SECURITIES AND EXCHANGE COMMISSION

Litigation Release No. 17156 / September 27, 2001

Accounting and Auditing Enforcement Release No. 1458

SEC v. Holden, Skooglund, Padda, and Beal (U.S.D.C. N.D. Illinois, Civil Action No. 01-C-7463, filed September 27, 2001)

The Commission announced the filing on September 27, 2001 of a complaint charging four executives of a Chicago-area company with a multi-million dollar accounting fraud. The defendants are Stephen L. Holden, of Deerfield, Illinois, Scott P. Skooglund, of Woodridge, Illinois, Kuldarshan S. Padda, of Chicago, Illinois, and Stephan C. Beal, of Norwell, Massachusetts. All four were formerly executives of Sabratek Corporation, a Skokie, Illinois developer and seller of remote healthcare equipment, including infusion pumps and flush syringes and related equipment and software used in both hospital and home healthcare situations.

The Commission's complaint alleges that the defendants engaged in a scheme to overstate Sabratek's sales and results of operation in its Form 10-K for the year 1998 and Forms 10-Q for the first three quarters of 1998 and the first quarter of 1999. During those years, Padda was Sabratek's chief executive officer and chairman of the board; Holden was at first Sabratek's chief financial officer, controller, and treasurer and then later its president and treasurer; Beal was Sabratek's vice president of sales; and Skooglund was Sabratek's vice president of finance and chief accounting officer.

According to the Commission's complaint, Sabratek's pump and flush syringe businesses were the company's two primary sources of sales. Prior to 1998, Sabratek capitalized on strong demand for pumps from large institutional customers to increase its sales. In 1998, however, Sabratek faced first slowing demand for its pumps and later an FDA demand that the company stop selling its flush syringes. The Commission alleges that despite these adverse developments, Padda and Holden told analysts that Sabratek's sales would continue to grow in 1998. Based on Padda and Holden's representations, analysts projected that Sabratek's net sales would grow by as much as $23 million in 1998.

The Commission charges that to meet these forecasts, from the first quarter of 1998 through the first quarter of 1999, the defendants recognized numerous large, end-of-the-quarter transactions that did not qualify as sales under Generally Accepted Accounting Principles ("GAAP"). In some instances, the defendants allegedly created fictitious sales of pumps that had not been ordered by customers, but instead were parked at third-party warehouses. In other instances, they allegedly entered into sales agreements containing consignment or right-of-return provisions. In still other instances, they allegedly agreed to significant seller's obligations, including promises that Sabratek's sales force would assist Sabratek's customers in the resale of these pumps to end-users.

The Commission also alleges that throughout 1998 and the first quarters of 1999, certain defendants inflated Sabratek's sales by billing another company a total of $4.5 million for "consulting services" that Sabratek executives in fact largely never provided.

The Commission alleges that over the five quarters from the first quarter of 1998 through the first quarter of 1999, Sabratek, through the defendants' actions, overstated net sales by $30.7 million, or more than 60%. The Commission also alleges that through the defendants' actions, Sabratek reported total operating income of $10.3 million, when in fact it had experienced an operating loss of $8 million over the five quarters in question.

The Commission's complaint also charges that the Company's press releases and the MD&A sections of Sabratek's periodic reports filed during 1998 and early 1999, which were approved by Padda and Holden, touted the company's sales growth without disclosing that the sales growth had been achieved through the fraudulent "consulting services" billings and through special inducements and concessions, including extended payment terms, consignment arrangements, rights of return, and other significant seller's obligations.

According to the complaint, in the second half of 1999, when news of Sabratek's inflated operating results began to emerge, the company's market capitalization declined by $202.5 million, or 98%. On December 17, 1999, Sabratek filed a petition to reorganize under Chapter 11 of the Bankruptcy Code.

The Commission charges that through the conduct alleged in the complaint, the defendants violated and/or aided and abetted violations of antifraud, reporting, internal controls and record keeping provisions of the Securities Exchange Act of 1934 ("Exchange Act"). Specifically, the complaint charges that Holden violated and/or aided and abetted violations of Sections 10(b), 13(a), 13(b)(2)(A), 13(b)(2)(B) and 13(b)(5) of the Exchange Act and Rules 10b-5, 12b-20, 13a-1, 13a-13, 13b2-1, and 13b2-2 thereunder; that Skooglund violated and/or aided and abetted violations of Sections 10(b), 13(a), 13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act and Rules 10b-5, 12b-20, 13a-1, 13a-13, 13b2-1 and 13b2-2 thereunder; that Padda violated and/or aided and abetted violations of Sections 10(b), 13(a), 13(b)(2)(A), 13(b)(2)(B) and 13(b)(5) of the Exchange Act and Rules 10b-5, 12b-20, 13a-1, 13a-13, 13b2-1, and 13b2-2 thereunder; and that Beal violated and/or aided and abetted violations of Sections 10(b), 13(a), 13(b)(2)(A), and 13(b)(5) of the Exchange Act and Rules 10b-5, 12b-20, 13a-1, 13a-13, 13b2-1 thereunder. The complaint also alleges that Holden is additionally liable for certain violations by others because he was a control person under Section 20(a) of the Exchange Act. The Commission's complaint asks the Court to order permanent injunctions and civil penalties against all the defendants, and disgorgement with prejudgment interest from Holden, Skooglund, and Beal, and to issue an order barring Holden from acting as an officer or director of any issuer of stock registered under Section 12 of the Exchange Act

Simultaneously with the filing of the Commission's complaint, Padda and Beal consented to settle the Commission's suit, without admitting or denying the Commission's allegations. Padda consented to the entry of a final judgment that permanently enjoins him from violations of Sections 10(b), 13(a), 13(b)(2)(A), 13(b)(2)(B) and 13(b)(5) of the Exchange Act and Rules 10b-5, 12b-20, 13a-1, 13a-13, 13b2-1, and 13b2-2 thereunder, and orders him to pay $125,000 in civil penalties. Beal consented to the entry of a final judgment that permanently enjoins him from violations Sections 10(b), 13(a), 13(b)(2)(A), and 13(b)(5) of the Exchange Act and Rules 10b-5, 12b-20, 13a-1, 13a-13, 13b2-1 thereunder, and orders him to pay disgorgement of $29,237 and prejudgment interest thereon of $6,193, and to pay $60,000 in civil penalties.

In related proceeding, the Commission issued an administrative order against Paul Jurewicz the former chief financial officer of Sabratek. That order directs Jurewicz to cease and desist from committing or causing any violation or any future violations of Sections 10(b), 13(a), 13(b)(2)(A), 13(b)(2)(B) of the Exchange Act, and Rules 10b-5, 12b-20, 13a-1, 13a-13, 13b2-1, and 13b2-2 thereunder, and to pay disgorgement of $14,838 and prejudgment interest thereon of $2,718. For more information regarding the administrative proceeding against Jurewicz, see Securities and Exchange Act Release No. 34-44860.

http://www.sec.gov/litigation/litreleases/lr17156.htm