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UNITED STATES OF AMERICA
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In the Matter of Harry P. Adler, Respondent. |
: : : : : : : : |
ORDER INSTITUTING PUBLIC CEASE-AND-DESIST PROCEEDINGS, MAKING FINDINGS, AND IMPOSING A CEASE-AND-DESIST ORDER PURSUANT TO SECTION 21C OF THE SECURITIES EXCHANGE ACT OF 1934 |
I.
The Securities and Exchange Commission ("Commission") deems it appropriate that public cease-and-desist proceedings be, and hereby are, instituted pursuant to Section 21C of the Securities Exchange Act of 1934 ("Exchange Act") against Harry P. Adler ("Adler" or "Respondent").
II.
In anticipation of the institution of these proceedings, Respondent 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 in which the Commission is a party, and without admitting or denying the findings herein, except that the Respondent admits the Commission's jurisdiction over him and the subject matter of the proceedings, Respondent consents to the entry of this Order Instituting Public Cease-and-Desist Proceedings, Making Findings, and Imposing a Cease-and-Desist Order Pursuant to Section 21C of the Securities Exchange Act of 1934 ("Order").
III.
On the basis of this Order and Respondent's Offer, the Commission finds1 that:
Respondent
Respondent Adler is the president, co-founder, and co-owner of TWS Shoe, Inc. ("TWS"), a wholesale distributor of outdoor apparel. Adler, 69 years old, is a resident of Santa Ana, California.
Other Relevant Entities
TWS, a private company formed in California in 1990, is a wholesale distributor of outdoor apparel. TWS's principal place of business is in Anaheim, California. From at least 1997 through 1999, TWS primarily sold product manufactured by The North Face, Inc. ("The North Face").
The North Face was a Delaware corporation with its headquarters in San Leandro, California and Carbondale, Colorado. The North Face is now a wholly-owned subsidiary of VF Corporation, but during the relevant time period it was a publicly-traded company. The North Face products include outerwear, skiwear, and outdoor equipment designed for activities such as mountaineering, backpacking, skiing, hiking, training, and adventure travel.
Conduct
The North Face had a network of what it called variously "wholesale distributors" or "premium dealers" or "Territory 68"; these were primarily small operations that diverted North Face product into "gray market" export channels. TWS was a Territory 68 customer. In the fourth quarter of 1998, The North Face arranged a $2.6 million consignment sale to TWS. The true terms of the sale were not disclosed and the sale was improperly recorded by the company as a normal sale-with immediate, improper recognition of revenue and full profit margin. 2
The fourth quarter transaction occurred after certain employees of The North Face, including an officer of the company, offered to sell $2.6 million worth of product on consignment terms to TWS. Adler successfully had sold The North Face product for years, but ordinarily he would not place a large order unless it was "matched". In a "matched" order, Adler acted as a broker. He would receive a purchase order from a client, re-format the order as being from TWS and send it to The North Face. The fourth quarter sale was not, however, a matched sale. When Adler saw the product list of what had been shipped to his warehouse, he told a company employee that he would not be able to sell it to his normal customers. The company employee asked him to hold the product and said that the company would work with him to identify potential sales channels.
The North Face's independent auditors, in connection with their audit of the 1998 year-end financial statements, sent a confirmation letter to Adler regarding the fourth quarter transaction. The letter was more detailed than a typical confirmation: it set forth all of the elements of a bona fide normal sale and asked Adler to confirm that the description of the transaction was accurate. Adler knew that, other than the ostensible price of the product, each of the elements the auditors sought to confirm in the letter was false. An officer of the company instructed an employee to persuade Adler to sign the false confirmation. After being assured by the company employee that the company was not trying to change the consignment terms of the sale, Adler agreed to sign the confirmation letter. Adler signed the false confirmation letter and returned it to the auditors. The auditors were thereby provided with materially false and misleading information about the fourth quarter sale.
As a result of the conduct described above, Adler caused violations of Rule 13b2-2 promulgated under the Exchange Act, which prohibits officers and directors of an issuer from (i) making or causing to be made materially false or misleading statements, or (ii) omitting to state, or causing another person to omit to state, any material fact necessary in order to make statements made, in light of the circumstances under which such statements were made, not misleading to an accountant in connection with any audit or examination of the financial statements of the issuer or the preparation or filing of any document or report required to be filed with the Commission.
IV.
In view of the foregoing, it is appropriate to impose the sanctions agreed to in the Offer submitted by Respondent. Accordingly,
IT IS ORDERED, pursuant to Section 21C of the Exchange Act, that Respondent cease and desist from committing or causing any violations and any future violations of Rule 13b2-2 promulgated under the Exchange Act.
By the Commission.
Jonathan G. Katz
Secretary
1 The findings herein are made pursuant to Respondent's Offer of Settlement and are not binding on any other person or entity in this or any other proceeding
2 Statement of Financial Accounting Standards No. 48, "Revenue Recognition When Right of Return Exists," does not allow the seller to recognize revenue [or, therefore, profit] when the customer can return the product and payment to the seller is contingent upon resale by the customer. Thus, recognition of revenue and profit for a contingent sale is improper since payment to the seller being contingent upon resale by the customer is the essence of a consignment sale.
http://www.sec.gov/litigation/admin/34-47341.htm
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