FOR IMMEDIATE RELEASE 2000-142 SEC and U.S. Attorney Coordinate Efforts to Crackdown on "Cooking the Books" Los Angeles, CA, September 27, 2000 -- The Securities and Exchange Commission today announced the filing of 11 enforcement actions for fraud and related financial accounting and reporting abuses by six different public companies. These actions allege a variety of accounting abuses that were designed to fraudulently mislead the investing public about the state of the issuers' financial health. Among those named in the actions are former officers of Sirena Apparel Group, Inc. and Craig Consumer Electronics, Inc., two Southern California-based public companies. The SEC also brought securities fraud charges involving four other public companies located in California, Nevada and Washington. These actions are part of a coordinated effort by the SEC and the U.S. Attorney for the Central District of California to highlight incidents of financial fraud occurring on the West Coast. Valerie Caproni, the Regional Director for the SEC's Pacific Region, stated, "The SEC is dedicated to investor protection. It is imperative that investors receive complete and accurate information about the financial well being of the companies in which they invest their hard-earned dollars. These actions underscore that the SEC has a zero tolerance policy toward public companies and their officers who attempt to undermine the integrity of our securities markets by engaging in fraudulent accounting practices to the detriment of public investors." Alejandro Mayorkas, the United States Attorney for the Central District of California, said, "The ability of investors and financial institutions to make business decisions depends upon the honest and fair dealings of those in the business community. When false representations are made and disseminated widely, the integrity of the transactions is thrown into question. This United States Attorney's Office is here to protect not only the individual businessperson, but the marketplace as a whole." The actions brought today by the SEC and the United States Attorney are summarized below: Case Summaries and SEC/U.S. Attorney Contact List: 1. SEC v. Maurice B. Newman and Richard A. Gerhart (U.S. District Court, Central District of California) (SEC Contact: Diana K. Tani (323) 965-3991) United States of America v. Maurice "Corky" Newman and Richard Gerhart (U.S. District Court, Central District of California) (Contact: Assistant U.S. Attorney Gregory Weingart (213) 894-0346) The SEC sued Maurice B. Newman, the former chairman of the board and CEO of Sirena Apparel Group, Inc. and Richard A. Gerhart, the former chief financial officer of Sirena. Sirena is a women's swimwear manufacturer located in Los Angeles County. The complaint alleges that in order to meet revenue and earnings projections, Newman and Gerhart caused Sirena to report false financial information in a press release and a quarterly report for the fiscal quarter ending March 31, 2000. Newman and Gerhart overstated Sirena's revenue by $3.6 million (or 13%) and its earnings by $1.3 million (or 30%). The complaint alleges that Newman and Gerhart instructed Sirena personnel to hold open the March 1999 quarter until Sirena had reached its sales target for that period. The quarter was held open by resetting the date on Sirena's computer clock to March 30 or 31 until sales targets were met on April 12, 1999. Manipulation of the computer clock allowed April shipments to be recorded as March revenue because the computer clock controlled the date that was printed on the company's invoices and the date on which the revenue was recognized. Newman and Gerhart held the March 1999 quarter open until April 12, 1999. Newman and Gerhart attempted to conceal the scheme by falsely telling their independent auditors that there were no sales cutoff problems for the quarter and by ordering Sirena personnel to create false shipping records that would be provided to the auditors. The complaint charges Newman and Gerhart with securities fraud, falsifying Sirena's books and records, knowingly circumventing Sirena's internal controls, and lying to an accountant and with aiding and abetting Sirena's violations of the periodic reporting and record-keeping provisions of the federal securities laws. Newman has agreed to settle this action by consenting to a permanent injunction, without admitting or denying the allegations in the complaint, and to pay a $30,000 penalty. As to Gerhart, the complaint seeks a permanent injunction, civil penalties and an order barring him from serving as an officer or director of a public company. In the criminal case, a federal grand jury in Los Angeles has named Newman and Gerhart in a 10-count indictment that alleges various securities fraud violations arising out of the scheme to misrepresent Sirena's financial condition and profitability to the investing public. Yesterday, special agents with the FBI arrested the two defendants, who have been freed on bond. The two defendants are scheduled to be arraigned on the indictment on Monday, October 2. If they are convicted of all counts in the indictment, Newman faces a maximum sentence of 95 years imprisonment, and Gerhart could be sentenced to as much as 85 years in federal prison. 