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SEC v. International Systems & Controls Corp.

SEC v. International Systems & Controls Corp.

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Published by Mike Koehler

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Published by: Mike Koehler on Aug 29, 2011
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SEC
v.
INTERNATIONALSYSTEMS
&.
CONTROLSCORP.
UnitedStatesDistrictCourt,DistrictofColumbia.No.79~1760
December17,1979.LitigationRelease
in
fulltext.
The
Securities
andExchangeCommission(''Com-mission")announcedtodaythattheUnitedStates
District
CourtfortheDistrictofColumbiahas.enteredaFinal
OrderenjoiningInternationalSystems
&.
ControlsCorpora-tion
("ISC")-
aHouston,Texas
based,
DelawareCorpora-tion;andtwoof
the
IndividualDefendants,
J.
Thomas
Kenneally
("Kebne.aJ.ly"),
currentlyadirectorand
formerly
ChiefExecutiveOfficerandChairmanoftheBoardof
Directorsof
ISC;
and.HermanM.Frietsch("Frietsch"),SePJo'VicePresidentofISC,fromfutureviolationsoftheantifraud,reportingandproxy
provisions
of
theSecur-rtiesActof1933andthe:
SecuritiesExchangeAct
of1934andtheaccountlngalldbookkeepJ.ngprovisionsof
.theForeignCorrupt
PracticesAct.
18C,.KenneallyandPrietsch
--cot)senteCftlfthe-eritry
ofth~Fit1:hlOrdej-
Wiiliouf
ad:
mittingordenyingtheallegationsoftheComplaint.
In
addition
totheimposition
of
the
injunctionagainst
!SC,
Kenneally
andFrletsch,theFinaIOrderdirectsISCto:
1)Jile
with'theCommissionareport
amen.cUngISC'sprior
filings
relatingtoforeignpayments;
Z)
appointthree
nonaffiliateddirectors,satisfactorytotheCommission,whoshall
comprise
anAuwi
Committee
withspecified
oversight
and
au.illtduties
andfunctions;
and3)
appoint
a
Special
Agent,
satisfiICtoryto
the
Commission,
·Wnoshll.llinvestigateandreportoncertainspecifictransactionsandoncertainrelatedpartytransactionsand.onthehtstory-and
accountingfor
ISC'sunbilled
receivables
account.
Furthermore>
Kenneally
andFtie'l$cl(forpeliod.'t
of
fouryellrsandrwoyearsrespectivdy)agreedtobeem-ployedasan
officer
ordirectorofapubllciyheldcompanyonly
if
thatcompanyhasacommitteewithdutiesandfunctions
similar
tothoserequiredoftheISCAuditCom-mittee;andtodisposeof
any
publicly-heldcompany's
assetsorenterintoanysubstantial
contracts
ormakeany
disclosureson.behalfofa
public
companyonly
if
suchdisclosureor
transactions
arefirstapproved.
by
anotherpersonMtsubordinateto
Kenneally
orPrietsch,
In
addition,
Kenlleailyagreecito
disgorgetoISCtheamount,
if
any,'WftichtheISCAuditCommitteesubsequently
determinesisappropriate.Forfurtherinformation,seeLitigation
Release
No.
BSI5,
July
9,1979.
UuitedStatesDmrictCourt,DistrictefCohwbia.
July
9,1979-S~()fS&'Complmai
ExchmgeAct
.0-
ForclgnConupt
Pmclices
Act-Anti-
f.mudViolations
Aneged.-
SECCom~:tamt
The
Securities
and
Exchange
Commissionhas
chargedanIssuerandseveralof"itsofficersand
directors,
present
andformer,
with
violations
ofdle
antifraud,proxyand
reportingprovisionsoftheExchange
Act.
Thecomplaint
-itlsoiUeges
f3lileariiimisleaaipg
Olsclo$ures
concemmgthe--
i..'lsuer's
questionableand
improperpaymentsofapprox,
imately$23millioninanumberofforeigncountries
and
the.
issuanceoffalse.and.misleading.flnancialstatements
whichoverstatedassets,earningsandshareholders'equity.
The
complaint
specifically
alleges
that
theissueranaits
subsidianespaitimore·th.an$23million
in
material;ques-
tionable,andillicitpaymentstoforeignpersonsandentities
in
connection
with
the
ptoourementof·contracts.
Thesepaymentsweredisguised.onthehook
and.
recordsof
the
iSSuer,
it
isalleged,andconcealedfrom
customers
includingforeigngovemmentssndgovemment-cwnedentities.Theissuerallegedlyfailed.todisclosethat
it
wasdependentuponit:sfordgnpaymentsforthesecuringofbusinessandtheobtainingofpaymentsinadditiontothe
.onginaliycontracted
amounts,.
and
mat
material
r.W;:s
to
itsearningsandrevenues
were·
allegedlyoccasionedbysuchpractices.
The
issueralso
is
allegedtohaveftledfalseandmisleading
statementawithfheUnitedStatesExport-ImportBank
concerning.
foreign.
payments,TheiSsuerillalsoallegedtohavefalselyandnuslead-
ingIyrecordedandpubliclyreportedas"unbilledreceiv-
abies"costoverrunsonfixedpricecontracts,claimsfor
escalationandkickbaekarrangementswithsuppliers.
Additionally,
uncollectable
contract
costswhichindicated
lossesinfixedpricecontractswereallegedto
have
been
635
CopyrightDecember31,1982BUSINESSLAWS,INC.(FCPA)
 
