Bausch and Lomb Case - SEC Verdict

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txt
UNITED STATES OF AMERICA
Before the
SECURITIES AND EXCHANGE COMMISSION
SECURITIES EXCHANGE ACT OF 1934
Release No. 39329 / November 17, 1997
ACCOUNTING AND AUDITING ENFORCEMENT
Release No. 987 / November 17, 1997
ADMINISTRATIVE PROCEEDING
File No. 3-9488
In the Matter of ORDER INSTITUTING PUBLIC
ADMINISTRATIVE PROCEEDINGS
PURSUANT TO SECTION 21C OF THE
SECURITIES EXCHANGE ACT OF
1934, MAKING FINDINGS, AND
BAUSCH & LOMB INCORPORATED, IMPOSING A CEASE-AND-DESIST
HAROLD O. JOHNSON, ORDER
ERMIN IANACONE, and
KURT MATSUMOTO,
Respondents.
I.
The Securities and Exchange Commission ("Commission") deems
it appropriate that public administrative proceedings be, and hereby are,
instituted pursuant to Section 21C of the Securities Exchange Act of 1934
("Exchange Act") against Bausch & Lomb Incorporated (hereinafter "B&L"),
Harold O. Johnson, Ermin Ianacone, and Kurt Matsumoto (hereinafter the
"Respondents").
II.
In anticipation of the institution of these administrative
proceedings, the Respondents have each submitted an Offer of Settlement
(hereinafter the "Offers") 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 in which the Commission is a
party, and without admitting or denying the findings set forth herein,
Respondents consent to the entry of this Order Instituting Public
Administrative Proceedings Pursuant to Section 21C of the Exchange Act of
1934, Making Findings, and Imposing a Cease-and-Desist Order (hereinafter the "Order").
III.
On the basis of this Order and the Respondents' Offers, the
Commission makes the following findings:<(1)>
A. Summary
B&L materially overstated its net income for 1993 by
improperly recognizing revenue from the sale of contact lenses through its
Contact Lens Division ("CLD") and the sale of sunglasses through its Asia-
Pacific Division ("APD"). These overstatements of revenue resulted from
the activities of certain of the individual Respondents and other employees
of B&L. The portion of the overstatement relating to the CLD arose from
sales of significant amounts of contact lenses to the CLD s distributors
less than two weeks before B&L s 1993 fiscal
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year-end in connection with a marketing program that effectively resulted
in consignment sales. The portion of the overstatement relating to the APD
arose from certain APD personnel recording fraudulent sales. As a result
of the foregoing, B&L violated the anti-fraud and reporting provisions of
the federal securities laws by filing with the Commission materially false
and misleading financial statements for its fiscal year ended December 25,
1993, which overstated revenue by $42.1 million and net income by at least
$17.6 million, or 11%, as part of its annual reports on Form 10-K for 1993
and 1994, and violated the recordkeeping and internal controls provisions
of the federal securities laws.
As to the CLD, Ermin Ianacone, the CLD's Controller and Vice
President of Finance, and Kurt Matsumoto, the CLD's Director of Distributor
Sales, caused B&L's violations of the antifraud, reporting, recordkeeping,
and internal controls provisions of the federal securities laws. Ianacone
and Matsumoto also violated the recordkeeping and internal controls
provisions of the federal securities laws. Harold O. Johnson, the CLD's
President, caused B&L's violations of the reporting provisions.
In the first quarter of 1996, B&L amended its Forms
10-K for 1993 and 1994 to include restated financial statements for 1993
which corrected this improper revenue recognition.
B. Respondents
During all relevant times, B&L was a New York corporation,
doing business internationally with its headquarters in Rochester, New
York, and a leading manufacturer of contact lenses and sunglasses. The CLD
conducted B&L's U.S. contact lens business while the APD conducted B&L's
sunglass and vision care business in the Asia-Pacific region. B&L's common
stock has at all relevant times been registered with the Commission
pursuant to Section 12(b) of the Exchange Act, and listed for trading on
the New York Stock Exchange.
Harold O. Johnson was at all relevant times the President of
the CLD and Senior Vice President of B&L. Ermin Ianacone was at all
relevant times Controller and Vice President of Finance of the CLD. He
<(1)> The findings herein are made pursuant to the
Respondents' respective Offers of Settlement and are not binding
on any other person or entity in this or any other proceeding.
======END OF PAGE 2======
left B&L in November 1994.<(2)> Kurt Matsumoto was at all relevant
times the CLD's Director of Distributor Sales. His employment was
terminated in April 1995.
C. Facts
1. The CLD December Program
In the early 1990s, the CLD's contact lens business was
undergoing substantial changes and faced major strategic challenges. The
CLD's business historically had centered upon the sale of traditional "SVS"
lenses, which were marketed to be worn for six months or more. However,
beginning in the 1980s, new "disposable" contact lenses, designed to be
worn for periods ranging from one day to several months, gained popularity
in the market.<(3)> A late entrant in the disposable lens market, B&L
wished to devote increased efforts to increasing its sales in this critical
and growing market segment. At the same time, the CLD wanted to continue
to maximize its traditional SVS sales, which -- while diminishing over time
-- continued to account for a substantial part of the CLD sales and
revenues.
In late 1993, the CLD decided that a reallocation of
marketing responsibilities among its sales channels would offer the best
