Fw: POST:Don Mcghan/Innamed/SECURITY EXCHANGE COMMISSION

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Subject: POST:Don Mcghan/Innamed/SECURITY EXCHANGE COMMISSION

Subj: Don Mcghan/Innamed/SECURITY EXCHANGE COMMISSION Date: 11/8/2002 8:15:59 PM Eastern Standard Time From: janmarh@... Dear Kathy, please send this to your email list. I am not sure if thisis old news, but thought it was interestingly maddening.sorry i didn't have the time to clean up the text..http://www.sec.gov/litigation/litreleases/lr16466.htmhttp://www.sec.gov/litigation/admin/34-41751.htmU.S. Securities and Exchange Commission SEC v. K. McGhan, Civ.Action No. 00CV00475 Litigation Release No. 16466 / March 8, 2000Accounting and Auditing Enforcement Release No. 1234 / March 8, 2000SEC Files Settled Financial Fraud Case Against Inamed Corporation'sFormer CEO McGhan The Securities and Exchange Commission filed today a settled civilinjunctive action against K. McGhan, Inamed Corporation's formerChairman and Chief Executive Officer. The complaint alleges that in 1996and 1997, Inamed Corporation, a publicly owned breast implantmanufacturer, made materially false and misleading statements andomissions in its financial statements and periodic reports filed withthe Commission and in press releases distributed to theinvesting public. As Inamed's former Chairman and Chief ExecutiveOfficer, McGhan wasresponsible for the company's public financial disclosures and either knew or was reckless innot knowing of the company's materially false and misleading statements and omissionsduring this period. Without admitting or denying the allegations of the complaint, McGhanconsented to the entry of a final judgment permanently enjoining him fromviolating the antifraud, record-keeping and internal controls provisions of the federalsecurities laws [sections 10( and 13((5) of the Securities Exchange Act of 1934 and Rules10b-5 and 13b2-1, thereunder], and ordering him to pay a $50,000 civil penalty. The complaint alleges that Inamed failed torecord a $1.4 million interest expense relating to a waiver of an indenture default andthus materially overstated income and shareholder equity for the quarter ended June30, 1996. McGhan signed the Form 10-Q and knew or was reckless in not knowing that itcontained false and misleading financial statements. For the quarter ended September 30,1996, the complaint alleges that McGhan knowingly or recklessly caused Inamed toimproperly reduce the allowance for product returns by nearly $1.9 million from theprior quarter, which resulted in material overstatements in Inamed's pre-tax income andshareholder equity. The complaint also alleges that between May andSeptember 1997, McGhan was unable to resolve Inamed's several outstanding issues withits auditors. On September 9, 1997, over five months after the required filing date,McGhan reviewed and authorized Inamed's filing of its Annual Report on Form 10-K with unauditedfinancial statements. Where the auditor's report should have been located in theForm 10-K, Inamed simply inserted the notation "To Come." McGhan caused Inamed to makethe filing without informing its auditors, whose work on the audit continued, andwithout a chief financial officer to review the financial statements. Inamed againunderstated its allowance for product returns and incorrectly recorded a deferred tax asset of$2,022,382. Moreover, Inamed failed properly to account for its intercompany transfers ofinventory and the concomitant elimination of intercompany profit, resulting in approximatelya $1.2 million overstatement of inventories and gross profit. The cumulative effect of thesemisstatements was that Inamed reported a net loss of $7,071,660, or $0.91 per share,when it should have reported a net loss of at least $11,379,000, or $1.46 per share, a 60%understatement. Thus, had Inamed correctly reported its losses, the company'slosses on a per share basis would have increased substantially from the prior year,rather than remaining the same. The complaint alleges that McGhan knew or wasreckless in not knowing that Inamed's unaudited financial statements in its 1996 Form10-K were false and misleading. Inamed also failed to disclose a related partytransaction between the company and an entity controlled by McGhan. The complaint also alleges that in connectionwith a default of a covenant relating to approximately $6 million of convertibledebentures issued in January 1997, Inamed, at the direction of McGhan, failed to discloseeither the default or the additional costs associated with the default in its quarterlyreports for the periods ended