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UNITED STATES DISTRICT COURT
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United States Securities and Exchange Commission, Plaintiff, v. SIDNEY V. CORDER, RANDAL J. SAGE, Defendants. |
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CIVIL ACTION |
Plaintiff United States Securities and Exchange Commission ("Commission") alleges as follows:
1. During the period from at least October 1998 through at least December 1999, Defendants Sidney V. Corder ("Corder"), Randal J. Sage ("Sage"), and Brian J. Yates ("Yates"), (collectively, "Defendants"), all former officers of Analytical Surveys, Inc. ("ASI"), engaged in a scheme to defraud investors by fraudulently inflating ASI's revenue and earnings in press releases and periodic reports filed with the Commission.
2. Corder and Yates, directly and indirectly, have engaged and, unless enjoined, will continue to engage in acts, practices, and courses of business that violate Sections 10(b) and 13(b)(5) of the Securities Exchange Act of 1934 ("Exchange Act") [15 U.S.C. §§ 78j(b) and 78m(b)(5)] and Rules 10b-5, 13b2-1, and 13b2-2 [17 C.F.R. §§ 240.10b-5, 240.13b2-1, and 240.13b2-2] thereunder, and, as control persons, Section 13(a) of the Exchange Act [15 U.S.C. §§ 78m(a)] and Rules 12b-20, 13a-1, and 13a-13 [17 C.F.R. §§ 240.12b-20, 240.13a-1, and 240.13a-13] thereunder.
3. Sage, directly and indirectly, has engaged and, unless enjoined, will continue to engage in acts, practices, and courses of business that violate Sections 10(b) and 13(b)(5) of the Exchange Act [15 U.S.C. §§ 78j(b) and 78m(b)(5)] and Rules 10b-5, 13b2-1, and 13b2-2 [17 C.F.R. §§ 240.10b-5, 240.13b2-1, and 240.13b2-2] thereunder, and, has aided and abetted, and unless enjoined, will continue to aid and abet acts, practices and courses of business which constitute violations of Section 13(a) of the Exchange Act [15 U.S.C. §§ 78m(a)] and Rules 12b-20, 13a-1, and 13a-13 [17 C.F.R. §§ 240.12b-20, 240.13a-1, and 240.13a-13] thereunder.
4. The Commission brings this action to enjoin such acts, practices, and courses of business pursuant to Sections 20(e), 21(d), and 21(e) of the Exchange Act. [15 U.S.C. §§ 78t(a), 78u(d), and 78u(e)].
5. The Court has jurisdiction over this action pursuant to Sections 21(e) and 27 of the Exchange Act [15 U.S.C. §§ 78u(e), 78aa] and 28 U.S.C. § 1331. Venue is proper in this Court pursuant to Section 27 of the Exchange Act [15 U.S.C. § 78aa].
6. The acts, practices and courses of business constituting the violations alleged herein have occurred within the jurisdiction of the United States District Court for the Southern District of Indiana and elsewhere.
7. Defendants, directly and indirectly, made use of the means and instrumentalities of interstate commerce and of the mails in connection with the acts, practices, and courses of business alleged herein.
8. Defendants will, unless enjoined, continue to engage in the acts, practices and courses of business set forth in this complaint, and acts, practices and courses of business of similar purport and object.
9. Pursuant to authority conferred upon the Commission by Sections 10(b), 13(a) and 13(b)(5) of the Exchange Act [15 U.S.C. §§ 78j(b), 78m(a), and 78m(b)(5)], the Commission has promulgated Rules 10b-5, 12b-20, 13a-1, 13a-13, 13b2-1, and 13b2-2 [17 C.F.R. §§ 240.10b-5, 240.12b-20, 240.13a-1, 240.13a-13, 240.13b2-1, and 240.13b2-2], which were in effect at all times relevant and at the present time.
10. On information and belief, Corder, age 61, resides in Zionsville, Indiana. Corder became President of ASI in 1990. From March 1997 to January 2000, Corder was Chairman, President and Chief Executive Officer ("CEO") of ASI. On or about January 20, 2000, ASI's board sought and accepted Corder's resignation.
11. Sage, age 46, resides in Carmel, Indiana. From July 1997 through October 1999, Sage was Chief Operations Officer ("COO") of ASI. In October 1999, Sage became ASI's Director of International Affairs. On approximately April 14, 2000, ASI terminated Sage's employment.
12. Yates, age 39, resides in Colorado Springs, Colorado. From at least 1992 to March 2000, Yates was the Controller of ASI. In or about February 2000, Yates tendered his resignation and ceased being an ASI employee on March 1, 2000. Yates is currently employed as the Controller of another public company that files periodic reports with the Commission.
13. ASI is a Colorado corporation and at all times relevant was headquartered in Indianapolis, Indiana. ASI is currently headquartered in San Antonio, Texas. ASI makes high-resolution computerized maps showing multiple layers of geographic information.