means of meeting its strategic goals. The CLD's
products, both traditional SVS and disposable, were sold to optical
practitioners (i.e., ophthalmologists, optometrists, and opticians)
primarily through two channels: directly, i.e., through a sales force of
CLD employees; and through authorized optical distributors, who purchased
lenses from the CLD for resale to optical practitioners. Johnson believed
that, by giving the distributors primary sales responsibility for the
traditional SVS segment of its product line, the CLD could allow its direct
sales force to devote increased resources and efforts to the sale of
disposable lens products, and he further believed that selling a
substantial amount of traditional SVS inventory to distributors would serve
this objective.
In December 1993, to further this strategy of shifting
traditional SVS sales responsibility to distributors, the CLD launched a
marketing program -- the "December Program" -- in which it told its
distributors, in order to maintain an authorized distributorship, to
purchase an unprecedented amount of traditional SVS inventory less than two
weeks before the end of its fiscal year. To encourage the distributors to
participate, the CLD offered to provide optical practitioners with
incentives to buy traditional SVS lenses from distributors, which would
purportedly help the distributors resell the large amount of inventory they
<(2)> Ianacone has never been a Certified Public
Accountant.
<(3)> The SVS Traditional Lens market, industry-wide, had
fallen 18% between 1991 and 1992, and 11% between 1992 and 1993.
In 1993, SVS traditional lenses comprised approximately 52% of
the CLD's sales. The CLD's internal estimate in December 1993
was that this would decline to 46.0% of sales in 1994, and to
25.5% of sales by 1998.
======END OF PAGE 3======
were being asked to purchase. The CLD also offered several incentives,
including profit-sharing opportunities, to the distributors, to encourage
them to participate in the Program. As discussed below, B&L improperly
recognized $22 million in revenue from this Program when, among other
things, certain employees of the CLD granted unauthorized rights of return
to certain distributors and shipped contact lenses after the fiscal year-
end.
a. The September Promotion
B&L management placed great importance on each of B&L's
operating divisions achieving or exceeding the sales and other financial
goals it set. Many divisions were successful in reaching their goals,
including the CLD, which, under Johnson, had met or exceeded sales goals
for 48 consecutive months and had double-digit revenue growth each year
between 1989 and 1992.
Early in the fall of 1993, Johnson realized the CLD was not
on target to meet its third quarter sales and earnings forecasts.
Subsequently, Johnson met with a number of CLD employees, including
Ianacone, Matsumoto, and Matsumoto's supervisor (a CLD Vice President), to
discuss ways to boost sales. As a result of that meeting, the CLD
developed a promotion whereby it would sell its distributors a large amount
of traditional SVS lenses, significantly in excess of historical levels, at
a discounted price of $6.00 per lens with extended payment terms. The
promotion, which concluded in September 1993, enabled the CLD not only to
meet, but substantially to exceed, its third quarter sales forecasts.
However, as a result of this third-quarter promotion, the CLD had sold
distributors enough traditional SVS inventory to meet or exceed most
distributors' fourth quarter needs.
b. Planning the December Program
In October 1993, Johnson instructed certain members of the
CLD staff to implement the December Program. Johnson hoped to use the
Program to facilitate the strategic shift of marketing responsibility for
traditional SVS lenses to the CLD s distributors. Additionally, he sought
through the Program to achieve fourth quarter sales and earnings goals
approved by B&L. In designing the December Program, the CLD did not attempt
to ascertain how many lenses the distributors wanted to purchase. Rather,
Johnson and the CLD staff divided the total amount of traditional SVS
inventory the CLD had on hand (approximately 1.8 million units) among the
distributors according to their pro rata share of overall distributor
sales. As the Program was designed and presented, participation by the
distributors was
required in order for them to maintain their authorized distributor status.
The CLD's internal estimates indicated that, under sales
conditions which existed prior to the December Program, it might take
certain of the distributors up to two years to sell the 1.8 million
traditional SVS lenses that CLD management was expecting them to purchase
in the two weeks before the close of B&L's 1993 fiscal year. To assist
sales by the distributors, the Program provided them with access to optical
practitioner accounts and large retail accounts which had previously been
serviced by the CLD directly. Further, under the Program, B&L would permit
distributors to share in incremental profits due to any expansion of the
======END OF PAGE 4======
CLD s share of the declining market for traditional SVS lenses up to
fifteen percentage points.<(4)>
In order to convince distributors that the CLD was serious
about increasing distributors sell-through of traditional SVS lenses, the
CLD devised several initiatives and incorporated them into the December
Program to support its claim that dramatic market share increases were
within reach. Primary among these initiatives was the "Premier Vision"
Program, through which optical practitioners, by purchasing traditional SVS