2. SEC v. Richard I. Berger and Donna M. Richardson (U.S. District Court, Central District of California) In the Matter of Bonnie K. Metz (Administrative Proceeding) In the Matter of Craig Consumer Electronics, Inc. (Administrative Proceeding) (SEC Contact: Diana K. Tani (323) 965-3991) United States of America v. Richard I. Berger, Donna Richardson and Bonnie Metz (U.S. District Court, Central District of California) (Contact: Assistant U.S. Attorney Robert J. Borthwick (213) 894-0703) In this action, the SEC sued defendants Richard I. Berger, the former CEO of Craig Consumer Electronics, Inc., and Donna M. Richardson, Craig's former chief financial officer. Craig, which is now defunct, was a marketer of consumer electronics products located in Los Angeles County. The complaint alleges that Berger and Richardson failed to disclose the true state of Craig's precarious financial condition and its cash flow situation in periodic reports and the company's IPO registration statement by engaging in the following conduct: ú Inflating Craig's accounts receivable that were used to secure a line of credit from a bank. Berger and Richardson inflated the accounts receivable on a daily basis by delaying the processing of the sales returns, which Craig was not permitted to borrow against, in an area of Craig's computer system called the "queue." ú Inflating Craig's inventory that was also used to secure its line of credit. Berger and Richardson inflated the value of inventory by transferring defective goods, which Craig was not permitted to borrow against, into "new" or "refurbished" categories. As a result of the manipulation of its accounts receivables and inventory, Craig significantly exceeded its credit limit. Additionally, the complaint alleges that Berger caused Craig to overstate revenue and earnings for the first quarter 1997 by recognizing improperly $1.3 million in revenue from sales of defective product. This resulted in Craig overstating its revenue by 11% and understating its pretax loss by 14%. The complaint charges Berger and Richardson with securities fraud, falsifying books and records, knowing circumvention of internal controls and lying to an accountant and with aiding and abetting Craig's violations of the reporting, record-keeping and internal controls provisions of the federal securities laws. Berger offered to settle the action by agreeing to a permanent injunction, without admitting or denying the allegations in the complaint, to pay a $25,000 penalty and to be barred from serving as an officer or director for five years. In a related administrative proceeding, the Commission found that Bonnie K. Metz, Craig's vice president/managing director for its Hong Kong office, knowingly circumvented Craig's internal controls by falsifying bills of lading to create the illusion that Craig held title to goods owned by others. Without admitting or denying the SEC's findings, Metz agreed to cease and desist from knowingly circumventing internal controls and falsifying books and records. The SEC instituted a separate administrative proceeding against Craig to determine whether the registration of its stock should be revoked. A hearing on this matter will be scheduled before an administrative law judge. A federal grand jury in Los Angeles yesterday indicted Berger, Richardson and Metz in a scheme to defraud four banks that had extended a line of credit to Craig. The 21-count indictment alleges conspiracy, loan fraud, falsifying corporate books and records, lying to the auditors of a publicly traded company, and making false statements in reports filed with the SEC. The three defendants, who will be arraigned next month in federal court in Los Angeles, are accused of causing the consortium of banks to lose approximately $8 million by artificially inflating the amount of money they were permitted to borrow from the banks. If they are convicted of all charges in the indictment, all three defendants face scores of years in federal prison. 3. SEC v. John Daws, Thomas Butler and Mark Folit (U.S. District Court, Northern District of California) In the Matter of Cylink Corporation (Administrative Proceeding) (SEC Contact: Robert Mitchell (415) 705-2351) The SEC's federal court action names John Daws, Cylink Corporation's former chief financial officer, Thomas Butler, Cylink's former vice president of sales, and Mark Folit, Cylink's former head of North American sales. Cylink, based in the Silicon Valley, develops, markets, and supports computer network security products. The complaint alleges that in order to meet Cylink's ambitious revenue goals, the defendants caused the company to recognize revenue on numerous transactions in violation of Cylink's own revenue recognition policy, Generally Accepted