==========================================START OF PAGE 1====== UNITED STATES OF AMERICA Before the SECURITIES AND EXCHANGE COMMISSION SECURITIES EXCHANGE ACT OF 1934 Release No. 38555 / April 29, 1997 ACCOUNTING AND AUDITING ENFORCEMENT Release No. 909 / April 29, 1997 ADMINISTRATIVE PROCEEDING File No. 3-9302 ------------------------------------ : : In the Matter of : ORDER INSTITUTING PUBLIC : PROCEEDINGS PURSUANT TO : SECTION 21C OF THE : SECURITIES EXCHANGE ACT OF DOROTHEA BOSSIO, MICHAEL IMBRIALE : THE 1934, MAKING FINDINGS AND and ROCCO LEONE, : IMPOSING SANCTIONS : Respondents. : : : ---------------------------------- I. The Commission deems it appropriate and in the public interest that public administrative proceedings be, and they hereby are, instituted against Dorothea Bossio ("Bossio"), Michael Imbriale ("Imbriale") and Rocco Leone ("Leone") pursuant to Section 21C of the Securities Exchange Act of 1934 ("Exchange Act"). II. In anticipation of the institution of these administrative proceedings, Bossio, Imbriale and Leone have submitted Offers of Settlement, which the Commission has determined to accept. Solely for the purpose of these proceedings, and any other proceeding brought by or on behalf of the Commission or to which the Commission is a party, and without admitting or denying the findings contained herein, Bossio, Imbriale and Leone consent to the issuance of this Order, the entry of the findings contained ==========================================START OF PAGE 2====== herein, and the imposition of the sanctions set forth below. III. The Commission makes the following findings: -[1]- A. RESPONDENTS 1. Bossio Bossio, 40, at all relevant times served as the bookkeeper and office manager of Peltz Food Division ("PFD"), a division of Chipwich Inc. She began working for Chipwich's former CEO in 1973 when she graduated from high school. Bossio reported directly to Chipwich's former CEO until his May 29, 1992 resignation. Bossio currently is unemployed. 2. Imbriale Imbriale, 41, at all relevant times functioned as the General Manager of PFD. He began working for Chipwich's former CEO right out of college in 1976. Imbriale currently is a sales representative for a food company. 3. Leone Leone, 39, served as PFD's director of purchasing and was responsible for maintaining and tracking PFD inventory records and inventories. Leone reported to Imbriale. Leone left Chipwich in July 1992 and now runs a frozen food warehouse. B. OTHER RELEVANT PERSONS 1. Chipwich, Inc. Chipwich is a New York corporation with its principal place of business in New York. In February 1989, Chipwich, a public company, merged with Peltz Food Corp. ("PFC"), a private company. From February 1989 until its bankruptcy in July 1992, Chipwich's business consisted of the Chipwich Ice Cream Division, which manufactured and sold "Chipwich" frozen snack products, and PFD (formerly PFC), which distributed frozen and refrigerated foods to institutional customers in the New York City metropolitan area. For the year ending December 31, 1991, including discontinued operations, Chipwich reported revenues of ---------FOOTNOTES---------- -[1]- The findings herein are not binding on anyone other than the Respondents. ==========================================START OF PAGE 3====== approximately $41 million and current assets of approximately $9.9 million, including approximately $4.9 million in inventory. Chipwich's common stock was registered with the Commission pursuant to Section 12(g) of the Exchange Act and was listed for over-the-counter trading during the relevant time period. As of May 8, 1992 Chipwich had 11,803,571 shares of Class A Common Stock outstanding. As a result, in part, of the conduct described below, Chipwich filed for Chapter 11 bankruptcy protection on July 31, 1992, and its stock was delisted. Following the bankruptcy filing, the assets of PFD were sold. On August 20, 1994 Chipwich emerged from bankruptcy as a private company, again only in the business of selling frozen snack products. C. SUMMARY From at least February 1989 until May 1992 Bossio, Imbriale and Leone, three long-time PFD employees, implemented a fraudulent scheme to overstate PFD's inventory. Chipwich's former CEO devised the fraud and, in concert with a certified public accounting firm that functioned as PFD's in-house accounting department and its financial management (the "CPAs"), directed Bossio, Imbriale and Leone to effect it. In addition, Bossio aided Chipwich's former CEO in covering up his misappropriation of corporate