lenses from the distributors, earned frequent-flyer type points that could
be used to obtain premiums. The CLD did not offer distributors a price
discount in the December Program. Instead, the CLD offered SVS lenses at
$11.90 per lens, which was full list price and double what distributors had
paid in the September 1993 promotion.<(5)>
c. The CLD Prepares Promissory Notes
Varying from B&L's usual practice, and to clearly evidence
the distributors' obligation to pay, the December Program, as designed and
as approved by senior B&L management, required that each distributor sign a
promissory note for amounts owed to B&L. Under the terms of the promissory
notes, all amounts owed to B&L, including the December Program purchases,
would have to be satisfied in full by June 1994. The notes required
distributors to pay their existing pre-December Program balances in January
and February 1994. Beginning in March 1994, the notes also required
distributors to make payments on their December Program balances calculated
to coincide with expected product sell-through. In June 1994, the notes
required distributors to make a "balloon" payment for their outstanding
balances, which the CLD estimated would be approximately 70% of the
December Program purchases. As discussed below, most distributors refused
to sign the promissory notes.
<(4)> As of April 1993, the Company's internal sales
projections had estimated no market share increase in 1994, and
only an increase of two percentage points in total over the next
four years. There is little indication that, prior to the
December Program, CLD management ever expected to achieve an
increase in market share for traditional SVS lenses as large as
the 15 percentage points that they represented as a goal to
distributors.
<(5)> The return to list pricing of $11.90 per lens reduced
the profit distributors could make on resale. Moreover, since
the average price at which the CLD sold traditional SVS lenses to
practitioners (the "average realized price" or "ARP") ranged
between $4.23 and $10.64 between August and November 1993, and
was $7.46 for 1993 as a whole, distributors were concerned that
they would not be able profitably to increase sales of
traditional SVS lenses when they had purchased their inventories
of these lenses from the CLD at significantly higher prices.
======END OF PAGE 5======
d. Presentation of the December Program to, and Negotiations With, the Distributors
On December 13, 1993, the CLD held a meeting with its
distributors to present to them the December Program. Even though
participation was required to maintain an authorized distributorship, two
of the CLD s thirty-two distributors refused to participate in the Program.
As described below, many of the other distributors, though not refusing
participation outright, demanded terms and concessions from certain CLD
representatives varying the terms of their December Program purchases.
Johnson and other senior B&L officials did not approve these terms and
concessions, and were unaware they had been granted.
Following the December 13 meeting, the CLD implemented the
December Program and, at year end, recognized revenue from its sales. In
the process, certain CLD representatives:
(1) extended credit limits significantly without analyzing the
distributors' creditworthiness and ability to pay; (2) recognized revenue
on lenses shipped after year-end; (3) granted many distributors the right
to return unsold lenses; (4) shipped product to warehouses; and (5)
violated B&L s policies and procedures, and failed to comply with generally
accepted accounting principles ("GAAP"), with respect to revenue
recognition.
e. B&L Increases Credit Limits Without
Performing Financial Analyses Required by
Company Policy
The CLD knew that, in many instances, the distributors would
not be able to order the lenses they were being asked to purchase in the
December Program unless the CLD increased the distributors credit limits.
Some of the contemplated December Program purchases were so large that they
exceeded not only certain distributors credit limits, but also their net
worth,<(6)> making it highly unlikely that, absent resale, such
distributors would be able to pay for the lenses.<(7)> To secure
distributor participation in the December Program, the CLD, on its own
initiative, extended the distributors' credit limits substantially, without
completing the substantive analysis of the distributors' creditworthiness
required by Company policy. Ultimately, existing credit limits, which had
been increased to accommodate the September 1993 promotion, were raised up
to 100% or more for some distributors.
B&L's Credit Limit Authorization Policy required senior CLD
and B&L officials personally to authorize the credit limit increases
granted in connection with the December Program. Before this could be
<(6)> For example, a distributor that was being asked to
purchase $2.5 million worth of lenses in the December Program had
a net worth at the time of approximately $600,000.
<(7)> Many distributors told CLD employees who urged them to
participate in the December Program that they would be unable to
pay for the lenses unless and until they were resold.
======END OF PAGE 6======
done, a CLD credit analyst (under Ianacone's supervision) was required
under the Company s policy to perform a detailed analysis of the
distributors creditworthiness using credit histories and other relevant
information and then submit a recommendation for the requested increase for
appropriate approvals.
On December 10, 1993, Ianacone prepared a summary memorandum
requesting credit limit increases for 11 of the CLD s distributors. The
