UNITED STATES OF AMERICA Before the SECURITIES AND EXCHANGE COMMISSION SECURITIES EXCHANGE ACT OF 1934 Release No. 39793 / March 25, 1998 ACCOUNTING AND AUDITING ENFORCEMENT Release No. 1019 / March 25, 1998 ADMINISTRATIVE PROCEEDING File No. 3-9565 ______________________________ : : In the Matter of : : ORDER INSTITUTING PUBLIC THOMAS H. PIKE, : ADMINISTRATIVE PROCEEDINGS, : MAKING FINDINGS, AND ISSUING : CEASE-AND-DESIST ORDER Respondent. : ______________________________: I. The Commission deems it appropriate that public administrative proceedings be, and they hereby are, instituted against Thomas H. Pike ("Pike") pursuant to Section 21C of the Securities Exchange Act of 1934 ("Exchange Act"). II. In anticipation of the institution of these administrative proceedings, Pike has submitted an Offer of Settlement ("Offer"), 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, Pike, without admitting or denying the findings contained in this order, consents to the issuance of this Order Instituting Public Administrative Proceedings, Making Findings, and Issuing Cease and Desist Order ("Order"), the findings contained herein, and the imposition of the relief set forth below. III. The Commission makes the following findings:[1] A. FACTS 1. Summary From at least July 1, 1993, through July 10, 1995, Sensormatic Electronics Corporation, a company engaged in manufacturing and selling electronic security systems, improperly recognized revenue in order to manipulate its quarterly revenue and earnings to reach its budgeted earnings goals and thereby meet analysts' quarterly earnings projections. Sensormatic employed the following practice, among others, to improperly and prematurely recognize revenue. At the end of each quarter Sensormatic turned back the computer clock that dated and recorded shipments. Based on these computer-generated documents reflecting shipments, Sensormatic then prematurely recognized revenue on shipments made past the end of the quarter. Pike, Sensormatic's then Director of Management Information Systems ("MIS") and for part of this period, also its Director of U.S. Operations, was responsible for Sensormatic's computer and information systems and the accounting records and other reports generated by Sensormatic's computer. Pike supervised the individuals who circumvented the internal controls, reset the computer clock, and generated documents bearing false dates. Pike, by permitting the process to be implemented, caused the falsification of Sensormatic's books and records and Sensormatic's violations of the internal controls provisions of the federal securities laws. Pike also understood or should have understood that the acceleration of revenue recognition into a prior quarter was not in conformity with generally accepted accounting principles ("GAAP") and that Sensormatic was using the inaccurate information generated by the computer to prepare its financial statements. Based on the false shipping documents, Sensormatic reported inaccurate revenue figures and misstated its earnings in financial statements that were contained in its periodic reports filed with the Commission. As a result, Pike also caused Sensormatic's violations of the reporting provisions of the federal securities laws. 2. Respondent: Thomas H. Pike Pike, age 45, was Sensormatic's Director of MIS from July 1991 through October 1995, when he resigned. From February 1994 through April 1995, Pike also served as Sensormatic's Director of U.S. Operations. As the Director of MIS, Pike was responsible for the company's information systems, its computer network, and the reports and records generated by these systems. As Director of U.S. Operations, Pike had oversight responsibility for the general accounting and controllership functions for U.S. operations, which included responsibility for the preparation of the general ledger and other accounting records that were used in preparing the company's financial statements. Pike is a certified public accountant, licensed since 1983 by the State of Florida, but he has not practiced public accountancy since then. 3. The Issuer: Sensormatic Electronics Corporation Sensormatic, a Delaware corporation with its principal executive offices in Boca Raton, Florida, manufactures and markets electronic security systems used, among other things, to deter shoplifting. Sensormatic's common stock is registered with the Commission pursuant to Section 12(b) of the Exchange Act and is traded on the New York Stock Exchange. During the relevant time Sensormatic was required to file reports with the Commission pursuant to Section 13(a) of the Exchange Act. During the relevant period, Sensormatic reported that it generally recognized revenue upon shipment of equipment. 