PWC Settles Warnaco Case for $2.4 Million
On Tuesday, The Securities and Exchange Commission instituted settled enforcement proceedings against The Warnaco Group, Inc., its former CEO, Linda Wachner, its former CFO, William Finkelstein, former general counsel Stanley Silverstein, and the company's former audit firm, PricewaterhouseCoopers LLP ("PwC").
Warnaco was charged with securities fraud for issuing a false and misleading press release about its financial results on March 2, 1999, and Finkelstein with aiding and abetting the company's fraud.
The Commission also charged Warnaco, Finkelstein, Wachner, and Silverstein for their roles in connection with Warnaco's misleading disclosure in its annual report for 1998. In addition, the Commission charged PwC, Warnaco's audit firm at the time, with aiding and abetting Warnaco's reporting violations in the 1998 annual report. All of the respondents and defendants have agreed to settlements without admitting or denying the findings or allegations in the Commission's orders or complaints.
The Commission's orders include the following findings.
- The March 1999 press release, which reported "record" results for 1998, failed to inform investors that Warnaco had discovered a $145 million inventory overstatement that would require the company to restate and significantly lower its financial results for the prior three years. Instead, Warnaco falsely characterized the inventory restatement as the write-off of deferred start-up costs under a new accounting pronouncement. In fact, the overstatement had been caused by serious defects in Warnaco's inventory accounting and internal control systems and did not involve deferred start-up costs.
- One month after issuing the fraudulent press release, Warnaco filed a misleading annual report for 1998. Although the annual report correctly accounted for the $145 million restatement, Warnaco failed to inform investors of the true cause of the restatement, instead claiming that the restatement resulted from the write-off of "start-up related" costs. Warnaco's senior management — Wachner, Finkelstein, and Silverstein — knew or should have known that the restatement resulted from material flaws in the company's cost accounting and internal control systems at one of its divisions. Nevertheless, all three approved the annual report, and Wachner and Finkelstein signed it.
- PwC, which audited the consolidated financial statements contained in Warnaco's 1998 annual report, failed to object to Warnaco's mischaracterization of the inventory overstatement as "start-up related" costs and incorporated the misleading description of the restatement into its audit report.
Antonia Chion, an Associate Director of the Commission's Division of Enforcement, said, "With the action taken today, the Commission has reiterated to issuers, their management, and audit firms that simply `getting the numbers right' is not enough. An issuer's filings cannot give misleading reasons for its financial results and must disclose material information to investors."
The Commission filed a settled civil injunctive action against Finkelstein and a settled action for a civil money penalty against PwC in federal district court for the Southern District of New York. These settlements are subject to court approval. Simultaneously, the Commission initiated settled administrative proceedings and issued cease-and-desist orders against Warnaco, Wachner, and Silverstein for reporting and other federal securities laws violations, and censured Silverstein and PwC pursuant to Rule 102(e) of the Commission's Rules of Practice. The settlements also include other substantial relief.
- Warnaco is required to hire an independent consultant to perform a complete review of the company's internal controls and policies relating to its inventory systems, internal audit, financial reporting and other accounting functions. Warnaco also agreed to adopt the recommendations of the independent consultant within 180 days.
- In addition to an injunction against future violations of the federal securities laws, Finkelstein has agreed to disgorge $189,464 in bonus for 1998 and prejudgment interest, and to pay a $75,000 civil penalty, for a total payment of $264,464. He also has consented to an order prohibiting him from acting as an officer or director of a public company for four years.
- Wachner and Silverstein have also agreed to disgorge bonus amounts for 1998 along with prejudgment interest. Wachner is required to pay a total of $1,328,444; Silverstein is required to pay a total of $165,772.
- In the federal court action, PwC consented to pay a $2.4 million penalty.
Contact: Antonia Chion, Associate Director, 202-942-4567
Yuri B. Zelinsky, Assistant Director, 202-942-4890
Litigation Release No. 18701
Administrative Proceeding Release No. 34-49678 (PricewaterhouseCoopers LLP)
Administrative Proceeding Release No. 34-49677 (Linda J. Wachner)
Administrative Proceeding Release No. 34-49676 (Stanley P. Silverstein)
Administrative Proceeding Release No. 34-49675 (The Warnaco Group, Inc.)