improperlyrolledintootherunrelatedcontracts.liabilitiesandotherobligationsthatwerenotreportedin,orweremisleadinglyreportedinthefinanclal
statements.
Allegedly,theissuerfailedtomakeandkeepadequate
bookscrecordsandaccounts.twhlch,
inreasonabledetail,accuratelyand
fai.rly
reflect
transactions
involVirlgtheassets
oftheissuer.
There
was
analleged
failure
to
deviseand
maintaina
system
of
internal
accounting
controls.sufficien
t
tomaintainassurancesthattransactionswererecordedproperlyandasnecessaryto
permit
theaccurateprepara-
tioncfreports.
The
Issuerisalsocharged
With.
failing
to.
disclosethatmorethan$1,000,000wasexpended
for
thepurchase,decoration,andmaintenanceofanIrishestateprimarilyused
.3.S
asummerresidenceofone
of
theBoardofDirec-tors-:Additionally,theissuer
is
allegedtohavemadefalse
andmisieadingdisclosuresconcerningasubsidiary,
TheMarch,197EForm8·Kandthe1978annualrepcrtdldnotdisclosethesematerialfacts}the~iECalleges,
in
addition,
the
reportsareallegedtofalselypresenttheopinionsofthe.SpecialCounselthatwasInvestigatingthe
__1!1ll.~t_~r,.
jlla(Idj_ti~l1>
.!-h~
torts~Ald_notstate.that
the
issuer'scontiullingviability
depend.'iupori-lts
-abilitY
torecoverescalation
claims.
madeagainstseveralforeign
governments.
It
s.allegedthatIn·.itsfillngswiththeCommission,theissuerfailedtodisclosethenature
and
effectofamend-mentstoa
revolving
creditagteement.whichgrantedthe
lendersprocedures
and
rightsastotheeontroloveranduse
of.net
.proceeds
from
.the
saleof
·collateral:ized
assets.TIleissuerhas
been
additionallychargedwithover-statingassetsinitsfinancialreportsofthisdecade.
In
particular,
it
isalleged
that:
(a)cost
overruns
on{SC's
contract
were.lID-properlyreflectedas"unbilledreceivables"withoutanyreasonableassurancethatISCcustomers
would
reimbursesuchcosts;(b)improperandquestionablepayments.wereincluded
in
"unbilledreceivables"aslegitimatereimbursablecontractcosts;
(c)
liabilitiesandobligationswerenotproperlyrecordedandac-counted
for;
(d)additional
cost
reimbursementsoughtonafixed-pricecontractwasmisrepresentedas.an"escalationpayment";
(c)
profitswereprematurelyrecognized;(f)fundsreceivedthroughkickbackarrangementswereimproperlyaccountedfor;(g)
costS
whichwerenotcollectibleunderthecontracttowhichtheywereattributablewereimproperly
rolled
intoother.contractsandcarriedasassets;and(h)
sham
'<escalation"
claims
wereandalestilloeingcarriedas
receivables.
Itis.
alleged
that
the.
foregoingactivityconstitutedaviolationof
Section
17
of
theSecuritiesAct,andSections10(b),13(a),13{b)
(2)
and14(a)oftheExchangeAct~and
-RulesH)b~.s
,T2b~20,1'Ja~1,-13
a=-rr,
11'a.13~-13O::2~
f4a;:r-
and149promulgatedthereunder.TheCommission
is.
seekingapreliminaryinjunction
and
theappointment
.of
aspecial
agent.
to,amongother
things,
takecustodyand
control
oftheassets,
books
and
records.oftheissuerand
overseeits
businessactiv.ifiesand
toassurethat
these
activitiesar~beingc8rriedout
forlegiti.matebusinesspurposes,
636
CopyrightDecember31,1982BUSINESSLAWS,INC.(FCPA)
 