funds. Bossio, Imbriale and Leone violated the antifraud, record-keeping and internal controls provisions of the federal securities laws as a result of these activities. D. THE SCHEME TO OVERSTATE INVENTORY Throughout the relevant time period, according to Chipwich's financial statements, PFD's inventory represented approximately 50% of Chipwich's then-current assets. In fact, however, from 1989 through and including the first quarter of 1992, an increasing amount of the inventory reported in its annual reports filed with the Commission on Forms 10-K was fictitious. Chipwich's former CEO and the CPAs designed the scheme to overstate PFD's inventory. To effect the scheme, Chipwich's former CEO convened meetings in his Randall Avenue office prior to the commencement of the year-end audits. At these meetings, Imbriale and Bossio were told what inventory number should be reflected on PFD's year-end financial statements. They were told that a number greater than the actual inventory number was needed ==========================================START OF PAGE 4====== to show greater profitability. -[2]- Next, the meeting participants discussed how to proceed, and it was determined that the fictitious inventory would be reflected as being at outside warehouses since Chipwich's outside auditors did not perform a physical count of the inventory at those locations. Afterwards, Imbriale told Leone that they needed to create fictitious inventory at outside warehouses. -[3]- They discussed what product to use, choosing high volume fruits and vegetables. Leone and Imbriale then drew up a handwritten list of various food brokers, packers and growers who were connected with the product and with whom PFD had good relationships. On at least one occasion, Bossio also collaborated with Imbriale and Leone in drafting the handwritten list of fictitious inventory at outside warehouses. Randomly they came up with product, assigned the prevailing price and selected a "warehouse." Chipwich's former CEO, Imbriale, Bossio and Leone then made phone calls to the respective "warehouse" people whom each knew best. The warehouses did what was asked, returning signed confirmations to Chipwich's outside auditors which conformed to the amounts on the handwritten list. As an example of the inventory scheme, for year end 1990 Imbriale, Bossio, Leone and others created at least $1.3 million of fictitious inventory, inflating inventory reported in the financial statements included in the annual report on Form 10-K by nearly 50%, and contributing approximately $950,000 in income to Chipwich which enabled the company to report $187,000 in pre-tax income rather than a large pre-tax loss from operations. For year end 1991 they created approximately $2.1 million of fictitious inventory, which resulted in nearly a 100% inventory overstatement, and allowed Chipwich to report a net ---------FOOTNOTES---------- -[2]- Bossio knew that the inventory number was greater than the actual inventory because it did not correspond to the weekly inventory reports that she filed with Chipwich's lender. Imbriale knew that the number was grossly overstated because of his general familiarity with the relative capacities of PFD's warehouses and his knowledge of PFD's actual inventory. -[3]- Leone knew that the number was overstated because he maintained PFD's inventory records, including those reflecting inventory at the outside warehouses. (In fact, because of the economics of outside storage costs and other factors, at no time was the value of PFD inventory being stored at outside warehouses greater than approximately $250,000.) This was not Leone's first experience with falsifying PFD's inventory. At various times during the relevant period, Chipwich's former CEO and Imbriale told Leone to falsify some of the inventory cards he maintained to make it appear as if PFD had actually received product when, in fact, it had not. ==========================================START OF PAGE 5====== loss of $1.139 million instead of a net loss of at least $1.9 million. Thus, the inventory fraud had the effect of overstating Chipwich's assets by increasing amounts for the years ended 1989, 1990 and 1991, and for all quarters in which PFD publicly reported financial results as a part of Chipwich, up to and including the quarter ended March 31, 1992. In addition, the inventory fraud had the effect of overstating Chipwich's pre-tax earnings or understating its pre-tax losses by the same increasing amounts during the relevant periods. E. BOSSIO'S ROLE IN THE