Accounting Principles, or both. This included recognizing revenue: (1) on a transaction where the customer could cancel the order; (2) on orders from a distributor who was not credit worthy; and (3) on software product orders that were contingent on the customer's right to exchange the software for hardware. After the fraud was uncovered, Cylink issued restated financials that sharply reduced its results for the periods in question. For the first quarter of fiscal 1998, Cylink restated revenue from $15.8 million to $8 million (a 97.5% overstatement) and net income from continuing operations of $1.1 million to a net loss from continuing operations of $3.4 million. For the second quarter of fiscal 1998, Cylink restated revenue from $18 million to $12.4 million (a 45% overstatement) and net income of $1.7 million to a net loss of $1.7 million. For the fourth quarter of fiscal 1997, Cylink restated net income from discontinued operations from $4.5 million to $3.2 million (a 41.7% overstatement). The complaint charges all of the defendants with securities fraud, knowing circumvention of Cylink's internal controls, falsifying Cylink's internal records, and aiding and abetting Cylink's violations of the periodic reporting and record-keeping provisions of the federal securities laws. The Complaint also charges Daws with failing to devise and maintain adequate internal accounting controls and failing to provide material information to Cylink's outside auditors in connection with Cylink's 1997 audit. The complaint seeks a permanent injunction, disgorgement of each defendant's quarterly bonus and a civil penalty. In a separate action, the SEC instituted, and simultaneously settled, administrative cease-and-desist proceedings against Cylink. The SEC's Order finds that Cylink materially misstated its financial results for the fourth quarter of fiscal 1997 and the first two quarters of fiscal 1998 and directs Cylink to cease and desist from violations of the periodic reporting, internal controls and record-keeping provisions. Cylink consented to issuance of the Order without admitting or denying its findings. 4. In the Matter of YourBankOnline, Pakie V. Plastino and William L. Butcher, C.P.A. (Administrative Proceeding) (SEC Contact: Robert Mitchell (415) 705-2351) The SEC sued YourBankOnline, a Seattle-area software company, and its president, Pakie V. Plastino, as well as William L. Butcher, YourBankOnline's outside auditor. The SEC staff alleges that YourBankOnline and Plastino committed fraud by issuing a press release that drastically overvalued the company's primary asset and triggered a sharp run-up in its stock price, and by later filing financial statements with the SEC that also inflated the asset's value. The staff also alleges that Butcher failed to conduct an adequate audit before he certified the company's financial statements. The charges stem from YourBankOnline's March 1999 acquisition of an Internet banking software program, which the Company claimed in a press release was being purchased for $10 million in cash and stock. The $10 million figure purportedly greatly overstated the value of the software and misrepresented YourBankOnline's financial strength. The staff alleges that YourBankOnline, which had $138 in cash at the time, had no ability to make any substantial cash payments to acquire the software and the Company stock that YourBankOnline issued in exchange for the software was worth far less than $10 million. Moreover, the staff contends that the $10 million value was unreasonable in light of the fact that the company that sold the software to YourBankOnline had purchased it in a separate transaction six months earlier for approximately $400,000. In the days after it announced the software acquisition, YourBankOnline--which was then known as Consolidated Data, Inc.-- sent out numerous other press releases touting various features of the software, which caused the Company's stock to rise from less than $1 to $32 over a two-week period in trading on the OTC Bulletin Board. The staff alleges that YourBankOnline also fraudulently inflated the value of the software in financial statements filed with the SEC in August 1999 and that Butcher engaged in improper professional conduct in his audit of those financial statements. The staff alleges that Butcher failed to take reasonable steps to determine the true value of the software, despite the fact that it was essentially the Company's only asset. The staff also alleges that Butcher failed to follow Generally Accepted Auditing Standards and falsely represented that the Company's financial statements complied with Generally Accepted Accounting Principles. A hearing will be scheduled before an administrative law judge to determine whether the allegations in the administrative order are true and, if so, what remedial actions or sanctions are appropriate. 