QOESTIONABLEOR,ILLEGAL
CORPORATE'
PAYMENTS
..
'
s:ec\.":.
CtownCor:k
'.Seal
Co.,
Inc.,
CivilAction
No.8.1"":2065CDDC·Sept.2,19
an
TheCommission
filed
a
Compla.intseeking
intUnc-
tive,and
otherr~lief
againstCroWnCork
ft.
Seal.Co..
("CrownCork.")
alleging
vto
l.;'ltionsofthe
ahti-frauo"
periodicr~po'Ctingandbooks
andrecdrds
prC)vi~ibnsof
theExcha.nge
l\ct.
The
Complaint
alleged.t.hat
Ct'own.
Cor)t
ll1~cle
42paymf:nts
tOPa.sha
S~rvicesCorporatior'l'
frQmOct-ober197
Othr
ough
·OctolJer197
S,..
w.hichamount.ed
to
about·$5..
9million..
Itwas
further.allegea
t.hat
PasnaServicesCorp.was
controlled
by-a
s·en.i9r
officer
ofone
6£
Crown
Cork's
major
customers,that:
the
pay-
ment;:swererecordedby
Crown
Corkas<:ompetitivea'll:ow-
ances,
di1ico~mt$
or
rebates;
a.no'
that
approximately
$5.,lmillio,()
wasdivertedto
the.
benefit
of
ttiesenlor
.9
f
iicerthatcontrolled.Pasha
Sery
icesGot"p.
The
Complaint
allegedthai;:,CrowhCorkviolatedthe
reco:rd-
ke<eping
rElqul
remen
t.
becaus~
1twasrec~le$$in
not
.knowingth,a~
the
paymeil.t:s¥er~f9rthe~rsonalbenefit
...of
the.
individual'
involved
rather
th~in,~Qr
f,hepur:pose's
s.tate.d....''..
SimultanEtOuslyw.iththe
fili1'l9'"of
the
Complaint
I
GJ;oTpinCorkqonSEN,tec;lto
the
entryofa
Final
Order
of
Permanen~.
Injunct.ion.
from
futu17eviola
tionso!
Sect,i6ns
10
(bltl.J(~),
l:3JO)(,2
)(ALof
the
ElxchangeAct
J.
andRulesIOb-S,12b,.,.20,
and'13a"":"1t.here\lode
r.
[Tbi.'$
actiOnfsTela
ted
toSEC
v,.
HerberbG.
.Paigee.taL.,
Civil
Action
.No.81....
2666(DOC
Sept.
2,·
£98l).}
SEcv.lnternat.Ional~stem.s&¢Oh
t!"Ols
.corpu.'
"efaJ.)j:Ciyil
J\ct,ion
NO~
79-1T60{.ppg,Ju.1y9.,
1.9J9l
~hetCommi$sloJl
~.ileda.
c.Q"in:Plalhtalle-9i.h9,.
{trnpng.
other'
things,'tha',tlntgrflati9:na.1
Syst.~~s&·controls.
Corp•.
("I$C'"
)<
paidm,?rethan,$23mi,lliontht:oughone
OJ:;'
mOl:E;!'
$ubs.i.d
ta.l:'
iestocertain
fOt:"-cigfl
pi;!''tsons
and
entitlesihcrderto
assistth~qornpf:ln'Y
insecurin9
ce-rtain
cont:racts"
TheCornplaintal1e9~sthatin
furtheranceo.fthis
sCl).eme
rsc
disguisedsuc-hpayments,
onits.books,and
recor8sasconsultin.9
fee~
I
(:0'l1sulting
services.
,agent
1
sfeesorcommissions...TheC~plaint
alsoalleged'.
that
·15C.
v~olat~a
thelntet:-nq'la9CQuntips
c9ntrQlsp:ro'v:i,siqn~
hyfail,ingto
devise~nad~q1Jate
214

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