MISAPPROPRIATION BY CHIPWICH'S FORMER CEO In addition to the scheme to overstate inventory, Chipwich's former CEO regularly took cash from the company without disclosing the sums that he took. As PFD's bookkeeper, Bossio routinely gave Chipwich's former CEO cash from the day's receipts and prepared bank deposit slips to reflect deposits that were reduced by the amounts that she gave to Chipwich's former CEO. Although these deposit slips accurately reflected the amounts deposited, they were used for preparing books and records, including cash receipts ledgers, that understated the amount of cash received by the company by the amount Chipwich's former CEO misappropriated. During the relevant time period Chipwich's former CEO misappropriated anywhere from $1,500 to $10,000 at a time, once to three times per week, amounting to a total of at least $375,000 wrongfully taken from the company. These amounts were not reflected on any of the corporate books and records. F. LEGAL ANALYSIS The inventory scheme and the misappropriation by Chipwich's former CEO resulted in violations of the antifraud, reporting, record-keeping and internal control provisions of the securities laws. 1. The Antifraud Provisions Section 10(b) of the Exchange Act and Rule 10-5 thereunder prohibit a person from making misstatements or omissions of material fact in connection with the purchase or sale of a security. Violations of Section 10(b) and Rule 10b-5 occur when an issuer makes material misstatements in periodic reports filed with the Commission and trading thereafter occurs in the issuer's securities. SEC v. Texas Gulf Sulphur Co., 401 F.2d 833 (2d Cir. 1968), cert. denied, 394 U.S. 976 (1969). In addition, to violate Section 10(b) and Rule 10b-5, a defendant must act with scienter, Aaron v. SEC, 446 U.S. 680, 695 ==========================================START OF PAGE 6====== (1980), "a mental state embracing intent to deceive, manipulate, or defraud." Ernst & Ernst v. Hochfelder, 425 U.S. 185, 193 n.12 (1976). Reckless conduct satisfies the scienter requirement. See, e.g., IIT v. Cornfeld, 619 F.2d 909, 923 (2d Cir. 1980); Decker v. Massey-Ferguson, Ltd., 681 F.2d 111, 120 (2d Cir. 1982); Lanza v. Drexel & Co., 479 F.2d 1277, 1306 (2d Cir. 1973). 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). Bossio, Imbriale and Leone caused Chipwich's violations of Section 10(b) and Rule 10b-5 in connection with Chipwich's filing of the false and misleading Forms 10-K and 10-Q for the period 1989 through the first quarter of 1992. They knowingly participated in the overstatement of Chipwich's inventory. Under these circumstances, they knew or should have known that their actions to assist the inventory manipulation would contribute to these violations of the antifraud provisions of the Exchange Act. 2. The Reporting and Recordkeeping Provisions Section 13(a) of the Exchange Act and Rules 13a-1 and 13a-13 thereunder require issuers with securities registered under Section 12 of the Exchange Act to file annual and quarterly reports with the Commission and to keep this information current. The obligation to file reports embodies the requirement that such reports be true and correct. See e.g., SEC v. Savoy Indus., Inc., 587 F.2d 1149, 1165 (D.C. Cir. 1978), cert. denied, 440 U.S. 913 (1979). Exchange Act Rule 12b-20 further requires the inclusion of any additional material information that is necessary to make required statements, in light of the circumstances under which they were made, not misleading. Section 13(b)(2)(A) of the Exchange Act requires issuers to make and keep books and records which accurately reflect the transactions and disposition of assets. Section 13(b)(2)(B)(ii) requires issuers to devise and maintain a system of internal accounting controls sufficient to provide reasonable assurances that, among other things, transactions are recorded as necessary to permit preparation of financial statements and to maintain the accountability of assets. Section 13(b)(5) of the Exchange Act prohibits any person from knowingly circumventing or failing to implement a system of internal accounting controls or knowingly falsifying any book, record or account described in Section 13(b)(2). Rule 13b2-1 also prohibits any person from, directly or indirectly, falsifying or causing to be falsified any such book, record or account. ==========================================START OF PAGE 7====== ==========================================START OF PAGE 8====== Bossio, Imbriale and Leone, while acting at the direction Chipwich's former