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UNITED STATES OF AMERICA
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In the Matter of Zimmerman Sign Company Respondents.
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ORDER INSTITUTING PUBLIC ADMINISTRATIVE AND CEASE-AND-DESIST PROCEEDINGS PURSUANT TO SECTION 21C OF THE SECURITIES EXCHANGE ACT OF 1934 AND RULE 102(e) OF THE COMMISSION'S RULES OF PRACTICE, MAKING FINDINGS, AND IMPOSING REMEDIAL SANCTIONS AND A CEASE-AND-DESIST ORDER |
I.
The Securities and Exchange Commission ("Commission") deems it appropriate and in the public interest that public administrative and cease-and-desist proceedings be, and hereby are, instituted against Zimmerman Sign Company, pursuant to Section 21C of the Securities Exchange Act of 1934 ("Exchange Act"), and against Jeffrey P. Johnson, pursuant to Section 21C of the Exchange Act and Rule 102(e)(1)(iii) of the Commission's Rules of Practice. 1
II.
In anticipation of the institution of these proceedings, the Respondents have submitted an Offer of Settlement ("Offer") that 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, the Respondents, by their Offer, admit the jurisdiction of the Commission over them and over the subject matter of these proceedings, and consent to the entry of this Order Instituting Public Administrative and Cease-and-Desist Proceedings Pursuant to Section 21C of the Securities Exchange Act of 1934 and Rule 102(e) of the Commission's Rules of Practice, Making Findings, and Imposing Remedial Sanctions and a Cease-and-Desist Order ("Order"), without admitting or denying the Commission's findings contained in this Order.
III.
On the basis of this Order and Respondents' Offer, the Commission makes the following findings:
Respondents
A.Zimmerman Sign Company ("Zimmerman" or the "Company") is a Texas corporation formerly based in Tyler, Texas, now in Jacksonville, Texas. The Company's shares of common stock have been registered with the Commission, pursuant to Section 12(g) of the Exchange Act, from December 1996 to the present, and are quoted on the Pink Sheets under the symbol "ZSCO." Zimmerman was founded in 1901, and became a public reporting company in December 1996. From its two manufacturing plants, Zimmerman produces and sells commercial signage.
B.Jeffrey P. Johnson, age 41, of Tyler, Texas, was employed by Zimmerman from 1985 through October 2001, and was the Company's vice president and chief financial officer ("CFO") from at least 1990 through October 2001. Johnson has been a licensed certified public accountant in Texas since 1985.
Facts
C. From December 1996 though June 2001 ("the relevant period"), Zimmerman materially understated its production costs, causing it to overstate assets and earnings. During the relevant period, Zimmerman deferred certain production costs related to long-term contracts to future reporting periods. Those deferred costs grew continually as inventory on the Company's balance sheet. Because Zimmerman failed to ultimately recognize these deferred costs, the Company materially understated by $5.5 million its costs-of-goods sold, and overstated by $5.5 million both its earnings and inventory, in its financial statements over the approximate five year period ended June 30, 2001. For each year-end computation between 1997 and 2000, the average understatement of the costs-of-goods sold in the Company's financial statements was $1.375 million, ranging in percentage each year between 3% and 4%. Likewise, for each year-end computation between 1997 and 2000, the average overstatement of earnings and inventory in the Company's financial statements was $1.375 million, ranging in percentage each year between 44% and 193% (earnings) and 8% and 10% (inventory).
D. The Company discovered the $5.5 million accounting discrepancy after conducting a complete physical count of its inventory as of June 30, 2001. Since then, the Company has been unable to apportion the cost-of-goods sold understatement and corresponding inventory and earnings overstatement to any particular reporting period, because it did not adequately maintain the books and records necessary to make that determination. As a result, Zimmerman has been unable to restate its prior financial statements. Furthermore, from May 15, 2001 to the present, Zimmerman has failed to file with the Commission required periodic reports on Forms 10-Q and 10-K.
E. Johnson, the Company's CFO during the relevant period, supervised Zimmerman's daily accounting functions, including the maintenance of its books and records. Johnson was also responsible for compiling financial data for Zimmerman's periodic reports, which Johnson signed. Johnson's failure to ensure the accuracy of Zimmerman's books and records through implementation of appropriate internal controls resulted in Zimmerman's inclusion of materially misstated financial statements in its filings with the Commission.
F. In determining to accept the Respondents' Offer, the Commission considered Zimmerman and Johnson's cooperation in the staff's investigation.
IV.
