S.E.C. v. Guenthner, 8:02CV10.

• Decision Date: 26 September 2005
• Docket Number: No. 8:02CV10.,8:02CV10.
• Citation: 395 F.Supp.2d 835
• Parties: SECURITIES AND EXCHANGE COMMISSION, Plaintiff, v. David C. GUENTHNER, and Jay M. Samuelson, Defendants.
• Court: U.S. District Court — District of Nebraska

395 F.Supp.2d 835

SECURITIES AND EXCHANGE COMMISSION, Plaintiff, v. David C. GUENTHNER, and Jay M. Samuelson, Defendants.

No. 8:02CV10.

United States District Court, D. Nebraska.

September 26, 2005.

COPYRIGHT MATERIAL OMITTED

Robert Fusfeld and Polly Atkinson of the SEC's Denver office, for S.E.C.

Duncan Grant and Jeff Toll of Pepper Hamilton LLP, Philadelphia, PA, for Guenthner.

David Zisser of Isaacson Rosenbaum PC in Denver, CO, for Samuelson.

MEMORANDUM OPINION AND ORDER

BATAILLON, District Judge.

This matter is before the court after a bench trial on April 18-21, 2005. This is an action for injunctive relief and civil penalties filed by the United States Securities and Exchange Commission ("the Commission") against David C. Guenthner and Jay M. Samuelson for alleged securities laws violations in connection with InaCom Corporation ("InaCom"). The Commission alleges fraud in violation of § 10b and records violations under § 13b of the Securities Exchange Act of 1934 ("Exchange Act") 15 U.S.C. § 78j(b); 13b-2; 17 C.F.R. §§ 240.10b, 240.13b2. In particular, the Commission alleges that defendants committed fraud by causing InaCom to overstate its earnings for the third quarter of 1999 in public filings, fraudulently recorded the overstated earnings in its books and records, and lied to auditors to conceal the fraudulent activities. It also alleges that defendant Samuelson aided and abetted such violations.

The Commission's claim of securities fraud involves three allegedly improper or erroneous accounting practices that affected InaCom's third-quarter 1999 financial statements and filings: (1) InaCom's reduction of certain reserves; (2) InaCom's adjustment of certain inventory and accounts-payable discrepancies and the posting of those adjustments to third-quarter 1999 financial statements; and (3) InaCom's recognition of "bid price arbitrage" ("BPA") receivables in third-quarter 1999.¹ The Commission contends these accounting practices violated Generally Accepted Accounting Principles ("GAAP").²

I. FINDINGS OF FACT

The parties have stipulated to the following facts. See Filing No. 141, Order on Pretrial Conference at 2-4. InaCom Corp., a Delaware Corporation headquartered in Omaha, Nebraska, was a provider of information technology products and services. As part of it business, InaCom purchased computer equipment from major manufacturers for resale to end-users. InaCom merged with Vanstar Corporation, another provider of information technology products and services, in February 1999. During the late 1990s, traditional computer manufacturers who had distributed their products through resellers such as InaCom experienced significant price competition from direct sale manufacturers. As a result, the traditional manufacturers established "special bid" rebate programs to effectively compete with the direct sellers for the business of large customers. The traditional manufacturers also established various price protection programs. Under these programs, a computer manufacturer would rebate the difference in price for each computer that a reseller held in inventory if it decreased the wholesale price of a computer within a certain time after a computer reseller's purchase.

Defendant David C. Guenthner was InaCom's Chief Financial Officer ("CFO") through November 1999. He was licensed as a Certified Public Accountant ("CPA") in Nebraska from 1974 through 1980, when he allowed his license to lapse because he became a private accountant. Defendant Jay M. Samuelson was the Assistant Corporate Controller from September 1990 through February 2000. Inacom had no corporate controller from mid-1998 through February 2000. Samuelson worked with other InaCom accounting personnel to prepare InaCom's consolidated financial statements. Samuelson has been licensed as a CPA in Nebraska since 1998. His license has been inactive since early 2001.

InaCom's common stock was registered with the Commission under Section 12(b) of the Exchange Act and InaCom reported on Form 10-K from 1987 through 1998 and on Form 10-Q through the third quarter of 1999. InaCom's common stock was traded on the New York Stock Exchange until trading was suspended in May 2000. Defendant Samuelson did not sign any Forms 10-K or 10-Q filed with the Commission. Defendant Guenthner signed the "management representation" letters that InaCom provided to its accountants, KPMG, in connection with KPMG's review of InaCom's financial statements for each of the first three quarters of 1999.