March 31, June 30 and September 30, 1997. As a result Inamedfailed to report interest expense of $192,067 for the period ended March 31, 1997,$736,000 for the six months ended June 30, 1997 and $1.2 million for the nine monthsended September 30, 1997. The default costs alone caused Inamed's income to bematerially overstated in each of its 1997 Form 10-Qs. In a related cease-and-desist proceeding, In theMatter of Inamed Corporation (Admin. Proc. No. 3-9976, August 17, 1999), theCommission entered a settled order against Inamed Corporation ordering it tocease-and-desist from violations from Sections 10(, 13((2)(A) and 13((2)( of the Exchange Actand Rule 10b-5 thereunder. http://www.sec.go Home | Previous Page UNITED STATES OF AMERICA before the SECURITIES AND EXCHANGE COMMISSION Securities Exchange Act of 1934 Release No. 41751 / August 17, 1999 Accounting and Auditing Enforcement Release No. 1154 / August 17, 1999 Administrative Proceeding File No. 3-9976 In the Matter of INAMED CORPORATION Respondent. ORDER INSTITUTING PROCEEDINGS PURSUANT TO SECTION 21C OF THE SECURITIES EXCHANGE ACT OF 1934, MAKING FINDINGS AND IMPOSING A CEASE-AND-DESIST ORDER I. The Securities and Exchange Commission("Commission") deems it appropriate and in the public interest that public administrativeproceedings be, and hereby are, instituted pursuant to Section 21C of the SecuritiesExchange Act of 1934 ("Exchange Act") to determine whether Inamed Corporation ("Inamed")violated or caused violations of Sections 10(, 13((2)(A) and 13((2)( ofthe Exchange Act and Rule 10b-5 thereunder. II. In anticipation of the institution of theseadministrative proceedings, Inamed has submitted an Offer of Settlement ("Offer") thatthe Commission has determined to accept. Solely for the purposes of these proceedings andany other proceedings brought by or on behalf of the Commission or to which theCommission is a party, and prior to hearing and without admitting or denying the findings setforth herein, except as to jurisdiction over it and over the subject matter of theseproceedings, which Inamed admits, Inamed consents to the entry of this Order InstitutingProceedings Pursuant to Section 21C of the Securities Exchange Act of 1934, Making Findings andImposing A Cease-and-Desist Order ("Order"). The Commission has determined that it isappropriate and in the public interest to accept the Offer of Inamed and accordingly is issuingthis Order. III. FACTS Based on the foregoing, the Commission findsthat:1 A. Respondent Inamed is a Delaware corporation with itsheadquarters in California. At the time of the findings contained herein, Inamed was a Floridacorporation with its headquarters in Las Vegas, Nevada. Inamed develops, manufactures andmarkets medical devices and products for surgical specialty applications,specifically a number of implantable products, including breast implants, tissue expanders andfacial implants for plastic and reconstructive surgeons as well as customprostheses for a variety of surgical applications and procedures. Inamed's common stock isregistered with the Commission pursuant to Section 12(g) of the Exchange Act and currentlytrades on the Nasdaq Bulletin Board. Inamed replaced its senior management in thefirst quarter of 1998 after the events that gave rise to the violations described herein. B. Summary Inamed failed to properly account for numeroustransactions between 1996 and 1997, resulting in material misstatements andomissions in Inamed's financial statements contained in periodic reports filed with theCommission on Form 10-K for the period ended December 31, 1996 and on Form 10-Q for theperiods ended June 30, 1996, September 30, 1996, March 31, 1997, June 30 1997 andSeptember 30, 1997.2 The misstatements and omissions caused Inamed's books and recordsto be inaccurate. In addition, on April 15 and May 15, 1997, Inamed issued materiallymisleading press releases concerning the reasons for the company's failure to timely fileits Annual Report on Form 10-K and its results of operations for the period endedDecember 31, 1996. During 1996 and 1997, Inamed also failed to devise and maintain asystem of internal accounting controls sufficient to provide reasonable assurances thattransactions were recorded as necessary to permit preparation of financial statements inconformity with generally accepted accounting principles ("GAAP"). C. Background In January 1996, Inamed raised approximately $35million through a private placement offering of convertible notes, a portion ofwhich was ear-marked for the anticipated settlement of Inamed's breast implantlitigation. A covenant in