Legal Analysis
A. Section 13(a) of the Exchange Act requires issuers to file periodic reports with the Commission containing such information as the Commission prescribes by rule. Exchange Act Rule 13a-1 requires issuers to file annual reports; Exchange Act Rule 13a-13 requires issuers to file quarterly reports. The obligation to file reports embodies the requirement that such reports be true and correct. United States v. Bilzerian , 926 F.2d 1285, 1298 (2d Cir. 1991), cert. denied , 112 S. Ct. 63 (1991). Rule 12b-20 requires, in addition to information required in periodic reports by Commission rules, such further material information as may be necessary to make the required statements not misleading. The reporting provisions are violated if false and misleading reports are filed. SEC v. Falstaff Brewing Corp. , 629 F.2d 62, 67 (D.C. Cir. 1980). Scienter is not required to prove a violation of these provisions. SEC v. Savoy Industries, Inc., 587 F.2d 1149, 1167 (D.C. Cir. 1978).
B. Section 13(b)(2)(A) of the Exchange Act requires all reporting companies to make and keep books, records, and accounts which, in reasonable detail, accurately and fairly reflect their transactions and dispositions of their assets. Scienter and materiality are not elements of primary violations of this provision. SEC v. World-Wide Coin Inv. , Ltd ., 567 F. Supp. 724, 749-50 (N.D. Ga. 1983).
C. Section 13(b)(2)(B) of the Exchange Act requires issuers to devise and maintain an adequate system of internal accounting controls. Scienter and materiality are not elements of a violation of this provision. World-Wide Coin , 567 F. Supp. at 749-50.
D. Section 13(b)(5) of the Exchange Act and Rule 13b2-1 (promulgated under Section 13(b)(2)(A) of the Exchange Act) prohibit any person from knowingly failing to implement a system of internal accounting controls or causing to be falsified any accounting books and records of reporting public companies. Scienter is not an element of a violation of Rule 13b2-1. SEC v. McNulty , 137 F. 3d 732 (2d Cir. 1998).
V.
Violations
Based on the foregoing, the Commission finds that:
A. Zimmerman violated 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;
B. Johnson caused and willfully aided and abetted Zimmerman'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; and
C. Johnson violated Section 13(b)(5) of the Exchange Act and Rule 13b2-1 thereunder.
VI.
In view of the foregoing, the Commission deems it appropriate and in the public interest to impose the sanctions that are set forth in the Offer submitted by Zimmerman and Johnson.
Accordingly, IT IS HEREBY ORDERED that:
A. Zimmerman cease and desist from committing or 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.
B. Johnson cease and desist from committing or causing any violation and any future violation of Section 13(b)(5) of the Exchange Act and Rule 13b2-1 thereunder and from 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 Rules12b-20, 13a-1 and 13a-13 thereunder.
C. Johnson is denied the privilege of appearing or practicing before the Commission as an accountant.
D. After two years from the date of this Order, Johnson may request that the Commission consider his reinstatement by submitting an application (attention: Office of the Chief Accountant) to resume appearing or practicing before the Commission as:
1. a preparer or reviewer, or a person responsible for the preparation or review, of any public company's financial statements that are filed with the Commission. Such an application must satisfy the Commission that Respondent's work in his practice before the Commission will be reviewed either by the independent audit committee of the public company for which he works or in some other acceptable manner, as long as he practices before the Commission in this capacity; and/or
2. an independent accountant. Such an application must satisfy the Commission that:
a). Johnson, or the firm with which he is associated, is a member of the SEC Practice Section of the American Institute of Certified Public Accountants Division for CPA Firms ("SEC Practice Section") or an organization providing equivalent oversight and quality control functions ("equivalent organization");
b). Johnson, or the firm, has received an unqualified report relating to his, or the firm's, most recent peer review conducted in accordance with the guidelines adopted by the SEC Practice Section or equivalent organization; and
c). as long as Johnson appears or practices before the Commission as an independent accountant he will remain either a member of, or associated with a member firm of, the SEC Practice Section or equivalent organization, and will comply with all applicable SEC Practice Section or equivalent organization requirements, including all requirements for periodic peer reviews, concurring partner reviews, and continuing professional education.
E. The Commission will consider an application by Johnson to resume appearing or practicing before the Commission provided that his state CPA license is current and he has resolved all other disciplinary issues with the applicable state boards of accountancy. However, if state licensure is dependant on reinstatement by the Commission, the Commission will consider an application on its other merits. The Commission's review may include consideration of, in addition to the matters referenced above, any other matters relating to Johnson's character, integrity, professional conduct, or qualifications to appear or practice before the Commission.
By the Commission.
Jonathan G. Katz
Secretary
http://www.sec.gov/litigation/admin/34-47860.htm
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