14. During the period from October 1, 1998 through December 31, 1999, ASI had five facilities located in Colorado, Indiana, Wisconsin, North Carolina and Texas.
15. During the period October 1998 through May 2002, ASI stock was registered pursuant to Section 12(g) of the Exchange Act and traded on the Nasdaq National Market System. On June 6, 2002, ASI stock began trading on the Nasdaq SmallCap Market.
16. Pursuant to Section 13(a) of the Exchange Act, and the rules and regulations thereunder, ASI filed periodic and other informational reports, including Forms 10-K and Forms 10-Q, with the Commission. These periodic reports contained ASI's consolidated financial statements.
17. ASI's 1999 fiscal year ran from October 1, 1998 through September 30, 1999.
18. At all times relevant, ASI provided computerized map systems to customers under long term contracts. When ASI won the bidding on a contract, its bid would become the contract price. As part of formulating its bid, ASI would estimate the production costs, or estimated total direct costs, that it expected to incur to complete the contract.
19. During its 1999 fiscal year, ASI recognized revenue on its contracts using the percentage of completion method on a cost-to-cost basis. Under this method, which is appropriate under Generally Accepted Accounting Principles ("GAAP") and described in American Institute of Certified Public Accountants Statement of Position ("SOP") 81-1, revenue should be recognized as work on a contract progresses.
20. Under this method of accounting, a company may recognize revenue by calculating the direct costs incurred to date as a percentage of the estimated total direct costs, and multiplying this figure by the contract price. Under this method, revenue is recognized according to the following formula: (Direct costs incurred to date/Estimated total direct costs) x Contract price = Recognizable Revenue.
21. Under GAAP and SOP 81-1, when a business uses this method of accounting, contract costs must be identified, estimated, and accumulated with a reasonable degree of accuracy in determining income earned. In addition, all direct costs should be included in contract costs. In estimating total contract costs, the quantities and prices of all significant elements of cost should be identified. Moreover, cost estimates must be based on current information and should be reviewed periodically and revised as appropriate to reflect new information.
22. ASI's contracts typically took several months to complete, and they often involved systems whose design evolved during production. Due to these and other factors, including cost overruns, ASI's estimate of total direct costs could change over the life of a contract. Under GAAP, ASI was required to revise its calculations of revenue to reflect any cost estimate changes, which could effect revenue both positively and negatively.
23. During the relevant time period, Corder set aggressive revenue goals that were driven, in part, by analysts' expectations. Once analysts predicted ASI's earnings, Corder strived to exceed those expectations and set goals for each of ASI's five facilities accordingly.
24. Corder pressured his subordinates to achieve these goals. When he became dissatisfied with a subordinate's performance, Corder often shouted, threw documents or threatened jobs. Corder conducted weekly or bimonthly conference calls involving managers and other employees from the five ASI facilities, during which he often berated the managers when they told him that his budget expectations would not be met. Sage and Yates usually participated in these conference calls. At least one ASI manager who told Corder that he did not believe that he could meet Corder's revenue expectations was removed from his position.
25. Corder, Sage and Yates were eligible to receive a significant amount of their compensation in the form of a bonus based on ASI's year-to-year growth in net profits and return on equity. Corder's bonus for the 1998 fiscal year was $656,040, more than double his salary during this period. Sage and Yates received bonuses of approximately $200,000 and $95,000 respectively for the 1998 fiscal year. Their 1998 bonuses were roughly equal to their salaries. ASI also compensated employees by granting them stock options, with the value of the options dependent on ASI's stock price.
26. From at least October 1, 1998 through at least December 31, 1999, Defendants caused ASI to recognize excessive revenue on long-term contracts through the use of several improper accounting methods that did not comply with GAAP.
27. Under GAAP, if the total direct costs estimate increased after ASI had already begun work and had begun recognizing revenue on a contract, then ASI was required to adjust its revenue calculation downward. When an increase in a costs estimate necessitated a decrease in revenue already recognized, ASI managers termed the event a "revenue hit."
28. On several occasions, ASI simply failed to adjust direct costs estimates upward when an increase in a costs estimate necessitated a decrease in revenue already recognized, in order to avoid taking the revenue hit. In order to avoid reducing revenue on some such contracts, ASI relied on unfounded assumptions that it could reduce future direct costs by, among other things, using a low wage foreign subcontractor and/or obtaining concessions from customers to avoid increasing cost estimates.
29. ASI's failure to adjust total direct costs estimates upward under the circumstances described in paragraphs 27 and 28 above created problems when ASI reached the point where it had expended all of the costs it estimated would be required to complete a contract, i.e., the direct costs incurred were equal to the total estimated costs, but work on the contract remained. At that point, ASI had recognized all of the revenue available on the contract but the project was not finished.
30. Such contracts were termed "out-of-revenue" by ASI managers. Again, GAAP required that ASI increase the total estimated costs to complete the "out-of-revenue" contract and reduce the amount of revenue recognized accordingly.