memorandum described the results of the September 1993 promotion, the
potential strategic benefits of the December Program, the intended reliance
upon promissory notes to secure the distributors credit balances, and the
payment history and status of the 11 distributors. Johnson approved the
requested credit limit increases based upon this summary memorandum. In
light of the large size of the December Program and the large increases in
distributor credit limits it required, the CLD should have conducted a more
probing, substantive analysis of the distributors credit-worthiness.
f. The CLD Ships Lenses After the End of its
1993 Fiscal Year
B&L's 1993 fiscal year ended on Saturday, December 25, 1993.
However, at least $5.7 million of revenue from the December Program --
approximately 26% of the revenue generated by the Program -- was recognized
from sales that were not shipped until after the end of the fiscal year.
The CLD extended its cutoff date, at Ianacone's instruction, to the morning
of Monday, December 27, 1993.
g. Certain CLD Employees Waive the Promissory
Note Requirement, Grant Rights of Return, and
Offer Storage and Delayed Shipping to Secure
Distributor Participation in the December
Program
In the twelve days between the December 13 meeting and the
end of B&L's 1993 fiscal year, certain CLD representatives spoke or met
with those distributors who left the December 13 meeting without committing
to participate in the December Program. As the fiscal year-end approached,
certain CLD representatives, without permission from their superiors, made
significant concessions to undecided distributors varying the terms of the
December Program to persuade those distributors to participate.
For example, on December 13, while certain distributors
signed the notes, most of the distributors refused to sign the promissory
notes that the CLD had prepared. Although Ianacone had intended to require
participating distributors to sign the notes because of the unusual
collection risk, he decided, in a number of cases, to waive the promissory
note requirement, in large part, because he knew that CLD salesmen were
having difficulty getting distributors to sign the notes.
Also, before the end of B&L's 1993 fiscal year, many
distributors obtained written or oral assurances from certain CLD
representatives that they could return unsold traditional SVS lenses for
credit or could later renegotiate payment terms. These distributors
accounted for approximately $13 million in "sales," or approximately 59% of
the total December Program. In violation of B&L's corporate policies,
Matsumoto and Matsumoto s supervisor granted, and instructed others under
======END OF PAGE 7======
their direction to grant, certain distributors the right to return unsold
lenses in connection with the December Program. Additionally, although
Ianacone was not asked to approve these side agreements, a copy of a letter
from the CLD s largest distributor, evidencing its understanding that it
could return unsold traditional SVS lenses, was found in Ianacone's files.
Finally, several distributors told certain CLD
representatives, during and after the December 13 meeting, that they did
not have sufficient capacity to store additional lenses in their
warehouses. As an accommodation to these distributors, certain CLD
employees arranged to hire freight forwarders and warehouse facilities, in
some cases at the CLD s expense, to hold inventories until distributors
would accept delivery of the lenses. In some cases, the CLD selected and
paid for warehouses while other distributors chose their own storage
facilities with the understanding that the CLD would reimburse them for
storage. In at least one case, Ianacone personally authorized
reimbursement of storage expenses.
h. B&L Ends the December Program
During the December 13 meeting, CLD representatives had told
the distributors that the Company would encourage optical practitioners who
had previously purchased traditional SVS lenses directly from the CLD to
purchase such lenses from distributors. Subsequently, distributors
realized they were receiving few, if any, orders from new customers. As a
result, the distributors asked Johnson to reiterate his encouragement, in
writing, to these customers. Johnson refused, because he was concerned
about possibly alienating the optical practitioners whose goodwill was
crucial to CLD s business.
Furthermore, when it appeared that the CLD's direct sales of
disposable lenses were behind forecast for the second quarter of 1994,
Johnson instructed his subordinates that maintaining the Division's own
direct sales efforts for the disposable lens market took priority over
efforts to increase distributors' sales of traditional SVS
lenses.<(8)>
In June 1994, most distributors advised CLD that they were
unable to make the balloon payment, and the CLD did not ultimately seek to
enforce the balloon payment. Thereafter, the CLD s efforts to spur
distributor sell-through and make collections proved unsuccessful. CLD
management decided in October 1994, to take back a substantial percentage
of the December Program inventory. Also, in October 1994, after B&L had
decided to take back most of the December Program lenses, Matsumoto,
Matsumoto's supervisor, and other CLD employees under their direction asked
<(8)> After the December Program, distributors continued to
purchase a significant amount of traditional SVS lenses from the
CLD, even though they had been sold one to two years of inventory
in the December Program. In many cases, distributors made these
additional purchases because they had no intent to resell the
inventory purchased through the Program and believed they could