5. SEC v. Michael L. Hiebert (U.S. District Court, Central District of California) In the Matter of Premier Laser Systems, Inc. (Administrative Proceeding) (SEC Contact: Lisa A. Gok (323) 965-3835) The SEC sued Michael L. Hiebert, the former chief financial officer of Premier Laser Systems, Inc. Premier, which is now bankrupt, was a manufacturer of medical lasers and fiber optic devices based in Orange County, California. The complaint alleges that Hiebert caused Premier to overstate quarterly revenue by more than a third in its Form 10-Q for the company's fiscal third quarter ended December 31, 1997. It did so by recognizing $2.4 million in revenue from a purported sale of dental lasers to an entity that in fact did not place an order but merely entered into a non-binding letter of intent to market the lasers. The purported order was the largest Premier had ever received and, if it had been real, would have resulted in the company's first-ever quarterly profit. The complaint alleges that Hiebert failed to review adequately documentation supporting the purported sale. As a result, Premier's now- deceased Executive Vice President was able to perpetrate the fraudulent scheme involving the creation of a fictitious customer order form and the shipment of 100 lasers to a warehouse. Hiebert is charged with securities fraud and falsifying Premier's books and records and with aiding and abetting Premier's violations of the periodic reporting, record-keeping and internal controls provisions of the federal securities laws. Hiebert settled the action by agreeing to the entry of a permanent injunction, without admitting or denying the allegations in the complaint, and to a $10,000 penalty. In a related administrative cease-and-desist proceeding based on the conduct described above, Premier consented to the entry of an order without admitting or denying the SEC's findings, that it cease and desist from violating the antifraud, reporting, record-keeping and internal controls provisions of the federal securities laws. 6. SEC v. Countryland Wellness Resorts, Inc., Fred Cruz (a.k.a. Federico Cruz Gonzalez), Luis R. Hidalgo, Jr. and Donald E. Studer (U.S. District Court, District of Nevada) In the Matter of Countryland Wellness Resorts, Inc. (Administrative Proceeding) (SEC Contact: Diana K. Tani (323) 965-3991) The SEC's injunctive action names the following parties: Countryland Wellness Resorts, Inc., based in Las Vegas, which claims to be in the mining and electrical contracting business and purports to plan to operate a longevity center at a wellness resort and casino in Las Vegas; Fred Cruz, aka Federico Cruz Gonzalez, Countryland's president and chairman of the board; Luis R. Hidalgo, Jr., Countryland's auditor and a licensed California certified public accountant; and Donald E. Studer, Countryland's attorney, who is licensed to practice law in California and Louisiana. The complaint alleges that Countryland and Cruz lied to investors about the following assets reported in the company's financial statements and in various SEC filings: ú Dirt stored in a warehouse was reported as gold with a value ranging from $19.5 million to over $27.3 million; ú Mining reserves were reported to have proven values ranging from $1.2 billion to $2.1 billion; in fact extensive work needed to be performed to determine the amount and value, if any, of recoverable minerals. Nonetheless, Countryland reported the mining reserves as assets from 1997 through 2000. ú Indonesian bank guarantees were reported to have values ranging from $400 million to $1.1 billion; in fact, the bank guarantees did not exist. The complaint also alleges that Hidalgo rendered false audit reports on Countryland's 1996, 1997, and 1998 financial statements, falsely stating that the company's financial statements were presented in conformity with Generally Accepted Accounting Principles and that he conducted his audit in accordance with Generally Accepted Auditing Standards. The complaint further alleges that Cruz and Countryland's counsel, Studer, knowingly included an unauthorized audit report in a June 1999 registration statement filed with the SEC. The complaint charges all of the defendants with securities fraud. The complaint also charges Countryland with violating and Cruz with aiding and abetting Countryland's violations of the periodic reporting, record-keeping and internal controls provisions and Cruz with violating the falsifying books and records and lying to an accountant provisions of the federal securities laws. Studer and Hidalgo agreed to settle the action by consenting to a permanent injunction without admitting or denying the allegations in the complaint; no penalties were assessed based on their demonstrated inability to pay. Countryland and Cruz also consented to the entry of a permanent injunction without admitting or denying the allegations in the complaint. Additionally, Cruz agreed to pay a $55,000 penalty. The SEC instituted a separate administrative proceeding against Countryland to determine whether the registration of its stock should be revoked. A hearing on this matter will be scheduled before an administrative law judge. # # #