31. On some "out-of-revenue" contracts, ASI improperly charged future direct costs associated with that contract to an indirect, or overhead, account. This technique was referred to by ASI managers as "finishing contracts on indirect."
32. By finishing contracts on indirect, ASI was able to avoid reducing the revenue earned on the contract and improperly recognize all of the revenue associated with the contract, even though work still remained to be done.
33. For some "out-of revenue" contracts, ASI improperly charged future direct costs to a second contract ("cost-shifting"). By allocating future direct costs to a second contract, ASI improperly recognized all of the revenue associated with the first contract, even though work still remained.
34. In addition, by engaging in cost-shifting, ASI improperly recognized additional revenue on the second contract when the work performed did not reflect progress on the second contract but related to the first contract.
35. In other instances, ASI artificially lowered the total estimated cost to complete a contract after work had begun. This technique allowed ASI to recognize revenue prematurely on that contract, providing an instant revenue boost.
36. Even though the estimated costs to complete several of its contracts increased, ASI avoided reducing the revenue that was budgeted for a particular fiscal quarter through the use of these improper accounting practices.
37. As a result of these improper accounting methods, ASI materially overstated its earnings and revenue in periodic reports filed with the Commission and in publicly disseminated press releases for its 1999 fiscal year.
38. During the relevant period, ASI had no internal audit function. ASI's accounting staff did not regularly review charges to overhead or fluctuations in cost estimates for accuracy. Although each of ASI's facilities was supposed to review its direct costs estimates monthly, at least one of ASI's facilities stopped conducting reviews in or about 1998. Employees of ASI frequently changed estimates of total direct contract costs with no review by others and no written record of the reason for the change.
39. During the period from at least October 1, 1998 through at least December 31, 1999, Sage directed ASI employees not to increase total costs estimates. He also directed them to finish contracts on indirect, engage in cost-shifting, and artificially lower cost estimates. Sage knew or was reckless in not knowing that his actions would cause ASI to materially overstate its earnings and revenue in its quarterly and annual reports for the 1999 fiscal year.
40. During the period from at least October 1, 1998 through at least December 31, 1999, Corder knew or was reckless in not knowing that Sage and other ASI employees were engaging in the fraudulent practices described above. In addition, in December 1999, Corder personally directed ASI employees to finish contracts on indirect and to rely on unfounded assumptions that ASI could reduce future direct costs by using a low wage foreign subcontractor and/or obtaining concessions from customers as a way to avoid reducing revenue.
41. During the period from at least October 1, 1998 through at least December 31, 1999, Yates approved finishing certain contracts on indirect. Yates also knew or was reckless in not knowing that Sage and other ASI employees were engaging in the other fraudulent practices described above. Yates approved or acquiesced in Corder's decision to direct ASI employees to finish contracts on indirect as a way to avoid taking a revenue hit in December 1999.
42. By October 1998, Sage had caused the Indiana facility's revenue to be inflated by directing the General Manager of the Indiana facility to: (i) artificially lower cost estimates, or hold them artificially low to boost or preserve revenue; (ii) have line workers finish contracts on indirect and employ cost-shifting to enhance revenue; and (iii) set high initial cost estimates on new contracts to create a cushion for later cost-shifting from older, "out-of-revenue" contracts if needed.
43. Throughout the 1999 fiscal year, ASI's Indiana facility failed to increase total costs estimates and finished contracts on indirect, performed cost-shifting, and artificially lowered costs estimates at Sage's direction and with his knowledge.
44. Throughout the 1999 fiscal year, ASI's Colorado facility finished contracts on indirect with Yates' approval.
45. Because ASI typically could bill only at certain production milestones, ASI used the term "unbilled revenue" to refer to revenue it had recognized on work it had completed, but for which it had not yet invoiced the customer.
46. Throughout the 1999 fiscal year, Defendants received and reviewed materials prepared for the conference calls conducted by Corder, which showed "unbilled revenue" for each of ASI's five facilities. During this time period, Yates also prepared and distributed to Corder, Sage, and others a separate monthly report showing "unbilled revenue."
47. Defendants knew from these monthly reports and conference call materials that Indiana's unbilled revenue almost doubled from April 1998 through October 1999, increasing from $12.2 million to $22.1 million. Defendants also knew that North Carolina's unbilled revenue figure had more than doubled from $3.3 million to $7.8 million during the 1999 calendar year. In addition, Defendants knew that Colorado's unbilled revenue figure increased from $8.5 million to $9.8 million during the 1999 calendar year.
48. Defendants knew, or recklessly disregarded, that excessive or upward-trending unbilled revenue could be the result of artificially inflated revenue. Defendants took no action in response to these "red flags" of fraudulent accounting practices.
