Securities and Exchange Commission

Litigation Release No. 16307 / September 28, 1999

Accounting and Auditing Enforcement
Release No. 1178

SECURITIES AND EXCHANGE COMMISSION V. COMPUTONE CORPORATION, THOMAS J. ANDERSON, GREGORY A. ALBA, DONALD A. PEARCE, DUNCAN E. HUME AND BRIAN D. KRETSCHMAN, Civil Action No. 1:99-CV-2496 (N.D. Ga.)

SEC SUES COMPUTONE CORPORATION AND CERTAIN OFFICERS FOR INFLATING EARNINGS

The Commission announced that on September 28, 1999, it filed a complaint against Computone Corporation ("Computone") of Alpharetta, Georgia, which designs, manufactures and sells computer hardware and software products, Thomas J. Anderson ("Anderson") of Georgetown, South Carolina, its former president and chief executive officer, Gregory A. Alba ("Alba") of Norristown, Pennsylvania, its former controller and chief financial officer, Donald A. Pearce ("Pearce") of Reston, Virginia, its former vice president of finance and principal accounting officer, Duncan E. Hume ("Hume") of Greensboro, Georgia, a vice president of international sales, and Brian D. Kretschman ("Kretschman") of Alpharetta, Georgia, a vice president of sales.

The complaint alleges a pervasive effort by these senior management employees to overstate Computone's income from October 1993 through October 1997. For example, the defendants recognized revenue in approximately 240 transactions where, among other things, customers had never placed orders, products were not shipped to customers, products were shipped before customers wanted delivery, or the risks/rewards of ownership had not passed to the customers. Computone's income was also overstated as a result of the deliberate refusal to timely record product returns and failure to properly account for various expenses. As a result, the defendants collectively violated the antifraud, reporting, books and records, and internal control provisions of the Securities Exchange Act of 1934 (Sections 10(b), 13(a), 13(b)(2)(A), 13(b)(2)(B), and 13(b)(5) and Rules 10b-5, 12b-20, 13a-1, 13a-13, 13b2-1 and 13b2-2 thereunder).

The complaint asks the Court to issue permanent injunctions against all the defendants and seeks civil money penalties against Anderson, Alba, Pearce, Hume and Kretschman, and disgorgement plus prejudgment interest against Anderson. The Commission also seeks a court order barring Anderson from serving as an officer and director in the future.

Anderson led the efforts to overstate Computone's income. Anderson regularly directed others to falsify Computone's financial statements and underlying accounting books and records, and on occasions he committed those acts himself. He also misled Computone's auditors and he circumvented and failed to implement internal accounting controls to prevent accounting errors and irregularities.

Alba, a CPA, disregarded factual matters relating to transactions that he recorded in Computone's books and financial statements. Alba regularly falsified financial statements and underlying accounting books and records. He also misled Computone's auditors and he circumvented and failed to implement internal accounting controls.

Pearce disregarded factual matters relating to transactions that he recorded on Computone's books and financial statements. He allowed Computone to record sales even though purchase orders had not been received, customers lacked the ability to pay for products, sales were conditional, or customers had the right to return products.

Kretschman created fictitious documents and altered existing documents in order to assist Computone to improperly report revenue. He also instructed a subordinate to alter documents. In addition, he misled the auditors about the accuracy of a purchase order.

Hume altered a customer's purchase order to allow Computone to inflate its income and then attempted to coerce the customer's president to sign a false confirmation request that a valid sale took place. Hume also misled the auditors about the transaction.

As a result of materially overstating its income, Computone filed false reports with the Commission and issued false press releases. In addition, Computone maintained inaccurate books, records and accounts and failed to maintain a sufficient system of internal accounting controls.

This action is one of fourteen cases involving financial reporting and/or fraud that were announced today.

http://www.sec.gov/litigation/litreleases/lr16307.htm