Accountant Newsroom

The Indictment Alleges That Symbol Engaged In Similar Improper Conduct With Respect To Its Customer Service Transactions








ROSLYNN R. MAUSKOPF, United States Attorney for the Eastern District of New York and a member of the President's Corporate Fraud Task Force, WILLIAM E. KEZER, Inspector in Charge, New York Division, U.S. Postal Inspection Service, and MICHAEL J. THOMAS, Special Agent-in-Charge, Internal Revenue Service - Criminal Investigation, announced today the unsealing of an indictment against seven top-level former executives at Symbol Technologies, Inc., including TOMO RAZMILOVIC, former president and chief executive officer, KENNETH JAEGGI, former senior vice president and chief financial officer, BRIAN BURKE, former senior vice president (operations), MICHAEL DEGENNARO, former senior vice president (finance), FRANK BORGHESE, former senior vice president (worldwide sales and service), CHRISTOPHER DESANTIS, former vice president (finance) and JAMES HEUSCHNEIDER, former director (finance) for their participation in a long-lived, pervasive accounting fraud scheme designed to ensure that Symbol could consistently report that its quarterly revenues and earnings met the estimates issued by professional stock analysts when, in fact, Symbol's true financial performance often fell short of the estimates. The indictment also alleges that an eighth defendant, Symbol's former general counsel, LEONARD GOLDNER, orchestrated a scheme in which he and other senior executives at Symbol fraudulently exploited Symbol's stock option plans to enrich the executives and illegally minimize their tax obligation at the expense of Symbol. (1)

The defendants will be arraigned at 3:00 p.m. this afternoon by United States District Judge Leonard D. Wexler, at the U. S. Courthouse in Central Islip, New York. (2)

Ms. MAUSKOPF, Mr. KEZER, and Mr. THOMAS also announced that, in a written Agreement executed today, Symbol has accepted responsibility for the fraudulent conduct of its former executives, adopted significant corporate reforms to ensure that the fraud does not recur, agreed to continue its cooperation with the government's ongoing investigation of the fraud and agreed to pay $139 million to compensate victims of the fraud and to help fund the United States Postal Inspection Service's Consumer Fraud Fund. As long as Symbol abides by the terms of the Agreement, the United States Attorney's Office for the Eastern District of New York has agreed not to prosecute Symbol. The Agreement with Symbol does not protect any individuals from prosecution.

SYMBOL TECHNOLOGIES, INC.

Symbol is the eighth largest public company on Long Island, employing approximately 5,600 employees worldwide, and one of the world's leading manufacturers and distributors of wireless and mobile computing and bar code reading devices and other networking systems. Its customers include the Department of Defense, the Department of Homeland Security, the United States Postal Service, federal and local law enforcement agencies, Wal-Mart and Federal Express. Its stock is traded on the New York Stock Exchange.

THE INITIATION OF THE INVESTIGATION

As the indictment sets forth, the government's investigation of fraud at Symbol began with an anonymous letter sent to the SEC in April 2001 reporting fraudulent revenue recognition practices at the company with respect to two specific transactions and alleging that "these two transactions are just the tip of the iceberg of how Symbol management continues to manipulate and improperly handle their business accounting." Shortly thereafter, Symbol commenced an internal investigation of the allegations. The indictment alleges, however, that for several months Symbol executives including the defendant MICHAEL DEGENNARO engaged in conduct designed to interfere with and obstruct the internal investigations. When, in approximately September 2002, the internal investigation discovered DEGENNARO's conduct, the company fired him. From that point forward, Symbol's cooperation with the government has been full and complete. For example, Symbol has shared the substance of hundreds of interviews conducted with current and former Symbol employees, customers and others, as well as over one-half million pages of documents and hundreds of thousands of restored email and voice mail messages. Symbol has also waived attorney-client privilege to assist the investigation, and has made available numerous witnesses for government interviews. Finally, in instances in which Symbol discovered misconduct by its officers, executives and employees, Symbol reported the misconduct to the government and terminated the individuals.