49. During the period October to December 1998, the first quarter of the 1999 fiscal year, the General Manager of ASI's North Carolina facility told Sage that the only way North Carolina could meet its revenue budget for that fiscal quarter was to artificially inflate revenue. Sage told the North Carolina General Manager to do what he had to do to meet the budget. Sage also told the General Manager that he would undo the fabrication in the next quarter. However, the fabrication was not undone.
50. In December 1998, the North Carolina General Manager told Sage he wanted to quit or be reassigned to a sales position because he was uncomfortable with revenue recognition abuses. During this conversation, Sage told the General Manager that if he worried about all the problems at ASI, he would have been dead six months before. Sage also told the North Carolina General Manager that revenue on a large contract in ASI's Indiana facility was inflated by $5 million, that ASI's Texas facility had inflated revenue totaling $500,000 and that ASI's Colorado facility probably also had inflated revenue, although he did not know the magnitude of that problem.
51. In or about December 1998, the General Manager of the North Carolina facility told Corder that North Carolina was having difficulty meeting Corder's business plan, that North Carolina was being overly aggressive on projects, and that projects were being pushed past where they ought to be in terms of their percentage of completion in order to meet the revenue budget. Corder cut the conversation short and told the General Manager to manage the problem on his own.
52. In or about March 1999, Indiana managers provided Sage with spreadsheets demonstrating that cost estimates were understated by as much as $8 million. An Indiana manager updated the spreadsheets monthly and sent them to Sage over the next few months. Over these months, Sage refused to allow the increases to cost estimates that the managers repeatedly requested.
53. In or about March 1999, the head of ASI's Utilities Division, which comprised the Indiana, Texas and Wisconsin facilities, told Corder that the Indiana facility might have a "financial" problem although he was unsure of the magnitude. Corder did not inquire further about the "financial" problem.
54. In or about March 1999, the North Carolina General Manager again told Corder that he was being overly aggressive in determining North Carolina's progress toward completing projects in order to meet the revenue budget. Again, Corder cut the conversation short.
55. In late spring or early summer of 1999, the head of ASI's Utilities Division told Corder that the Indiana facility had a problem with its costs estimates, that some contracts were over earned and that he did not see any way that Indiana would meet its budget. Corder took no action to further investigate the problem.
56. In or about June 1999, an Indiana manager told Corder and Sage that he wanted to resign because he felt that ASI was recognizing revenue improperly. In response, Corder told him that ASI would fix the situation, although Corder again did not ask the manager for any details.
57. In or about August 1999, in response to continued pressure from the Indiana managers to resolve what they believed was a $6 to $8 million cost estimate understatement, Defendants agreed to raise cost estimates on certain Indiana contracts and take a corresponding revenue hit of approximately $1.7 million. This $1.7 million revenue hit was offset by a $1.7 million reduction of the funds in ASI's bonus pool. The Indiana managers believed that the revenue hit should have been much greater and communicated this to Sage and Yates, who took no action.
58. In August 1999, a Colorado manager told Corder that he did not agree with the preliminary budget figures provided by the Colorado facility for the 2000 fiscal year. Corder told the manager that he did not want to hear about it, and directed another ASI employee to get the Colorado managers together to resolve their issues.
59. In September 1999, two Colorado managers told Yates and Sage that Colorado would not meet its budget for the fourth quarter of the 1999 fiscal year. The Colorado managers subsequently told Corder in a telephone conversation that Colorado would not meet the fourth quarter budget. They attempted to tell Corder about financial problems at the Colorado facility but Corder hung up on them. Corder later called back, told the Colorado managers that he had worked through some numbers about what the revenue would be, came to a conclusion that Colorado had too many employees, and demanded that he be immediately provided with a list of people to be laid off. Corder did not further investigate the financial condition of the Colorado facility.
60. In or about September 1999, the North Carolina General Manager informed Yates that he had artificially lowered cost estimates to generate revenue in North Carolina. Yates took no action in response.
61. In late September 1999, near the end of ASI's fiscal year, Corder learned that ASI had a significant revenue shortfall and was not going to be able to meet the annual revenue figure it had previously committed to. Corder told Sage and Yates to work on the problem. Within twenty-four hours, Sage and Yates told Corder that ASI would meet its commitment after all. They did not explain how this would happen, and Corder did not ask.
62. ASI reported revenue of $28,299,000 and earnings of $2,273,000 in its Form 10-Q for the first quarter of fiscal 1999 filed with the Commission. ASI reported revenue of $29,166,000 and earnings of $2,580,000 in its Form 10-Q for the second quarter of fiscal 1999 filed with the Commission. ASI reported revenue of $31,167,000 and earnings of $3,018,000 in its Form 10-Q for the third quarter of fiscal 1999 filed with the Commission. These revenue and earnings figures were also reported in press releases to the public. These "record" revenue and income figures were materially inflated due to the fraudulent accounting practices described above.
