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UNITED STATES OF AMERICA
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ORDER INSTITUTING CEASE-AND-DESIST PROCEEDINGS, MAKING FINDINGS, AND IMPOSING A CEASE-AND-DESIST ORDER PURSUANT TO SECTION 21C OF THE SECURITIES EXCHANGE ACT OF 1934 AS TO LOUIS LUCULLO |
The Securities and Exchange Commission ("Commission") deems it appropriate that public administrative proceedings be, and hereby are, instituted against Louis Lucullo ("Lucullo") pursuant to Section 21C of the Securities Exchange Act of 1934 (the "Exchange Act").
In anticipation of the institution of these administrative proceedings, Lucullo has submitted an Offer of Settlement ("Offer"), 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 to which the Commission is a party, and without admitting or denying the findings contained herein, except as to the Commission's finding of jurisdiction over Lucullo and the subject matter of this proceeding, which Lucullo admits, Lucullo consents to the issuance of this Order Instituting Cease-and-Desist Proceedings, Making Findings, and Imposing a Cease-and-Desist Order Pursuant to Section 21C of the Securities Exchange Act of 1934 as to Louis Lucullo ("Order") and to the entry of the findings and imposition of relief set forth below.
On the basis of this Order and Lucullo's Offer, the Commission makes the following findings:1
Summary
(1) This case involves the issuance of a purported insurance policy by American International Group, Inc. ("AIG") to Brightpoint, Inc. ("Brightpoint" or "the Company") for the purpose of assisting Brightpoint to conceal $11.9 million in losses the Company sustained in 1998. As a result, Brightpoint's 1998 financial statements, as reported in the 1998 Form 10-K, overstated Brightpoint's actual net income before taxes by 61 percent. As set forth in separate orders issued today, the Commission has found that both Brightpoint and AIG violated Section 10(b) and Rule 10b-5 of the Exchange Act, among other provisions, by engaging in the conduct that is the subject of this Order.
(2) Lucullo was an assistant vice president of AIG's Loss Mitigation Unit ("LMU"), and he was AIG's principal agent in structuring the insurance policy that allowed Brightpoint to conceal the losses. In the course of the Commission's investigation, and from his first opportunity, Lucullo forthrightly provided extensive testimony under oath about the development of this policy, including his own role in structuring it. In determining to accept Lucullo's offer of settlement, the Commission has taken into consideration Lucullo's cooperation in the investigation and his undertaking, contained in the Offer, to cooperate with the Commission staff in connection with any judicial or administrative proceeding or investigation commenced by the Commission or to which the Commission is a party that is related to the subject matter of this Order. For the reasons set forth below, the Commission finds that Lucullo was a cause of Brightpoint's violations of Section 13(a) and Rules 12b-20 and 13a-1 of the Exchange Act.
The Respondent
(3) Lucullo, age 32, is a resident of New York, New York. Lucullo is the senior vice president of the LMU, a division created in 1997 within one of AIG's principal general insurance company subsidiaries. Lucullo joined the LMU in February 1998 as assistant vice president and served in that position until June 1999, at which time he became vice president of the LMU.
Other Relevant Individuals and Entities
(4) AIG is a Delaware corporation with its principal corporate offices located in New York, New York. AIG is a holding company that, through its subsidiaries, is engaged in a broad range of insurance and insurance-related activities in the United States and abroad. AIG's primary activities include both general and life insurance operations. AIG's securities are registered pursuant to Section 12(b) of the Exchange Act and are listed on the New York Stock Exchange.
(5) Brightpoint is a Delaware corporation headquartered in Plainfield, Indiana. Brightpoint provides outsourced services such as distribution, fulfillment, customized packaging, prepaid and e-business solutions, and inventory management in the wireless telecommunications and data industry. Brightpoint's securities are registered pursuant to Section 12(g) of the Exchange Act and its common stock is listed on NASDAQ's National Market under the symbol CELL.
Discussion
(6) In October 1998, Brightpoint publicly announced that in the fourth quarter ending December 31, it would recognize a one-time charge, ranging from $13 million to $18 million, arising out of losses sustained by one of its divisions in the United Kingdom ("UK"). However, by December 1998, the UK losses were approaching $29 million, and Brightpoint's corporate controller, John Delaney ("Delaney"), and its director of risk management, Timothy Harcharik ("Harcharik"), devised a scheme to cover-up these additional, unanticipated losses, rather than disclose them.
(7) In December 1998, Delaney and Harcharik turned to AIG's LMU, which offered so-called "insurance" products specifically designed to minimize the financial statement impact of losses sustained by AIG clients. With Lucullo's assistance, Brightpoint and AIG fashioned an insurance policy (the "AIG Policy") with two parts. The first part purported to cover retroactively all of the extra UK losses up to $15 million in return for a $15 million premium that Brightpoint was to pay over the prospective three-year life of the policy. The second part of the policy provided prospective fidelity coverage for the three year period going forward for a premium of $202,400. The AIG Policy, finalized in January 1999, enabled Brightpoint to record in 1998 an insurance receivable of $11.9 million, which Brightpoint netted against the total UK losses of about $29 million, bringing the net loss to within the previously disclosed $13 million to $18 million range.