return it. The CLD's traditional SVS sales to distributors in
the first quarter of 1994 were 304% above those projected by its
operating plan.
======END OF PAGE 8======
three of the distributors who had been granted rights of return to destroy
or not disclose the existence of those rights of return.<(9)>
2. Overview of the Fraudulent APD Sunglass Sales
From their offices in Hong Kong, the APD s former President
and former Controller, with the complicity of certain APD employees and
customers, executed a scheme to record revenue from fictitious sales of Ray
Ban and other sunglasses.<(10)> As a result, B&L Hong Kong, a
division of the APD, recognized revenue for sunglass "sales" that in fact
were shipments of sunglasses to public warehouses in Hong Kong or to
accommodating customers who agreed to hold, but not pay for, the shipments.
In some instances, fictitious sunglass sales were titled to customers
without the customer s knowledge. In other cases, the APD titled goods to
a freight forwarder and recorded the transactions as sales. APD personnel
in Hong Kong fabricated documents to make the fictitious sales appear
genuine, to circumvent B&L's accounting controls, and to prevent detection
by B&L's management and auditors.
a. The Fraudulent Transactions
Fraudulent sunglass sales at the APD were initiated by a
phone call placing a fictitious order or a seemingly genuine "order" on
misappropriated customer letterhead. Unlike a genuine sale, however, APD
warehouse personnel in Hong Kong received oral instructions from the APD
warehouse manager to withhold warranty cards, consumer information, and
trademarks required to customize the orders by destination country. The
additional documentation for a genuine sale was generated, but warehouse
personnel were similarly instructed to ignore the "ship to" address on the
delivery note and ship instead to the warehouse.
At the instruction of his supervisors, the Hong Kong
warehouse manager titled the goods shipped to warehouses in the name of a
commonly used freight forwarder and also sent the warehouses the delivery
notes. In some instances, the warehouse manager forged delivery notes with
receipt acknowledgments, while in other cases cooperating customers falsely
stamped the delivery notes "received." Cooperating customers simply
ignored the fraudulent sales reflected on their account statements, while
the APD managed to delete fraudulent sales from monthly statements sent to
customers who were not participants in the scheme.
b. "Refreshing" Transactions
To hide the fraudulent scheme from B&L's internal controls
and recordkeeping procedures, the APD president and controller needed to
mask rising accounts receivable and avoid setting up greater bad debt
reserves. To accomplish this, APD personnel conducted fraudulent
"exchange" transactions whereby customers received credits to their
<(9)> Matsumoto, his supervisor, and the other CLD employees
acted to prevent their violation of company policy from coming to
light.
<(10)> Neither of these APD employees was a member of B&L s
corporate management.
======END OF PAGE 9======
accounts and were permitted to repurchase similar or identical goods stored
in the APD warehouse. There was, however, little, if any, physical
movement of inventory in these transactions. APD personnel prepared false
paperwork reflecting nonexistent transactions, including customer "requests
for exchange," warehouse receipts (similar to delivery notes), and "credit
notes" showing the quantity of sunglasses credited and the amount of the
credit. The warehouse manager falsified documents including "requests for
exchange" and warehouse receipts, to facilitate this scheme, and kept track
of false invoices to further prevent detection.
This process "refreshed" the accounts receivable by clearing
the oldest balance from the customer's statement, and avoided the need to
increase bad debt reserves. To cover up the extended receivable dating
resulting from these activities, APD personnel in Hong Kong manually
altered a computer-generated aging report.
c. B&L's Investigation of Fraudulent APD
Transactions
Beginning in June 1994, a B&L audit team conducted an
internal investigation of various accounting irregularities in the APD s
Hong Kong sales operation. As that investigation was continuing, in late
August 1994, B&L management in Rochester received an anonymous letter from
"a group of concerned APD employees," asserting that APD management in Hong
Kong had been booking fraudulent sales and falsifying documents to conceal
their misconduct from the company's management and auditors. In response,
B&L management assigned additional auditors to the ongoing investigation
and retained outside auditors to assist the Company s investigation. By
October 1994, these investigators uncovered evidence of the scheme
described above.
After discovering the scheme by APD personnel to generate
fictitious sunglass sales, B&L s management replaced the personnel in Hong
Kong who were responsible for the scheme. As to the CLD, the management of
B&L replaced all CLD personnel responsible for granting the rights of
return. During the course of the Commission's investigation, B&L restated
its 1993 and 1994 financial statements in order to correct the improperly
recognized revenue in the APD and the CLD.
D. Violations
1. B&L Violated the Antifraud, Reporting,
Recordkeeping, and Internal Controls Provisions of
the Exchange Act
Section 10(b) of the Exchange Act, and Rule 10b-5
thereunder, prohibit material misstatements or omissions, made with
scienter, in connection with the purchase or sale of securities. SEC v.
Texas Gulf Sulphur Co., 401 F.2d 833, 860-62 (2d Cir. 1968), cert. denied,