the indenture required Inamed to meet certain financial conditions,including minimum net operating income, as defined in the indenture, on both a quarterlyand annual basis. As of March 31, 1996, Inamed was in default ofthe indenture's minimum net operating income requirement of $2 million. On June 26,1996, Inamed announced it had received a waiver of this default from persons holding amajority of the principal amount. In connection with the waiver, the company agreedto issue to the note holders additional shares of common stock equal to five percent ofthe shares issuable upon conversion of the notes. The issuance of additional shares ofcommon stock was scheduled to occur on January 10, 1997. The issuance of the additionalshares should have resulted in an accrued liability of at least $1.4 million whichthe company should have booked for the period ended June 30, 1996. Inamed's accounting problems occurred in thecontext of former management's attempts to satisfy Nasdaq listing requirements. By late1995, Inamed's capital and surplus had dropped below the minimum required to remainlisted on the Nasdaq SmallCap Market and the Nasdaq Listing Qualifications Committeehad granted Inamed a temporary exception to the capital and surplusrequirement. During the winter and spring of 1996 Inamed requested another continued exception tothe Nasdaq SmallCap listing requirements and received such an exception onApril 25, 1996 to continue through May 20, 1996. Inamed failed to meet the listingrequirements by that date and as of May 24, 1996, Inamed was delisted from the NasdaqSmallCap Market. During June 1996 and the rest of the summer, Inamed continued to discusswith Nasdaq the possibility of relisting on the SmallCap Market if Inamed could reach aminimum capital and surplus of $2 million. D. The June 30, 1996 Form 10-Q On July 14, 1996 Inamed filed its QuarterlyReport on Form 10-Q for the period ended June 30, 1996, disclosing that it had received awaiver from the note holders concerning the default and that it would issue additionalshares of common stock as a result. The company made no disclosure, however, concerningany charge that might occur relating to the issuance of the shares, nor did it recordany charge in its financial statements. Shareholder equity was thus reported at$2,493,730, or only approximately $500,000 more than the minimum necessary for relisting onthe Nasdaq SmallCap Market. Less than one month after Inamed filed its original Form10-Q, on September 12, 1996, Inamed's common stock was reinstated on the NasdaqSmallCap Market. By failing to record the additional interestexpense in its original Form 10-Q, Inamed materially understated its liabilities andshareholder equity and materially overstated its income. In fact, for the six-month period endedJune 30, 1996, Inamed reported pre-tax income of $1,407,781 when it should havereported a loss of at least $53,000, and for the three-month period, Inamed reported income of$2,860,093 when it should have reported income of approximately $1,400,000. Furthermore,Inamed reported shareholder equity of $2,493,730 when it should have reportedapproximately $1,500,000, which would have caused shareholder equity to fall below thelevel sufficient to relist on Nasdaq's SmallCap Market. E. The September 30, 1996 Form 10-Q Inamed permits purchasers of its products toreturn those products under certain conditions. As a result, Inamed established anallowance for product returns to more accurately report receivables. A July 25, 1996internal memorandum from the former chief executive officer and the former vice presidentof finance purported to provide a basis for certain reductions in the allowance and maderecommended reductions for subsequent quarters. Contrary to the memorandum, however,the former chief executive officer caused the entire reduction to be recorded in the thirdquarter of 1996. On November 14, 1996, Inamed filed its QuarterlyReport on Form 10-Q for the period ended September 30, 1996, and reduced itsallowance for doubtful accounts and product returns by nearly $1.9 million from the priorquarter. Inamed also again failed to recognize the $1.4 million liability associatedwith the indenture default waiver which should have been recorded as an interest expensefor the nine-month period. Inamed thus reported an allowance for doubtfulaccounts and product returns of $2,409,839 when it should have reportedapproximately $4,315,000. This understatement caused material overstatements in Inamed'spre-tax income and shareholder equity. Inamed thus reported three-month pre-tax incomeof $999,330 when it should have