InaCom reported net (after tax) earnings of fifteen cents per share for the third quarter of 1999. On October 26, 1999, David Guenthner prepared a two-page memorandum entitled "Earnings Analysis" at the request of Gerry Gagliardi, InaCom's newly-appointed Chief Executive Officer ("CEO"). He was assisted by Jay Samuelson. A conference call that included board members was arranged for October 26, 1999.

On June 16, 2000, InaCom filed for Chapter 11 bankruptcy protection. Neither Guenthner nor Samuelson personally profited from the alleged misstatements in InaCom's financial statements. Guenthner did not sell any InaCom stock or exercise or sell any stock options at any time during or subsequent to 1999.

Trial of this action commenced on April 18, 2005. The Commission presented the testimony of David Guenthner in its case in chief. Guenthner testified that he was InaCom's CFO from 1987, when the company went public, until late November 1999 when he was relieved of his duties as CFO. He stated that InaCom had started as Valcom, a division of Valmont. Bill Fairfield had been Valcom's CEO and later became InaCom's CEO. Fairfield was replaced as CEO in October 1999. Guenthner continued to work for InaCom in various capacities until InaCom filed bankruptcy in June 2000.

Guenthner testified that he was responsible for all of InaCom's filings with the Securities Exchange Commission. He read and reviewed all SEC filings. He testified that he signed the third-quarter 1999 10-Q and authorized its filing. See Trial Exhibit ("Tr.Ex.") 304. He stated that KPMG reviewed the document and signed off on it. He also authorized and approved the press release issued October 2, 1999, with respect to InaCom's earnings. See Tr. Ex. 303. He testified that he is familiar with GAAP.

Guenthner testified that InaCom encountered difficulties in the late 1990s as a result of competitive changes within the computer industry. He explained that the entry of Dell Computer into the market and the gradual adoption of its business model of direct sales to the consumer exerted pressure on computer resellers such as InaCom. Accordingly, InaCom's management saw the future of its business progressing to service as opposed to hardware. InaCom merged with Vanstar early in 1999 in order to Increase the service end of its business and to acquire more service contracts. In the summer of 1999, Guenthner spoke to analysts in the investment community and gave guidance as to the direction that management thought the company's earnings would be headed. Analysts' expectations with respect to InaCom's earnings for third-quarter 1999 were about thirty cents per share.

With respect to the events leading to the third-quarter filing, Guenthner testified that Jay Samuelson and Paul Draheim reported to him. Draheim was responsible for inventory and had calculated an inventory adjustment in the amount of $15.6 million for the third-quarter 1999. Guenthner also testified that the company maintained operating reserves set by its operating divisions, inventory reserves in each division and corporate reserves, including those that were set up in connection with the acquisition of Vanstar. He reviewed total inventory reserves at the end of each quarter. His understanding of GAAP in connection with reserves was that it was necessary to have a basis or reason for setting the reserves and for reversing them.

Guenthner's original recommendation to the board in the third-quarter 1999 was that InaCom's third-quarter earnings should be twenty-five cents per share. Guenthner and Samuelson had met with then-CEO Bill Fairfield on October 15, 1999, to discuss the financial statements in preparation for the upcoming board meeting. Fairfield agreed with Guenthner's financial analysis. InaCom's Audit Committee also agreed with his recommendation. The twenty-five-cents-per-share figure was based on a reduction of reserves in the amount of $14 million. Guenthner continues to believe that the twenty-five-cents-per-share figure was appropriate under GAAP. Guenthner learned via e-mail shortly after meeting with Fairfield that Fairfield was being replaced as CEO.

Guenthner testified that Fairfield, the Audit Committee, the Board of Directors, and InaCom's outside auditors, KPMG, were all informed of the proposed reduction of reserves. The evidence shows that the reserves were discussed at the Audit Committee meeting and that representatives of KPMG were present at the meeting. Guenthner testified that he believes InaCom had adequate reserves even with a reduction in reserves in the amount of $14 million. He testified that InaCom had in excess of $116 million in reserves in third-quarter 1999. The reserves included NYNEX tax reserves and lease closing reserves. Guenthner testified that the likelihood of needing those reserves had lessened over time.

The Vanstar merger was InaCom's fourth major merger and it had also acquired twenty-five or thirty smaller computer companies. Guenthner testified that as a result of his experience with mergers he was conservative with reserves. As time went by and as a merger progressed, the company's reserve needs evolved and it was sometimes appropriate to release unnecessary reserve amounts. At the time of the third-quarter 1999 report, seven months had elapsed since the Vanstar merger, and it had become clear to Guenthner that there was room in the reserves. Reserves had declined in the two previous quarters...