394 U.S. 976 (1969). Recklessness or wilful disregard of the truth
generally satisfies the scienter requirement. See, e.g., Hollinger v.
Titan Capital Corp., 914 F.2d 1564, 1568-69 (9th Cir. 1990); SEC v. Blavin,
760 F.2d 706, 711 (6th Cir. 1985); SEC v. Falstaff Brewing Corp, 629 F.2d
62, 77 (D.C. Cir. 1980); Rolf v. Blyth Eastman Dillon & Co., 570 F.2d 38,
======END OF PAGE 10======
46 (2d Cir. 1978), cert. denied, 439 U.S. 1039 (1978).
A fact is material if there is a substantial likelihood that
a reasonable investor would consider the information to be important.
Basic, Inc. v. Levinson, 485 U.S. 224, 231-32 (1988). Misrepresentation of
a company's earnings, SEC v. Texas Gulf Sulphur Co., 401 F.2d 833, 849 (2d
Cir. 1968), cert. denied, 394 U.S. 976 (1969), and the improper recognition
of revenue in contravention of GAAP, see Fine v. American Solar King Corp.,
919 F.2d 290, 297, 300-01 (5th Cir. 1990), may be material.
Section 13(a) of the Exchange Act, and Rule 13a-1
thereunder, require issuers whose securities are registered with the
Commission pursuant to the Exchange Act to file annual reports. Such
reports must be true and correct. See SEC v. Savoy Industries, 587 F.2d
1149, 1165 (D.C. Cir. 1978). Rule 12b-20 requires that such reports
include all material information necessary to make the required statements,
in the light of the circumstances under which they are made, not
misleading. Pursuant to the instructions applicable to Form
10-K, financial statements contained therein must conform to Regulation S-
X, which, in turn, requires conformity with GAAP. 17 C.F.R. 210.4-
01(a)(1).
Statement of Financial Accounting Concepts No. 5, paragraphs
83 and 84, provides that revenue should not be recognized until it is (1)
realized or realizable and (2) earned. Revenue is realized or realizable
when products are exchanged for cash or for assets which are readily
convertible to cash or claims to cash. Revenue is earned when the entity
has substantially accomplished what it must do (generally including
delivery to the customer) to be entitled to the benefits represented by the
revenue.
In connection with many of the December Program sales, the
CLD granted rights of return. Furthermore, the December Program raised
significant questions as to whether the revenue was realized, realizable,
and earned. GAAP also requires that transactions be accounted for based on
their substance, not their form. In substance, many of the December
Program transactions were consignment sales, not bona fide sales. The
fictitious APD sales were similarly not bona fide and, indeed, were
entirely fictitious.
The December Program was designed, in part, to meet the
Company s sales targets. The CLD had been successful in meeting or
exceeding its targets for 48 consecutive months between 1989 and 1992 and
was anxious to continue this trend. As described above, the December
Program raised significant revenue recognition risks. Under such
circumstances, B&L should have exercised greater care to ensure that
revenues from the Program were properly recognized, although B&L senior
management was not aware of the CLD rights of return or the fictitious APD
sales when the Company s 1993 financials were published.
B&L violated Sections 10(b) and 13(a) of the Exchange Act,
and Rules 10b-5, 12b-20, and 13a-1 thereunder, by including financial
statements for the fiscal year ended December 25, 1993, in its 1993 and
1994 Annual Reports on Form 10-K, filed with the Commission, that were
======END OF PAGE 11======
materially false and misleading.<(11)> B&L recognized, in
contravention of GAAP and the Company's own revenue recognition policies,
$42.1 million of revenue, resulting in at least a $17.6 million, or 11%,
overstatement of the net income originally reported for its 1993 fiscal
year.
B&L also violated Section 13(b)(2)(A) of the Exchange Act by
maintaining false and misleading books and records which, among other
things, overstated the company s 1993 revenue, resulting in a material
overstatement of net income for 1993. B&L violated Section 13(b)(2)(B) of
the Exchange Act by failing to maintain a system of internal accounting
controls sufficient to provide reasonable assurances that certain sales
transactions in the CLD and APD were recorded as necessary to permit
preparation of financial statements in conformity with GAAP.
2.
Ianacone Was a Cause of B&L's Violations of the
Antifraud, Reporting, Recordkeeping, and Internal
Controls Provisions of the Exchange Act and
Violated Section 13(b)(5) of the Exchange Act
Ianacone was a cause of B&L's violations of Section 10(b) of
the Exchange Act, and Rule 10b-5 thereunder, and Section 13(a) of the
Exchange Act, and Rules 12b-20 and 13a-1 thereunder, because he prepared
division financial statements that he knew, or should have known, included
revenue that was not properly recognized under GAAP. He knew the
significant amount of inventory the distributors were purchasing, the price
at which they were purchasing it, and that distributors had been given
significant increases in their credit limits without adequate analysis of
their creditworthiness or ability to pay. Thus, he knew, or should have
known, that the division's financial statements contained improperly
recognized revenue, in that the distributors were unlikely to be able to
resell the product they were purchasing, which they needed to do to pay for
the product. Furthermore, Ianacone knew, or should have known, that
numerous distributors had refused to sign promissory notes, and that the
CLD had recognized revenue from sales that were shipped to third party
warehouses.