THE ACCOUNTING FRAUD SCHEME

As a result of the government's investigation, aided by Symbol's cooperation, a widespread and pervasive accounting fraud scheme was uncovered. The indictment alleges that, from 1999 to 2002, former Symbol executives engaged in widespread fraudulent practices that inflated Symbol's reported revenue by more than $200 million. The central goal of these practices was to ensure that Symbol consistently reported revenues and earnings that met or exceeded the public estimates issued by professional stock analysts who followed and reported on Symbol. Indeed, through the first quarter of 2001, Symbol had reported revenues and earnings, excluding non-recurring charges, that met or exceeded the consensus estimates of analysts for 32 consecutive quarters. In order to maintain Symbol's record of meeting or exceeding the consensus estimate, the defendant TOMO RAZMILOVIC established ambitious, and often unrealistic, financial performance targets for every Symbol division, and aggressively enforced those targets, rewarding those executives who met their targets and punishing those who failed. The indictment charges that it was the responsibility of the Symbol executives below RAZMILOVIC, including JAEGGI, BURKE, DEGENNARO, BORGHESE, DESANTIS and HEUSCHNEIDER, to ensure that the divisions for which they had responsibility met RAZMILOVIC's targets, and many executives' salaries and bonuses were tied to achieving these targets.

The defendants used a stunning array of fraudulent accounting manipulations to allow them to claim to have met the targets. These fraudulent practices included, among others, false and prematurely recognized revenue, a complex dance of manipulation of accounting entries to fabricate higher revenues and lower costs, referred to by the conspirators as "tango adjustments," phony classification of expenses and the creation of "cookie jar" reserves.

Unlawful Revenue Recognition Practices

Among the fraudulent techniques that the indictment alleges were used by Symbol's senior management to overstate Symbol's quarterly revenue and earnings were systematic "channel stuffing" transactions entered into at or near the end of fiscal quarters. Through these transactions, Symbol purported to sell products to various value added resellers ("VARs") and distributors even though the VARs and distributors had no firm obligation to pay for the products they purportedly purchased, and often could not afford to pay for the products they had purportedly purchased. These VARs and distributors were known at the company as "Friends of Frank," because they were companies with whom the defendant FRANK BORGHESE had developed a special relationship that fostered the channel stuffing activity.

The indictment further alleges that Symbol entered into "candy deals," as the conspirators described them. In these deals, Symbol pushed VARs to order Symbol products from distributors without having any customers to buy those products. To sweeten the deal, Symbol promised to buy back those products at the same price the VARs paid the distributors, and to pay the VARs an additional 1% of the purchase price. The candy deals actually cost Symbol money because it paid more to buy back the products than it had sold them for in the first place, plus an additional 1% bonus.

The indictment also alleges that, in order to overstate Symbol's quarterly revenues and earnings, Symbol deliberately shipped customers the wrong Symbol products at or near the end of quarters when the Symbol products that the customers actually wanted were unavailable. Later, when the desired products became available, Symbol either canceled the prior shipment or accepted the return of the wrong product, and then shipped the correct product to the customers. In this way, Symbol prematurely recognized revenue for legitimate orders.

The indictment also alleges that Symbol overstated its quarterly revenues and earnings by recognizing revenue on sales of Symbol products that were ordered by customers but which were not actually shipped to customers within that quarter. Under Generally Accepted Accounting Principles ("GAAP") and Symbol's own revenue recognition policy, revenue resulting from such transactions should not have been recognized until the products were actually shipped. However, despite Symbol's failure to ship the products by the end of a quarter, Symbol improperly recognized revenue on the products in that quarter. Moreover, in an effort to disguise Symbol's contravention of GAAP and its own revenue recognition policy, Symbol obtained phony "bill-and-hold" or "ship-in-place" letters from its customers. These bogus letters stated, in substance, that the customer wanted Symbol to hold the products at Symbol rather than ship the products to the customer. In reality, these letters were obtained after-the-fact and were back-dated to create the false appearance that the customer had requested "ship-in-place" transactions when, in fact, they had not. In some instances, these letters were obtained months after the Symbol customer already had received and paid for the Symbol products.

Finally, the indictment alleges that Symbol engaged in similar improper conduct with respect to its customer service transactions. Under GAAP and Symbol's revenue recognition policy, revenue for customer service should not have been recognized until after services were rendered. However, Symbol made phony journal entries in its customer service accounts in order to recognize revenue before Symbol had provided any services to the customer. In addition, Symbol invoiced and recognized revenue on customer service contracts that had either expired or been canceled by its customer.