63. In or about September or October 1999, a North Carolina manager reported to Defendants that North Carolina's costs estimates were significantly understated and might require ASI to take a revenue hit. The manager told Sage and Yates that this was potentially a $5 to $6 million problem. The manager reported to Defendants that he would most likely have to initiate layoffs and finish projects using lower cost subcontractors but that he did not think that such measures would completely resolve the costs estimates problem.
64. The manager told Defendants that he planned to continue investigating the matter. Sage took no action upon receiving this report. During the rest of the calendar year, Yates periodically checked on the manager's progress but took no additional action. After obtaining a list of potential employees to lay off, Corder never inquired about the matter again.
65. In or about October 1999, Yates received information from the Indiana controller that the Indiana facility might be finishing contracts on indirect. The controller gave Yates a memo reporting that employees had been charging more time to indirect than normal. The memo also expressed concern that improper charging to indirect could distort ASI's financial reporting and that employees must properly record their hours on projects. Yates knew that abnormal charges to indirect might mean that Indiana workers were finishing contracts on indirect, but he took no meaningful action to investigate or stop this practice.
66. In November 1999, two Indiana managers refused to sign the quarterly compliance letters required by Corder. In these letters, personnel representing each ASI facility were required to certify the accuracy of the current estimated total direct costs on certain contracts. The Indiana managers refused to sign the letters because they believed that the cost estimates on certain of the contracts were too low. The managers believed that costs estimates on Indiana contracts were understated by approximately $6.6 million, and Sage and Yates knew about this belief.
67. Although the Indiana managers had refused to sign the certifications for that facility, Yates and Sage signed all of the compliance certifications for the 1999 fiscal year.
68. Corder learned of the managers' refusals to sign, but did not discuss the matter with the Indiana managers.
69. At the time that the Indiana managers refused to sign the certifications, ASI was within days of issuing a scheduled press release announcing the financial results for the fourth quarter and its 1999 fiscal year.
70. ASI's newly-appointed Chief Financial Officer ("CFO") met with the Indiana managers, Yates and Sage in the wake of the managers' refusals to sign. In the meeting with the CFO, Sage only informed the CFO of a potential cost estimate understatement of approximately $2.7 million. Two days later, Sage claimed to have resolved most of this $2.7 million understatement by settling a pricing issue with a subcontractor.
71. ASI's CFO alerted ASI's outside auditor of the Indiana managers' refusals to sign the compliance letters. In response, the outside auditor conducted supplemental audit procedures. As part of these procedures, Yates signed a letter to the auditor representing that the contract costs estimates that ASI had provided to it were "accurate and complete" and that there were "no circumstances or issues that would cause [the estimates] to be materially misstated."
72. On November 11, 1999, ASI issued the press release with the fourth quarter and annual financial results as scheduled. Corder authorized the issuance of the press release. In the November 11, 1999 press release, ASI announced "record" sales and earnings results for the fourth quarter and its 1999 fiscal year. ASI announced fourth quarter sales of $28.5 million and earnings of $3.6 million. ASI also reported 1999 fiscal year revenue of $117.1 million and net earnings of $11.4 million. This "record" performance, however, was based on improperly inflated revenue.
73. In early December 1999, an Indiana manager reported to Defendants that the costs estimates for Indiana contracts were significantly understated and that he believed that there was potentially a $4 to $6 million problem. Defendants and other managers met on numerous occasions to resolve the problem.
74. Corder excluded the newly-appointed CFO from these December 1999 meetings. Corder told Yates not to discuss the meetings with the CFO.
75. During these December 1999 meetings, Corder directed managers to finish contracts on indirect at the Indiana facility as a way of reducing the $4 to $6 million problem. Yates knew of and approved or acquiesced in Corder's direction that certain Indiana contracts be finished on indirect.
76. Corder also directed the managers to rely on unfounded assumptions that ASI could hold costs down by using a low-wage foreign subcontractor and could get concessions from customers that would ease cost pressures in order to avoid increasing cost estimates and reducing revenue.
77. Despite the problems in Indiana, and their knowledge of the information set forth in paragraphs 43 through 76, above, Corder, Sage and Yates did not initiate any meaningful investigation of any other ASI facility.
78. After the meetings were completed in mid-December 1999, Corder presented the CFO with an analysis showing that ASI should take only a $1.1 million revenue reduction, and that this revenue reduction should be taken in the first quarter of fiscal 2000, rather than fiscal 1999. The analysis that Corder presented to the CFO was prepared by Yates.
79. The CFO believed that further investigation was necessary and persuaded Corder to create a special committee to conduct the investigation, which included two representatives from ASI's outside auditor.
80. In meetings and interviews conducted by the special committee as part of their investigation, Defendants failed to inform the committee of Corder's December 1999 plan to finish Indiana contracts on indirect.
81. The special committee, which focused on Indiana contracts, ultimately decided to reduce the 1999 fiscal revenue ASI had announced in its November 1999 press release by approximately $3.6 million (from $117.1 million to $113.5 million), more than triple the $1.1 million Corder initially suggested.