reported a loss of approximately $905,000,three-month per share income of $0.04 versus an actual loss of approximately $0.12 pershare, nine-month pre-tax income of $2,407,111 versus a loss of approximately$958,000, nine-month per share income of $0.16 versus a loss of approximately $0.14 pershare, and shareholder equity of $2,850,236 versus actual shareholder equity ofapproximately $537,000. F. The April 15, 1997 and May 15, 1997 PressReleases In the course of their audit for the year endedDecember 31, 1996, Inamed's independent auditors raised several significant issues withthe former chief executive officer that had yet to be resolved by March 31, 1997. Moreover,in mid-March of 1997, while the company's auditors were continuing their auditof the company's year-end financial statements, the chief financial officer (who hadbeen hired a year earlier) was terminated by the former chief executive officer.3 On April 1, 1997, Inamed issued a press releasestating that it had not timely filed its Form 10-K because of the company's efforts tofile its S-3 registration statement. The release also indicated that Inamed would fileits Form 10-K on or before April 15, 1997. At the time, however, Inamed's auditors had not yetcompleted their audit of Inamed's financial statements required for the Form 10-Kfiling. On April 15, 1997, Inamed issued another press release, this time stating thatthe Form 10-K had not been filed as anticipated "due primarily to certain unresolvedissues relating to breast implant litigation that require opinion letters from attorneysrepresenting the company." At the time, however, several other significant issues werestill unresolved with Inamed's auditors, including concerns regarding the company'ssystem of internal controls, particularly as they related to related party transactions betweenInamed and a company controlled by the former chief executive officer, an inventoryanalysis and certain tax issues. On May 8, 1997, Inamed issued a press releasedisclosing that Nasdaq would delist the company's securities from the SmallCap Market.The company for the first time also disclosed that it was "continuing to work withits auditors to complete the annual report, including resolution of outstanding tax matters,requested management reports, detailed inventory analyses and certain legal opinions."A week later, on May 15, 1997 Inamed announced its results of operations withoutfiling its Form 10-K. In the press release Inamed reported a net loss of $7,074,992, or$0.91 per share, which equaled its per share loss from the prior year. These results,however, were materially overstated, as discussed below. On June 11, 1997, Inamed's common stockwas once again delisted from the Nasdaq SmallCap Market. G. Inamed Files Its Delinquent Form 10-K WithUnaudited Financial Statements Between May and September 1997, Inamed wasunable to resolve several outstanding issues with its auditors. On September 9, 1997,over five months after the required filing date, Inamed filed its Annual Report on Form10-K with unaudited financial statements. Where the auditor's report should have beenlocated in the Form 10-K, Inamed simply inserted the notation "To Come." Inamed made thefiling without informing its auditors, whose work on the audit continued, and without achief financial officer to review the figures. Inamed reported a net loss of $7,071,660, or$0.91 per share, the same amounts reported in the May 15, 1997 press release.Inamed again understated its allowance for product returns and incorrectly recorded adeferred tax asset of $2,022,382. Moreover, Inamed failed properly to account for itsintercompany transfers of inventory and the concomitant elimination of intercompany profit,resulting in approximately a $1.2 million overstatement of inventories and gross profit.The cumulative effect of these misstatements caused Inamed to report a net lossof $7,071,660, or $0.91 per share, when it should have reported a net loss of atleast $11,379,000, or $1.46 per share, a 60% understatement. Thus, had Inamed correctlyreported its losses, the company's losses on a per share basis would have increasedsubstantially from the prior year, rather than remaining the same. Inamed also failed to disclose a related partytransaction between the company and an entity controlled by the former chief executiveofficer. The entity provided Inamed flight-related services, as well as storageservices, amounting to nearly $250,000, which Inamed did not disclose in the original Form10-K. Such failure was due to Inamed's inadequate internal controls, which failed toensure that Inamed's former