SEC Sues Ex-Sunbeam Exec Dunlap, Alleges Financial Fraud

Dow Jones Newswires

WASHINGTON -- Regulators filed a lawsuit Tuesday charging five former Sunbeam Corp. (SOCNE) executives, including Chairman and Chief Executive Al Dunlap, with massive accounting fraud that ultimately pushed the firm into bankruptcy.

An Arthur Andersen LLP partner who audited Sunbeam's books was also named in the suit, filed in U.S. District Court in Miami by the Securities and Exchange Commission. The suit seeks to fine Dunlap and the others and bar them from serving as corporate officers or directors.

Sunbeam and former general counsel David Fannin settled administrative proceedings brought by the SEC which claimed the company filed false and misleading financial reports. The company agreed to a cease-and-desist order, but won't pay any fines.

"It isn't appropriate to punish the people who are stuck holding the bag," in the aftermath of the alleged fraud, said Thomas Newkirk, an associate director in the SEC's enforcement division, in Washington, D.C.

According to the SEC, Dunlap, a corporate turnaround specialist known as "Chainsaw Al," and top senior executives at Sunbeam used accounting tricks to inflate the company's stock. Sunbeam announced at least $60 million in bogus earnings in 1997, the SEC said. The tricks worked for a time, as Sunbeam's market capitalization hit $5 billion when its stock reached a high of $52 a share in March 1998.

Dunlap, who was hired in mid-1996, and top managers were fired once allegations of financial fraud came to light. Sunbeam later had to restate earnings from the fourth quarter of 1996 through the first quarter of 1998. The company is now reorganizing under Chapter 11 of U.S. bankruptcy laws.

SEC enforcement division director Richard Walker said the case against Dunlap and other former Sunbeam executives is the latest in an ongoing fight against bogus "earnings management" practices that have caused investors to lose billions of dollars.

In addition to Dunlap, the suit names former Sunbeam financial officer Russell Kersh, former controller Robert Gluck, former vice presidents Donald Uzzi and Lee Griffith, and Arthur Andersen partner Phillip Harlow.

At Sunbeam, the SEC said Kersh and Gluck created so-called "cookie jar" reserves in late 1996, where they stashed funds to inflate income in 1997, falsely creating the picture of a rapid financial turnaround at the company. Dunlap, Kersh, Gluck, Uzzi and Griffith made the financial reports even brighter in 1997 by having Sunbeam recognize revenue on sales that didn't meet accounting standards, the SEC also alleged.

Sunbeam offered discounts and other incentives to encourage customers to buy products sooner than usual, a practice known as "channel stuffing," but failed to disclose the near-term surge in revenue would come at the expense of future results, the SEC added. It says Harlow, the outside auditor, gave a clean bill of health to Sunbeam's 1996 and 1997 financial statements even though he knew about many of the accounting problems and disclosure failures.

By early 1998, the SEC claims Sunbeam's top executives were increasingly desperate to conceal mounting financial problems and were trying to acquire three other companies with funding from a bond offering, which led to engage in further accounting fraud that included materials provided in connection with the bond offering. At the same time, Fannin, Sunbeam's general counsel, allegedly helped draft press releases that presented a misleading view of the company's operations.

Fannin didn't admit or deny the SEC's allegations, contained in a separate administrative action, but agreed to an order barring him from future violations of federal securities laws.

Former CEO Dunlap issued a statement saying he is "outraged" by the accounting-fraud suit and intends to mount a vigorous defense.

"The allegations made against me by the SEC are totally false," Dunlap stated. Under his tenure, he said, Sunbeam fully disclosed all information to outside auditors at Arthur Andersen. He noted that he personally invested in Sunbeam and didn't sell a single share or exercise any options while at the company even though "it would have been enormously profitable" to do so.

Sunbeam's outside auditor had full access to all books and records, and the original financial reports were compiled in accordance with generally accepted accounting principles, Kersh said in a separate statement announcing his intention to contest the SEC's allegations.

"The original statements were accurate and we can and will prove that," said Donald Zakarin, a New York attorney, who represents Dunlap and Kersh. "We are ready to go to court."

Zakarin said the SEC went after Dunlap assuming he would be "a high-profile and easy target." He said the commission ignored a mountain of evidence that contradicts its allegations, including an analysis by forensic accounting experts from PricewaterhouseCoopers LLC which found Sunbeam's original financial reports were true and the restatement was improper.

PricewaterhouseCoopers confirmed it was hired by Pryor, Cashman, Sherman & Flynn, the New York law firm representing Dunlap and Kersh, to analyze Sunbeam's financial reports.

"At the appropriate time, these analyses will be formally presented to the SEC by counsel in their defense of Mr. Dunlap and Mr. Kersh," a Pricewaterhouse spokesman said.

A spokesman for Arthur Andersen said the firm cooperated fully in the SEC's investigation, but believes the case against Harlow, a managing partner in the firm's Ft. Lauderdale office with an unblemished, 30-year track record, is unjustified. The Big Five accounting firm wasn't accused of any wrongdoing by the SEC.

"Arthur Andersen LLP fully supports Mr. Harlow and will assist him vigorously in contesting the SEC's allegations," the company declared. It said the SEC's allegations "reflect professional disagreements about the application of sophisticated accounting standards. They are not indicative of fraud."

Harlow's attorney, Gandolfo DiBlasi, said Harlow brought "precisely the degree of skepticism and prudence" to his audit work the SEC wants, and complied fully with accounting rules.

Thomas McGonigle, an attorney for former Sunbeam controller Robert Gluck, said Gluck's conduct was proper and he will contest the allegations in court. Keith Olin, who represents former vice president Lee Griffith, said he never should have been charged by the SEC, and will mount a vigorous defense to clear his name.

"Mr. Griffith was the head of sales and his job was to lead the sales force to sell as much as possible," said Olin. He said Griffith isn't an accountant and "had no role or involvement in drafting or reviewing any of Sunbeam's accounting reports or press releases."

Uzzi, a former marketing and manufacturing executive, also plans to fight the SEC's allegations. His attorney, Brian Rosner, said Uzzi's 13 months at Sunbeam "were difficult and trying on both personal and professional levels," but he tried to do what was right for investors, didn't do anything wrong and isn't aware of any other executives who did, either.

"In the end, this is an accounting case. Don Uzzi is not an accountant," his attorney stated.

In the settled administrative action, Fannin's attorney, Lionel Pashkoff, said his client is happy to put the matter behind him and noted Fannin will pay no penalty to settle claims of negligence arising from Fannin's help in drafting "a few of Sunbeam's many press releases."

Sunbeam called the settlement "an important milestone" that allows the company to put the investigation behind it and concentrate on business opportunities.

The Boca Raton, Fla., firm's products, marketed under the Sunbeam and Oster brands, include Mr. Coffee and First Alert.

-By Judith Burns, Dow Jones Newswires, 202-862-6692; judith.burns@dowjones.com