Additionally, the copy of the letter found in Ianacone's
files from the CLD's largest distributor, evidencing its understanding that
it could return unsold traditional SVS lenses, indicates that Ianacone
knew, or should have known, that this distributor had been granted a right
of return, and that this right of return would cause B&L's financial
statements to include improperly recognized revenue. Ianacone also knew
that the CLD's financial statements included revenue improperly recognized
because he had extended the 1993 fiscal year to include sales of lenses
that were shipped after the fiscal year ended.
Ianacone also violated Section 13(b)(5) of the Exchange Act,
and Rule 13b2-1 thereunder, and caused B&L's violations of Sections
13(b)(2)(A) and (B) of the Exchange Act, by improperly recording the
<(11)> B&L's liability under Section 10(b) of the Exchange Act
and Rule 10b-5 thereunder is imputed from the acts of Ianacone,
Matsumoto, Matsumoto's supervisor, and the former President and
former Controller of the APD.
======END OF PAGE 12======
December Program sales in the books and records of B&L, and knowingly
failing to adopt and implement, or circumventing, internal controls
designed to reasonably assure that revenue was properly recognized in the
correct accounting period.
3. Matsumoto Was a Cause of B&L's Violations of the
Antifraud, Reporting, Recordkeeping, and Internal
Controls Provisions of the Exchange Act and
Violated Section 13(b)(5) of the Exchange Act
Matsumoto was a cause of B&L's violations of Section 10(b)
of the Exchange Act, and Rule 10b-5 thereunder, and Section 13(a) of the
Exchange Act, and Rules 12b-20 and 13a-1 thereunder, by granting
distributors the right to return unsold lenses in connection with the
December Program. He knew, or should have known, that his conduct would
cause B&L to improperly recognize revenue, and contribute to improper
revenue recognition in B&L s financial statements. Matsumoto also violated
Section 13(b)(5), and Rule 13b2-1 thereunder, and caused B&L's violations
of Sections 13(b)(2)(A) and (B) of the Exchange Act, by knowingly issuing
rights of return to distributors.
4. Johnson Was a Cause of B&L's Violation of the
Reporting Provisions of the Exchange Act
Johnson was a cause of B&L's violation of Section 13(a) of
the Exchange Act, and Rules 12b-20 and 13a-1 thereunder. Johnson saw and
presented divisional financial statements to B&L's financial department
that he should have known contained improperly recorded revenue.
Johnson knew that the December Program was ambitious and it
was his idea to move all of CLD's traditional SVS lens inventory from CLD s
warehouse to the distributors. Johnson knew the distributors were expected
to buy all the inventory in December 1993, and pay for it in six months.
Johnson also knew that distributors were being asked to sell these lenses
at prices significantly higher than the September promotion price and that,
despite the high price, the Program depended on an unprecedented increase
in CLD's market share. Johnson further knew that the distributors were
extended credit far in excess of anything that had been extended to them
before and should have known that in some cases the credit far exceeded the
net worth of the distributors.
The design and structure of the December Program raised
significant questions and risks about whether revenue from the Program
would be properly recognized, and Johnson had final responsibility for the
CLD's financial statements. Given these circumstances, Johnson should have
been especially vigilant in monitoring the implementation of the Program.
For example, Johnson knew before the December 13 meeting
with distributors that Ianacone had decided to require the distributors to
sign promissory notes evidencing their large indebtedness to B&L. Yet he
did not know, but should have known, that shortly after the December 13
meeting, in response to resistance from the distributors, Ianacone
abandoned that requirement. Johnson also did not know, but should have
known, that certain distributors were granted rights of return. Finally,
Johnson did not know, but should have known, that the CLD held the books
======END OF PAGE 13======
open after the close of the fiscal year and that certain distributors
required B&L to pay for storage of the lenses.
Because of the foregoing, and the risks associated with this
large, end of the year transaction, Johnson was a cause of B&L's violation
of the reporting requirements.
IV.
Based on the foregoing, the Commission deems it appropriate
to accept the Respondents' Offers and to impose the relief specified in
those Offers.
Accordingly, IT IS HEREBY ORDERED, pursuant to Section 21C
of the Exchange Act, that B&L cease and desist from committing or causing
any violation, and any future violation, of Sections 10(b), 13(a), and
13(b)(2)(A) and (B) of the Exchange Act, and Rules 10b-5, 12b-20, and 13a-1
thereunder.
IT IS ALSO ORDERED, pursuant to Section 21C of the Exchange
Act, that Ermin Ianacone cease and desist from causing any violation, and
cease and desist from committing or causing 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)(A) and (B) of the Exchange Act, and Rules
12b-20 and 13a-1 thereunder.
Act, that Kurt Matsumoto cease and desist from causing any violation, and
cease and desist from committing or causing 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)(A) and (B) of the Exchange Act, and Rules
Act, that Harold O. Johnson cease and desist from causing any violation,
and any future violation, of Section 13(a) of the Exchange Act, and Rules
By the Commission.
Jonathan G. Katz, Secretary
======END OF PAGE 14======