4. Falsifying Sensormatic's Computer and Accounting Records From at least July 1, 1993 through July 10, 1995, Sensormatic improperly recognized and recorded revenue in the quarter that had just ended on shipments made past the end of the quarter ("out-of-period shipments"). Sensormatic improperly recognized revenue by resetting the computer clock that dated and recorded shipments. [2] Shortly before midnight on the last day of the quarter, Sensormatic's computer system was "brought down" so that the computer clock date would reflect the last day of the quarter. The computer then recorded shipments made during the first days of the new quarter as having occurred on the last day of the prior quarter. Consequently, Sensormatic's records reflecting shipment dates were false. The false shipping records were then used in determining the quarterly revenue figures. As a result, Sensormatic's books and records improperly and prematurely recorded revenue from out-of- period shipments. During the relevant period, the amount of revenue improperly recognized on out-of-period shipments ranged from $4.6 million for the second quarter of fiscal year 1994 to over $30 million for the third quarter of fiscal year 1995. This revenue information was then included in Sensormatic's periodic reports which were filed with the Commission and disseminated to the public. Sensormatic's periodic reports misstated its quarterly revenue, and thereby misstated Sensormatic's quarterly net income and earnings per share. The false and misleading reports include the quarterly and annual reports on Forms 10-Q and 10-K filed for the first quarter of 1994 through the third quarter of 1995. Sensormatic's misstatements of net income ranged from an understatement of approximately $1.9 million or 9.1 percent for the second quarter of fiscal year 1994, to an overstatement of $6.7 million or 38.3 percent for the third quarter of 1995. In addition, Sensormatic also issued a press release that materially inflated preliminary estimates of its net income for the fourth quarter of 1995 and for fiscal year 1995. 5. Pike's Role in Turning Back the Computer Clock At the end of certain quarters in 1994 and 1995, Pike received internal Sensormatic memoranda that estimated the amount of revenue Sensormatic still needed to record in order to meet its quarterly sales goals. Pike was aware or should have been aware that these revenue figures could not be attained without improperly holding the quarter open. As Director of MIS, Pike was responsible for Sensormatic's computer system, which included responsibility for the accuracy and integrity of the documents and data generated by it. Yet, under Pike's supervision and despite his concerns -- which he conveyed to his superior -- that the resetting of the computer date could affect the integrity of computer data, the computer clock was turned back each quarter during the relevant period. Thus, Pike facilitated the practice of holding the quarter open. Employees under Pike's supervision approached him and raised concerns about the propriety of creating false documents and about the disruption and potential damage caused by turning back the computer clock. Nevertheless, Pike told these employees to reset the computer clock. He advised them that other companies engaged in similar conduct. As a result of Pike's instructions, Sensormatic's shipping records reflected false shipping dates. Pike, therefore, caused the falsification of these records. Pike also knew or should have known that the false information contained in these records would be used in determining Sensormatic's quarterly revenues and reflected in other books and records prepared and maintained by the company. In addition, Pike understood or should have understood that revenue would be recorded on out-of-period shipments and that this practice did not conform with GAAP. Moreover, he understood or should have understood that the company used the improperly recognized revenue in preparing its financial statements, which were contained in Sensormatic's periodic reports described above. B. LEGAL ANALYSIS 1. Pike Violated Rule 13b2-1 under the Exchange Act Exchange Act Rule 13b2-1 prohibits any person from, directly or indirectly, falsifying or causing to be falsified any book, record, or account subject to Section 13(b)(2)(A) of the Exchange Act. By supervising the employees who reset the computer clock in order to falsify dates on shipping records and prematurely recognize revenue, Pike violated Rule 13b2-1 under the Exchange Act. 2. Pike Caused Sensormatic's Violations of the Reporting, Recordkeeping, and Internal Controls Provisions of the Exchange Act 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, such as Sensormatic, to file annual reports on Form 10-K and quarterly reports on Form 10-Q with the Commission. Pursuant to instructions applicable to Form 10-K and Form 10-Q, the financial statements contained in these periodic reports must conform with Regulation S-X which requires conformity with GAAP. 17 C.F.R. 