chief executive officer obtain contemporaneous invoices orwritten contracts relating to the services rendered by the related party. H. The March 31, June 30 and September 30, 1997Form 10-Qs In January 1997, Inamed issued approximately $6million of convertible debentures. One of the debentures' covenants required Inamed tofile and have declared effective a registration statement within sixty days of thedebentures' issuance. As of March 31, 1997, Inamed had filed a registration statement, butit had yet to be declared effective.4 Inamed was therefore in default of the debtcovenant. Additional interest and penalties immediately accrued, for which Inamed failed torecord any liability. At the direction of the former chief executive officer, Inamed failed todisclose either the default or the additional costs associated with the default in itsquarterly reports for the periods ended March 31, June 30 and September 30, 1997. As a resultInamed failed to report interest expense of $192,067 for the period ended March 31, 1997,$736,000 for the six months ended June 30, 1997 and $1.2 million for the nine monthsended September 30, 1997. The default costs alone caused Inamed's income to bematerially overstated in each of its 1997 Form 10-Qs. IV. LEGAL DISCUSSION A. Inamed Violated Section 10( of the ExchangeAct and Rule 10b-5 Thereunder Section 10( of the Exchange Act and Rule 10b-5thereunder proscribe material misstatements or omissions made knowingly orrecklessly in a periodic or current report filed with the Commission or otherwisedisseminated to investors. Inamed's quarterly reports for fiscal quarters ended June 30, 1996,September 30, 1996, March 31, 1997, June 30, 1997 and September 30, 1997, and theunaudited Form 10-K for its fiscal year ended December 31, 1996, contained materialmisstatements and omissions, as described above. It further issued pressreleases in 1997 that materially misstated its financial results and the basis for its failureto timely file its Form 10-K. Based on the foregoing, Inamed violated Section 10( of theExchange Act and Rule 10b-5 thereunder. B. Inamed Violated Section 13((2)(A) and (B)of the Exchange Act Section 13((2)(A) of the Exchange Act requiresthat every issuer of securities registered pursuant to Section 12 of the Exchange Act makeand keep books, records, and accounts, which, in reasonable detail, accurately andfairly reflect its transactions and disposition of assets. As discussed above, the company failedto keep accurate records of numerous items for over a year. Specifically, in 1996 and1997 Inamed failed to properly maintain accurate accounts of the defaults as well as itsproduct return allowance, inventory and deferred taxes. Section 13((2)( of the Exchange Act requiressuch issuers to devise and maintain a system of internal accounting controlssufficient to provide reasonable assurances that transactions are recorded as necessary to permitpreparation of financial statements in conformity with GAAP. As described above,Inamed's internal accounting controls were deficient in violation of Section 13((2)(.For example, in 1996 the former chief executive officer caused payments to be made torelated parties without proper documentation and further caused the company todelay or fail to book the company's liabilities when they accrued. VI. The Commission finds that Inamed violatedSections 10(, 13((2)(A) and 13((2)( of the Exchange Act and Rule 10b-5 thereunder. VII. ACCORDINGLY, IT IS HEREBY ORDERED, pursuant toSection 21C of the Exchange Act, that: Inamed cease-and-desist from committing orcausing any violations and any future violations of Sections 10(, 13((2)(A) and13((2)( of the Exchange Act and Rule 10b-5 thereunder. By the Commission G. Katz Secretary FOOTNOTES 1 The findings herein are made pursuant to theOffer made by Inamed and are not binding on any other person or entity inthis or any other proceeding. 2 Inamed restated its financial statements forthe periods ended June 30, 1996 and September 30, 1996 in amended Form 10-Qs onSeptember 9, 1997. The company restated its financial statements for theyear ended December 31, 1996 and quarters ended March 31, 1997, June 30, 1997 andSeptember 30, 1997 in July and early August 1998. 3 The vice president of finance resignedapproximately three months later, in June 1997. The chief financial officer was notreplaced until December 1997, leaving Inamed without a chief financial officer forat least eight months, during which time Inamed was still undergoing its audit. 4 Inamed withdrew the registration statement ayear later. http://www.sec.gov/litigation/admin/34-41751.htm