82. In its Form 10-K for fiscal year 1999 filed on December 30, 1999, ASI reported reduced revenue of $113.5 million and reduced net earnings of $9.3 million. Although the Form 10-K for fiscal year 1999 reduced the revenue and net earnings that had been announced in the November 1999 press release, the figures reported in the Form 10-K were still inflated.
83. In December 1999, Corder authorized the issuance of a press release announcing ASI's annual financial results, which reflected reduced revenue and net earnings from the figures announced in the November 1999 press release. Among other things, the December press release stated that a "routine review" had led to these reductions. Corder knew, or recklessly disregarded, that this statement was false and misleading, because the review was in fact an unusual and unprecedented course of action for ASI.
84. In January 2000, the Colorado General Manager informed the CFO that Colorado and North Carolina cost estimates were understated by as much as $6.6 million combined. Also, the former North Carolina General Manager informed the CFO that he had inflated revenue in North Carolina. Around this time, the CFO initiated another review of Indiana contracts, at which time he discovered Corder's December 1999 plan to finish Indiana contracts on indirect.
85. As a result of these discoveries, in January 2000, ASI's audit committee initiated a comprehensive review of ASI's contracts to determine whether ASI needed to restate the figures contained in its Form 10-K for fiscal year 1999. ASI also publicly announced its review and that it might have to restate revenue and earnings for fiscal 1999.
86. On March 6, 2000, ASI filed an amended Form 10-K revising the figures reported in the November 11, 1999 press release and the December 1999 annual report as a result of its comprehensive review. In its amended Form 10-K, ASI reported that it had discovered certain accounting errors that required a downward adjustment of the revenues recognized in each of the four quarters of 1999.
87. ASI reported that the accounting errors related principally to the exclusion of certain contract-related costs in the estimated costs to complete, the untimely recognition of additional anticipated costs to complete, and the inaccurate assessment of future production efficiencies and inefficiencies affecting estimated costs to complete.
88. ASI decreased the revenue reported in the 1999 Form 10-K by $10.3 million to $103.2 million, and the net earnings by an additional $6.5 million to $2.8 million. Each ASI facility contributed to the revenue reduction as follows: $4.1 million reduction in Indiana; $3.3 million reduction in Colorado; $2.2 million reduction in North Carolina; $500,000 reduction in Texas; and $250,000 reduction in Wisconsin.
89. ASI reduced the revenue reported in its Forms 10-Q for the first, second and third quarters of the 1999 fiscal year by $1,378,000, $1,963,000 and $1,639,000, respectively. ASI also reduced the earnings reported in its Forms 10-Q for the first, second and third quarter of the 1999 fiscal year by $854,000, $1,217,000, and $1,016,000, respectively.
90. ASI's outside auditor conducted quarterly reviews and an annual audit of ASI's financial statements for the 1999 fiscal year. Corder and Yates signed management representation letters to the outside auditor regarding ASI's quarterly and annual financial statements. Sage signed a management representation letter to the outside auditor regarding ASI's third quarter financial statements.
91. In these letters, Defendants represented, among other things, that ASI's consolidated financial statements were fairly presented in accordance with GAAP. They also represented that all financial records and related data had been made available to the outside auditor. In addition, they represented that there were no instances of fraud involving management or employees who had significant roles in internal controls or instances of fraud involving others that could have a material effect on the consolidated financial statements. Defendants further represented that there were no material transactions that had not been properly recorded in the accounting records underlying the financial statements.
92. Defendants knew, or were reckless in not knowing, that these representations were false and misleading. Defendants knew or were reckless in not knowing that ASI's revenue and earnings were materially inflated through the use of fraudulent revenue recognition techniques.
93. In connection with the outside auditor's supplemental audit procedures in November 1999, Yates signed a management representation letter representing that ASI's cost estimates were accurate and complete and that no conditions existed that would cause the estimates to be materially misstated. Yates knew, or recklessly disregarded, that these representations were false and misleading. He knew that ASI's cost estimates were too low and that ASI's revenue and earnings were materially inflated.
94. In or about October 1999, during the outside audit, Sage pressured an Indiana manager to withhold from the outside auditor the manager's view of the magnitude of understated cost estimates.
95. In addition, Corder, Sage and Yates withheld information from the outside auditor regarding Corder's plan to finish Indiana contracts on indirect in the December 1999 meetings with the special committee.
96. As a result of the activities discussed above, ASI's periodic reports filed with the Commission for its 1999 fiscal year and the related press releases contained materially false and misleading financial information.
97. Specifically, ASI's revenue and earnings were overstated by approximately 10% and 232% respectively in its Form 10-K for the 1999 fiscal year. Revenue and earnings were overstated by approximately 5% and 60% in ASI's Form 10-Q for the first quarter of 1999, by 7% and 89% in ASI's Form 10-Q for the second quarter of 1999, and by 5% and 51% in ASI's Form 10-Q for the third quarter of 1999. ASI's revenue and earnings were overstated by approximately 13% and 307% in the November 1999 press release.