(8) In fact, the retroactive portion of the AIG Policy was not insurance. It was a mechanism for Brightpoint to deposit money with AIG - in the form of monthly "premiums" - which AIG was then to return to Brightpoint as purported "insurance claim payments." To minimize scrutiny by Brightpoint's auditors (the "Auditors"), Delaney, Harcharik and Lucullo designed both parts of the policy to look like a traditional, non-retroactive indemnity insurance contract that shifted risk to the insurer and they gave the policy an effective date of August 1998. Once the AIG Policy was finalized, Lucullo issued a letter to the Auditors, at Harcharik's request, stating that there would be a "probable" "insurance recovery" under the AIG Policy, even though Brightpoint was, in fact, certain to recover its deposits.
(9) In October 2001, as a result of the Commission's investigation, the Auditors began looking more closely at the AIG Policy and determined that it was not traditional insurance. Although the Auditors questioned whether the policy was insurance at all, they decided at the very least that the policy provided retroactive coverage and, therefore, that all premium expense associated with it should have been recorded in 1998. On November 13, 2001, Brightpoint announced a restatement, which treated the AIG Policy as real, but retroactive, insurance. The first restatement expensed the full policy "premium" in the fourth quarter of 1998, amounting to $15.3 million.
(10) On January 31, 2002, Brightpoint announced that it would further restate its financial statements to reflect that the AIG Policy "premiums" were nothing but deposits with AIG. This second restatement came about when the Auditors learned that, one day before Brightpoint announced the first restatement, it had "cancelled" the retroactive component of the AIG Policy and obtained from AIG a refund in the full amount of premiums Brightpoint had paid over and above the "insurance claim payments" made to it by AIG. The cancellation transaction essentially left no doubt about the true nature of the AIG Policy.
(11) At all relevant times, Brightpoint was a reporting company and subject to the provisions of Section 13(a) of the Exchange Act. Section 13(a) and Rule 13a-1 thereunder require issuers to file periodic reports with the Commission and to keep this information current. Rule 12b-20, which applies to all reports filed pursuant to Section 13 of the Exchange Act, requires disclosure of such additional information as may be necessary to make the required statements not misleading. Implicit in these provisions is the requirement that the information reported be true, correct and complete. See United States v. Bilzerian, 926 F.2d 1285, 1298 (2d Cir.), cert. denied, 502 U.S. 813, 112 S. Ct. 63 (1991); SEC v. Savoy Indus., Inc., 587 F.2d 1149, 1165 (D.C. Cir. 1978), cert. denied, 440 U.S. 913 (1979). No showing of scienter is necessary to establish an issuer's violation of the corporate reporting provisions, Section 13(a) of the Exchange Act and Rules 12b-20 and 13a-1. See SEC v. Wills, 472 F. Supp. 1250, 1268 (D.D.C. 1978). Consequently, an issuer violates the reporting provisions if it files materially false or misleading reports or omits information necessary to render the statements made not misleading. See SEC v. Koenig, 469 F.2d 198, 200 (2d Cir. 1972); see also Kaufman & Broad, Inc. v. Belzberg, 522 F. Supp. 35, 42 (S.D.N.Y. 1981) (Rule 12b-20).
(12) As described above, Brightpoint's annual reports contained material misrepresentations and omissions concerning the UK losses and the insurance available for those losses. By structuring the AIG Policy to aid Brightpoint in concealing losses, and by issuing a letter to the Auditors stating that there would be a "probable" "insurance recovery" under the AIG Policy when Lucullo knew that Brightpoint was certain to recover its deposits, Lucullo was a cause of Brightpoint's violations of Section 13(a) and Rules 12b-20 and 13a-1 of the Exchange Act.
Lucullo has undertaken and agreed to cooperate fully with the Commission in any and all investigations, litigations or other proceedings relating to or arising from the matters described in the Offer. In connection with such cooperation, Lucullo has agreed and undertaken:
1. To produce, without service of a notice or subpoena, any and all documents and other information requested by the Commission's staff;
2. To be interviewed by the Commission's staff at such times as the staff reasonably may direct;
3. To appear and testify truthfully and completely without service of a notice or subpoena in such investigations, depositions, hearings or trials as may be requested by the Commission's staff; and
4. That in connection with any testimony of Lucullo to be conducted at deposition, hearing or trial pursuant to a notice or subpoena, Lucullo:
a. Agrees that any such notice or subpoena for Lucullo's appearance and testimony may be addressed to his attorney, Ralph C. Ferrara, Esq., Debevoise & Plimpton, 555 13th Street, N.W., Washington, D.C. 20004, and served by regular mail; and
b. Agrees that any such notice or subpoena for Lucullo's appearance and testimony in an action pending in a United States District Court may be served, and may require testimony, beyond the territorial limits imposed by the Federal Rules of Civil Procedure.
In determining whether to accept the Offer, the Commission has considered these undertakings.
In view of the foregoing, the Commission deems it appropriate to impose the sanctions agreed to by Lucullo in the Offer.
Accordingly, IT IS ORDERED that pursuant to Section 21C of the Exchange Act, Lucullo shall cease and desist from causing any violations or any future violations of Section 13(a) and Rules 12b-20 and 13a-1 of the Exchange Act.
By the Commission.Jonathan G. Katz
Secretary
1 The findings herein are made pursuant to Lucullo's Offer and are not binding on any other person or entity in this or any other proceeding.
http://www.sec.gov/litigation/admin/34-48476.htm
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