitting or denying the findings herein, he consents to the Commission's entry of this Order, which: (1) makes findings, as set forth above; and (2) orders Bolduc to cease and desist from committing or causing any violations, or future violations, of certain provisions of the federal securities laws, as set forth below. As set forth in Bolduc's Offer of Settlement, Bolduc undertakes to cooperate with the Commission staff in preparing for and presenting any civil litigation or administrative proceedings concerning any transaction that is the subject of the Order. 

V.

On the basis of the foregoing, the Commission deems in appropriate to accept Respondent's Offer.

Accordingly, IT IS ORDERED that:

Respondent Bolduc cease and desist from committing or causing any violation and any future violation of Sections 10(b) and 13(b)(5) of the Exchange Act and Rules 10b-5 and 13b2-1 thereunder, and from causing any violation and any future violation of Sections 13(a) and 13(b)(2) of the Exchange Act and Rules 12b-20, 13a-1, and 13a-13 thereunder.

By the Commission.

Jonathan G. Katz
Secretary

Footnotes

¹ The findings herein are made pursuant to Respondent Bolduc's Offer of Settlement and are not binding on any other person or entity in this or any other proceeding.

² On June 30, 1999, Grace consented to the entry of an Order by the Commission (the "Grace Order") requiring Grace to cease-and-desist from committing or causing any violation and any future violation of Sections 10(b), 13(a) and 13(b) of the Exchange Act and Rules 10b-5, 12b-20, 13a-1 and 13a-13 thereunder. See In the Matter of W. R. Grace & Co., Securities Exchange Act Release No. 41578; Accounting and Auditing Enforcement Release No. 1140 (June 30, 1999). Pursuant to the Grace Order, Grace also undertook to establish a fund of $1 million for program(s) to further awareness and education relating to financial statements and generally accepted accounting principles.

³ On June 30, 1999, the Commission, on consent, ordered two PW partners who were involved in the audits of Grace's consolidated financial statements during the relevant period to cease and desist from causing any violation and any future violation of Sections 13(a) and 13(b) of the Exchange Act and Rules 12b-20, 13a-1 and 13a-13 thereunder. See In the Matter of Eugene Gaughan, C.P.A., Securities Exchange Act Release No. 41580; Accounting and Auditing Enforcement Release No. 1141 (June 30, 1999); In the Matter of Thomas Scanlon, C.P.A., Securities Exchange Act Release No. 41581; Accounting and Auditing Enforcement Release No. 1142 (June 30, 1999).