98. The "Management's Discussion and Analysis of Financial Condition and Results of Operations" ("MD&A") in each of the Forms 10-Q and 10-K for the 1999 fiscal year repeated the same overstated revenue and earnings figures and failed to disclose that revenue and earnings had been inflated by the fraudulent accounting practices described above. In addition, among other things, the MD&A in each of the Forms 10-Q and 10-K falsely stated that for each of the Company's contracts, the percentage of completion was based on production costs incurred to date as a percentage of the total estimated production costs. The MD&A in the 1999 Form 10-K also falsely stated that the estimates of total production costs were reevaluated monthly for each of the Company's contracts, and that the $3.5 and $2.2 million reduction to the revenue and earnings figures reported in the November 1999 press release was the result of delays in implementing certain cost reduction initiatives associated with several of the company's contracts in the first quarter of fiscal year 2000. The Forms 10-Q and 10-K also falsely represented that the financial statements contained therein were prepared in accordance with GAAP.
99. Corder and Yates signed the Forms 10-Q and Form 10-K for the 1999 fiscal year. Corder authorized the issuance of press releases communicating the financial information contained in the Forms 10-Q and 10-K and other information regarding ASI's revenue and earnings to the public.
100. Corder, Yates and Sage knew, or were reckless in not knowing that these periodic reports and press releases contained materially false and misleading financial information as described above.
101. From January 25, 2000, the day before ASI announced its comprehensive review of ASI's contracts, to the last day of March 2000, ASI's stock price dropped from $14.75 to $5.75. With approximately $6.9 million shares of stock outstanding, this represented a drop in market capitalization from $101.7 million to $39.6 million, for a decrease of $62.1 million or 61%.
102. ASI paid Corder approximately $390,691 in salary from October 1, 1998 through the time he resigned. ASI paid Sage approximately $376,277 in salary from July 1, 1998 through the time he was fired. ASI paid Yates $156,704 in salary from October 1, 1998 through the time he resigned.
103. In February 1999, Corder sold certain ASI stock that he had acquired through the exercise of his stock options for a profit of approximately $409,000. In or about May 1999, Corder again sold certain ASI stock that he had acquired through the exercise of his stock options for a profit of approximately $1.08 million.
104. In June 1999, Yates sold certain ASI stock that he had acquired through the exercise of his stock options for a profit of approximately $46,000.
105. During the period that Defendants received these salaries and sold their stock, they knowingly or recklessly caused ASI's revenue and earnings to be materially overstated and knowingly or recklessly caused ASI to file materially false and misleading financial statements with the Commission.
106. Paragraphs 1 through 105 are realleged and incorporated by reference.
107. Defendants, in connection with the purchase and sale of ASI's securities, directly and indirectly, by the use of the means and instrumentalities of interstate commerce, of the mails, or of the facilities of a national securities exchange: employed devices, schemes and artifices to defraud; made untrue statements of material fact and omitted to state material facts necessary in order to make the statements made, in light of the circumstances under which they were made, not misleading; and engaged in acts, practices and course of business which operated or would operate as a fraud and deceit upon purchasers and sellers and prospective purchasers and sellers of such securities.
108. Defendants knew or were reckless in not knowing of the facts and circumstances described in paragraphs 106 and 107 above.
109. By reason of the activities described in paragraphs 106 through 108 above, Defendants violated Section 10(b) of the Exchange Act [15 U.S.C. § 78j(b)] and Rule 10b-5 thereunder [17 C.F.R. § 240.10b-5].
110. Paragraphs 1 through 105 are realleged and incorporated by reference.
111. ASI, under Corder's and Yates' control, directly and indirectly, failed to file or caused a failure to file with the Commission, in accordance with such rules and regulations that the Commission has prescribed as necessary and appropriate in the public interest and for the protection of investors, ASI's annual report on Form 10-K for the period ending September 30, 1999 and ASI's quarterly reports on Form 10-Q for the first three fiscal quarters of 1999, and also failed to include in those reports such further material information, as was necessary to make the required statements, in light of the circumstances under which they were made, not misleading.
112. By reason of the activities described in paragraphs 110 and 111 above, ASI violated Section 13(a) of the Exchange Act [15 U.S.C. § 78m(a)] and Rules 12b-20, 13a-1, and 13a-13 [17 C.F.R. §§ 240.12b-20, 240.13a-1, and 240.13a-13] promulgated thereunder.
113. By reason of the activities described in paragraphs 110 through 112 above, and pursuant to Section 20(a) of the Exchange Act [15 U.S.C. § 78t(a)], Corder and Yates are liable for ASI's violations of Section 13(a) of the Exchange Act [15 U.S.C. § 78m(a)] and Rules 12b-20, 13a-1, and 13a-13 [17 C.F.R. §§ 240.12b-20, 240.13a-1, and 240.13a-13] promulgated thereunder.
