SEC Accuses Salt Lake Company of Inflating Revenues

SEC Accuses Salt Lake Company of Inflating Revenues


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SALT LAKE CITY (AP) -- The U.S. Securities and Exchange Commission has accused Salt Lake-based ClearOne Communications of inflating its revenues and earnings since at least March 2001.

ClearOne, formerly Gentner Communications, provides audio- and videoconferencing products and services.

The complaint filed Wednesday in U.S. District Court seeks a temporary restraining order and preliminary injunctions against the company and two of its officers. It also seeks, among other things, monetary penalties, officer-director bars against the two officers and appointment of a special monitor to oversee sales, billings and collections.

The two officers named were Frances M. Flood, chairman, chief executive officer and president, and Susie Strohm, chief financial officer and vice president of finance.

A statement from ClearOne released on Thursday says the company's internal audit committee was already looking into these very allegations when the claim was filed.

"We had not completed our work and are extremely surprised" by the lawsuit, the statement says. The company says the allegations are based on the word of a disgruntled employee, and therefore require "substantial verification" according to ClearOne.

The complaint alleges that ClearOne overstated revenues, income and accounts receivable by improperly recording certain transactions with its distributors and resellers as sales.

The SEC alleges the violations reach back to early 2001 when it became apparent that ClearOne would not meet its sales and revenue projections for the quarter ended March 31, 2001.

Ken Israel, SEC district administrator, said the commission was tipped off by a ClearOne insider.

"The company has been something of a high-flier as of recently," Israel said. "We're alleging that they've achieved those consistent increases in earnings and revenues through illegally recognizing revenue when they shouldn't have."

The SEC contends ClearOne engaged in "channel stuffing" in which it "would 'sweep the floor' of its inventory, stuff the distribution channels with ClearOne products and force distributors to accept product that they did not want. ClearOne would then enter into undisclosed verbal agreements with its distributors and resellers whereby the distributors and resellers agreed to pay for the ClearOne merchandise as it was sold rather than in accordance with the written contracts ClearOne had with those entities."

The company then recorded revenue and accounts receivable for those transactions, the documents state.

"In a couple of the most recent periods, their net income was overstated by 25 percent," Israel said. "And that's a pretty conservative estimate."

The company's alleged activities included millions of dollars worth of merchandise, some of which was outdated or obsolete, the complaint stated.

The SEC seeks injunctions against future violations of SEC regulations and disgorgement of improper gains by Flood and Strohm. It asks that Flood and Strohm be barred from serving as officers or directors of any public company.

Israel declined to say whether the SEC would refer the case for criminal investigation.

ClearOne reported a net loss of $1.2 million, or 10 cents a share, on sales of $13 million for the its first fiscal quarter ended Sept. 30, 2002.

The company is scheduled to announce earnings for its second quarter on Jan. 23.

The company's stock, traded on the NASDAQ exchange, closed Wednesday at $2.40, down $1.26.

(Copyright 2003 by The Associated Press. All Rights Reserved.)

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