Bausch and Lomb Case - SEC Verdict

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6/7/22, 10:11 AM https://www.sec.gov/litigation/admin/3439329.

UNITED STATES OF AMERICA

SECURITIES AND EXCHANGE COMMISSION

SECURITIES EXCHANGE ACT OF 1934

Release No. 39329 / November 17, 1997

ACCOUNTING AND AUDITING ENFORCEMENT

Release No. 987 / November 17, 1997

File No. 3-9488

In the Matter of ORDER INSTITUTING PUBLIC

PURSUANT TO SECTION 21C OF THE

SECURITIES EXCHANGE ACT OF

1934, MAKING FINDINGS, AND

BAUSCH & LOMB INCORPORATED, IMPOSING A CEASE-AND-DESIST

HAROLD O. JOHNSON, ORDER

ERMIN IANACONE, and

The Securities and Exchange Commission ("Commission") deems

it appropriate that public administrative proceedings be, and hereby are,

instituted pursuant to Section 21C of the Securities Exchange Act of 1934

("Exchange Act") against Bausch & Lomb Incorporated (hereinafter "B&L"),

Harold O. Johnson, Ermin Ianacone, and Kurt Matsumoto (hereinafter the

In anticipation of the institution of these administrative

proceedings, the Respondents have each submitted an Offer of Settlement

(hereinafter the "Offers") which the Commission has determined to accept.

brought by or on behalf of the Commission or in which the Commission is a

Respondents consent to the entry of this Order Instituting Public

Administrative Proceedings Pursuant to Section 21C of the Exchange Act of

On the basis of this Order and the Respondents' Offers, the

Commission makes the following findings:<(1)>

B&L materially overstated its net income for 1993 by

Pacific Division ("APD"). These overstatements of revenue resulted from

the activities of certain of the individual Respondents and other employees

sales of significant amounts of contact lenses to the CLD s distributors

less than two weeks before B&L s 1993 fiscal

year-end in connection with a marketing program that effectively resulted

in consignment sales. The portion of the overstatement relating to the APD

arose from certain APD personnel recording fraudulent sales. As a result

of the foregoing, B&L violated the anti-fraud and reporting provisions of

of the federal securities laws.

As to the CLD, Ermin Ianacone, the CLD's Controller and Vice

President of Finance, and Kurt Matsumoto, the CLD's Director of Distributor

Sales, caused B&L's violations of the antifraud, reporting, recordkeeping,

and internal controls provisions of the federal securities laws. Ianacone

and Matsumoto also violated the recordkeeping and internal controls

provisions of the federal securities laws. Harold O. Johnson, the CLD's

President, caused B&L's violations of the reporting provisions.

In the first quarter of 1996, B&L amended its Forms

which corrected this improper revenue recognition.

During all relevant times, B&L was a New York corporation,

doing business internationally with its headquarters in Rochester, New

the New York Stock Exchange.

Harold O. Johnson was at all relevant times the President of

relevant times Controller and Vice President of Finance of the CLD. He

<(1)> The findings herein are made pursuant to the

Respondents' respective Offers of Settlement and are not binding

on any other person or entity in this or any other proceeding.

======END OF PAGE 2======

left B&L in November 1994.<(2)> Kurt Matsumoto was at all relevant

times the CLD's Director of Distributor Sales. His employment was

terminated in April 1995.

1. The CLD December Program

In the early 1990s, the CLD's contact lens business was

undergoing substantial changes and faced major strategic challenges. The

beginning in the 1980s, new "disposable" contact lenses, designed to be

in the market.<(3)> A late entrant in the disposable lens market, B&L