114. Paragraphs 1 through 105 and 110 through 112 are realleged and incorporated by reference.
115. As set forth more fully above in paragraphs 110 through 112, ASI violated Section 13(a) of the Exchange Act [15 U.S.C. § 78m(a)] and Rules 12b-20, 13a-1, and 13a-13 [17 C.F.R. §§ 240.12b-20, 240.13a-1, and 240.13a-13] promulgated thereunder.
116. By his conduct described in paragraphs 1 through 105, Sage knowingly and substantially assisted ASI's violations of Section 13(a) of the Exchange Act [15 U.S.C. § 78m(a)] and Rules 12b-20, 13a-1, and 13a-13 [17 C.F.R. §§ 240.12b-20, 240.13a-1, and 240.13a-13] promulgated thereunder, and thereby aided and abetted ASI's violations of those provisions of the federal securities laws.
117. Paragraphs 1 through 105 are realleged and incorporated by reference.
118. Defendants knowingly circumvented or knowingly failed to implement a system of internal accounting controls and knowingly falsified books, records, and accounts described in Section 13(b)(2) of the Exchange Act [15 U.S.C. § 78m(b)(2)].
119. By reason of the activities described in paragraphs 117 and 118, Defendants violated Section 13(b)(5) of the Exchange Act [15 U.S.C. § 78m(b)(5)].
120. Paragraphs 1 through 105 are realleged and incorporated by reference.
121. Defendants directly and indirectly, falsified or caused to be falsified books, records, and accounts subject to Section 13(b)(2)(A) of the Exchange Act [15 U.S.C. § 78m(b)(a)(A)].
122. By reason of the activities described in paragraphs 120 and 121 above, Defendants violated Rule 13b2-1 [17 C.F.R. § 240.13b2-1] promulgated under Section 13(b)(2) of the Exchange Act [15 U.S.C. § 78m(b)(2)].
123. Paragraphs 1 through 105 are realleged and incorporated by reference.
124. Defendants, directly and indirectly, made or caused to be made materially false and misleading statements, or omitted to state or caused others to omit to state, material facts necessary in order to make statements made, in light of the circumstances under which they were made, not misleading to an accountant in connection with an audit or examination of the financial statements of ASI or the preparation or filing of a document or report required to be filed with the Commission.
125. By engaging in the conduct described in paragraphs 123 and 124 above, Defendants violated Rule 13b2-2 [17 C.F.R. § 240.13b2-2] promulgated under Section 13(b)(2) of the Exchange Act [15 U.S.C. § 78m(b)(2)].
WHEREFORE, the Commission requests that this Court enter a judgment:
A. Finding that Defendants committed the violations alleged above;
B. permanently enjoining Defendants from violating Sections 10(b) and 13(b)(5) of the Exchange Act and Rules 10b-5, 13b2-1, and 13b2-2 thereunder;
C. permanently enjoining Corder and Yates from violating Section 13(a) of the Exchange Act and Rules 12b-20, 13a-1, and 13a-13 thereunder;
D. permanently enjoining Sage from aiding and abetting violations of Section 13(a) of the Exchange Act and Rules 12b-20, 13a-1, and 13a-13 thereunder;
E. barring Defendants from serving as officers or directors of any issuer required to file reports with the Commission under Sections 12(b), 12(g), or 15(d) of the Exchange Act [15 U.S.C. §§ 78l(b), 78l(g), and 78o(d)], pursuant to Section 21(d)(2) of the Exchange Act [15 U.S.C. § 78u(d)(2)];
F. ordering Defendants to each pay an appropriate civil monetary penalty pursuant to Section 21(d)(3) of the Exchange Act [15 U.S.C. § 78u(d)(3)];
G. ordering Corder and Yates to disgorge the profits they obtained from selling ASI stock, and salaries they received from ASI, during the period of October 1, 1998 through end of their employment with ASI, plus prejudgment interest thereon;
H. ordering Sage to disgorge the salary he received from ASI during the period of July 1, 1998 through the end of his employment with ASI, plus prejudgment interest thereon;
I. retaining jurisdiction over this action to implement and carry out the terms of all orders and decrees that may be entered; and
J. granting such other and additional relief as this Court deems just and proper.
Respectfully submitted,
s/Kathryn A. Pyszka
Kathryn A. Pyszka
s/Paul A. Montoya
Paul A. Montoya
s/Kara M. Washington
Kara M. Washington
Attorneys for Plaintiff
U.S. Securities and Exchange Commission
Midwest Regional Office
175 West Jackson Blvd.
Suite 900
Chicago, Illinois 60604
(312) 353-7390
Dated: September 30, 2003
http://www.sec.gov/litigation/complaints/comp18387.htm
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