CEO and others, knew they were participating in a scheme to overstate inventory. All three falsified documents and corporate books and records by, among other things, creating lists of fictitious inventory that were given to the outside auditors and falsifying the inventory cards. And all three caused the outside warehouses to falsely confirm non-existent inventory. Thus, they knew they were participating in Chipwich's inflation of its inventory. They understood that the inventory manipulation would inflate Chipwich's inventory value in its year-end books and records thereby affecting its year-end results. Nor can they avoid the consequences of their actions by virtue of the fact that Chipwich's former CEO and others directed them to act. They cannot avoid culpability by invoking the "good soldier" defense and asserting that their violative conduct was ordered and condoned by their corporate superiors. See In re Collins Industries, Inc. et al., Admin. Proc. File No. 3-8542, Exchange Act Release No. 34-34934, 1994 SEC LEXIS 3416, at 28 (November 3, 1994). These materially misstated results, in turn, were reflected on company reports. For the period 1989 through the first quarter of 1992 Chipwich filed false and misleading annual reports on Forms 10-K and quarterly reports on Forms 10-Q with the Commission. Each of these reports included financial statements which contained overstated inventory figures which had the effect of overstating net profits or understating net losses. In addition, the cash receipts journals prepared by Bossio understated the company's cash receipts by the amounts Chipwich's former CEO directed Bossio to give to him. Bossio knew or should have known that such understated cash receipts had a material impact on the financial statements of the company and the reports filed with the Commission. Under these circumstances, Imbriale, Bossio and Leone knew, or should have known, that their actions to assist the inventory manipulation would contribute to Chipwich's violations of the reporting and recordkeeping provisions of the Exchange Act. Moreover, Bossio knew or should have known that her actions to conceal the misappropriation by Chipwich's former CEO from the company would likewise contribute to violations of the reporting and recordkeeping provisions of the Exchange Act. By engaging in such conduct, they caused Chipwich's violations of 13(a) and 13(b)(2) of the Exchange Act and Rules 12b-20, 13a-1, 13a-13 and 13b2-1. Last, by falsifying inventory records, they directly violated Section 13(b)(5) and Rule 13b2-1. ==========================================START OF PAGE 9====== IV. Based on the foregoing, the Commission finds that: A. Bossio violated Section 13(b)(5) of the Exchange Act and Exchange Act Rule 13b2-1 and caused violations of Sections 10(b), 13(a) and 13(b)(2) of the Exchange Act and Rules 10b-5, 12b-20, 13a-1, 13a-13 and 13b2-1 thereunder. B. Imbriale violated Section 13(b)(5) of the Exchange Act and Exchange Act Rule 13b2-1 and caused violations of Sections 10(b), 13(a) and 13(b)(2) of the Exchange Act and Rules 10b-5, 12b-20, 13a-1, 13a-13 and 13b2-1 thereunder. C. Leone violated Section 13(b)(5) of the Exchange Act and Exchange Act Rule 13b2-1 and caused violations of Sections 10(b), 13(a) and 13(b)(2) of the Exchange Act and Rules 10b-5, 12b-20, 13a-1, 13a-13 and 13b2-1 thereunder. V. In view of the foregoing, it is in the public interest to impose the sanctions agreed to in the Offers. Accordingly, IT IS HEREBY ORDERED THAT: A. Bossio, pursuant to Section 21C of the Exchange Act, cease and desist from committing or causing any violation, and from committing or causing any future violation, of Sections 10(b), 13(a), 13(b)(2) and 13(b)(5) of the Exchange Act and Rules 10b-5, 12b-20, 13a-1, 13a-13 and 13b2-1 promulgated thereunder. B. Imbriale, pursuant to Section 21C of the Exchange Act, cease and desist from committing or causing any violation, and from committing or causing any future violation, of Sections 10(b), 13(a), 13(b)(2) and 13(b)(5) of the Exchange Act and Rules 10b-5, 12b-20, 13a-1, 13a-13 and 13b2-1 promulgated thereunder. C. Leone, pursuant to Section 21C of the Exchange Act, cease and desist from committing or causing any violation, and from committing or causing any future ==========================================START OF PAGE 10====== violation, of Sections 10(b), 13(a), 13(b)(2) and 13(b)(5) of the Exchange Act and Rules 10b-5, 12b-20, 13a-1, 13a-13 and 13b2-1 promulgated thereunder. By the Commission. Jonathan G. Katz Secretary