210.4-01(a)(1). In addition, Exchange Act Rule 12b-20 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. An issuer violates these provisions if it files a periodic report that contains materially false or misleading information. See e.g., Laser Photonics, Inc., Securities Act Release No. 7463 (Sept. 30, 1997); and Spectrum Information Technologies, Inc., Securities Act Release No. 7426 (June 25, 1997). Sensormatic violated these provisions by filing materially false and misleading periodic reports during the relevant period of time. As discussed above, these reports misstated the company's results of operations, including revenue and net income. They also falsely stated that the company recognized revenue upon shipment during the stated periods, whereas in fact the company intentionally and prematurely recognized revenue on out-of-period shipments and did not comply with GAAP. By supervising the resetting of the computer clock, Pike caused Sensormatic's reporting violations. Pike knew that the computer clock was reset at the end of each quarter to falsely record shipment dates. He also knew or should have known that the company recorded and reported revenue on the out-of-period shipments based on the backdated shipping documents. Therefore, Pike knew, or should have known, that his actions in furtherance of the improper recognition of revenue would contribute to Sensormatic's violations of Section 13(a) of the Exchange Act and Rules 13a-1, 13a-13, and 12b-20 thereunder. Under Section 13(b)(2)(A) of the Exchange Act, Sensormatic was required to make and keep books and records which accurately reflected its transactions and disposition of assets. Section 13(b)(2)(B) of the Exchange Act requires issuers such as Sensormatic 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 in conformity with GAAP and to maintain accountability for assets. Sensormatic's conduct related to the resetting of the computer clock violated both of these provisions. Sensormatic routinely created documents bearing false dates that were relied upon in Sensormatic's preparation of other books and records, including those that recorded revenue from shipments made past the end of a quarter. By resetting the computer clock, Sensormatic failed to devise and maintain internal controls that would ensure that its financial statements were prepared in conformity with GAAP. By the same conduct described above, Pike caused Sensormatic's violations of Sections 13(b)(2)(A) and (B) of the Exchange Act. Pike knew, or should have known, that his role in resetting the computer clock would result in the falsification of Sensormatic's books and records and the subversion of existing internal controls. IV. Based on the foregoing, the Commission finds that: A. Pike violated Exchange Act Rule 13b2-1; and B. Pike caused Sensormatic's violations of Sections 13(a), 13(b)(2)(A), and 13(b)(2)(B) of the Exchange Act and Rules 12b-20, 13a-1, and 13a-13 thereunder. **FOOTNOTES** [1]: The Commission's findings herein are made pursuant to Pike's Offer and are not binding upon any other person or entity in these or any other proceedings. [2]: Sensormatic improperly recognized revenue on out-of- period shipments in this manner for many years prior to July 1, 1993. V. In view of the foregoing, the Commission finds that it is appropriate to impose the following relief as agreed to in the Offer. Accordingly, IT IS HEREBY ORDERED, pursuant to Section 21C of the Exchange Act, that Pike cease and desist from: A. committing or causing any violation, and any future violation, of Exchange Act Rule 13b2-1; and B. causing any violation and any future violation of Sections 13(a), 13(b)(2)(A), and 13(b)(2)(B) of the Exchange Act, and Rules 12b-20, 13a-1 and 13a-13 thereunder. By the Commission. Jonathan G. Katz Secretary SERVICE LIST Rule 141 of the Commission's Rules of Practice provides that the Secretary, or another duly authorized officer of the Commission, shall serve a copy the Order Instituting Public Administrative Proceedings, Making Findings, and Issuing Cease-and-Desist Order on each person named as a party in the order or their legal agent. The attached Order Instituting Public Administrative Proceedings, Making Findings, and Issuing Cease-and-Desist Order has been sent to the following parties and other persons entitled to notice: The Honorable Brenda P. Murray Chief Administrative Law Judge Securities and Exchange Commission Mail Stop 11-6 450 Fifth Street, N.W. Washington, D.C. 20549 Securities and Exchange Commission Division of Enforcement Mail Stop 7-9 450 Fifth Street, N.W. Washington, D.C. 20549 Attention: Sharon Zamore, Esq. Alan M. Cohen, Esq. Joseph C. Lombard, Esq. O'Melveny & Myers LLP 555 13th Street, N.W. Washington, D.C. 20004-1109 Thomas H. Pike c/o Alan M. Cohen, Esq. Joseph C. Lombard, Esq. O'Melveny & Myers LLP 555 13th Street, N.W. Washington, D.C. 20004-1109