U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.
Litigation Release No. 17155 / September 27, 2001
Accounting and Auditing Enforcement Release No. 1460 / September 27, 2001
, Civ. Action No. 01-WM-1903 (District of Colorado)
Today, the Securities and Exchange Commission filed suit in the United
States District Court for the District of Colorado against Vari-L
Company, Inc. ("Vari-L") and three of its former officers for
violations of the antifraud, periodic reporting, record keeping,
internal controls, proxy solicitation, and lying to auditors
provisions of the federal securities laws. Vari-L is a company that
designs and manufactures components for wireless telecommunications
products, located in Denver, Colorado. According to the Complaint,
Vari-L engaged in a massive financial reporting fraud designed to show
consistently increasing revenue and earnings, instead of losses, from
1996 through the quarter ended March 31, 2000 by recognizing false
revenue, improperly capitalizing and depreciating costs, overstating
inventory, and improperly deferring period costs.
Named as defendants in the Complaint are Vari-L, David G. Sherman of
Denver, Colorado, the former president and chief executive officer,
and also a director of Vari-L, Jon L. Clark of Navajo Dam, New Mexico,
the former chief financial officer of Vari-L, and Sarah H. Hume of
Aurora, Colorado, the former controller of Vari-L.
According to the Complaint, Sherman managed Vari-L's earnings by
imposing strict revenue and earnings targets every quarter and
enforcing a no-tolerance policy for failing to meet them. Hume carried
out the scheme by fraudulently recognizing revenue each quarter to
"make the numbers," and Clark signed filings with the Commission that
he knew contained false revenue and earnings figures. The Complaint
alleges that Sherman, Clark and Hume each realized the fruits of
Vari-L's fraudulent financial reporting by exercising Vari-L stock
options and selling Vari-L stock for substantial profits in 1999.
Specifically, the Complaint alleges Vari-L's financial statements
filed with the Commission quarterly and annually from 1996 through
1999 show a company with record income each year. The Commission
claims, however, that Vari-L's reported income growth was fictitious
and made possible only by aggressive earnings management and outright
fraud and that in reality, Vari-L had losses each fiscal year.
According to the Complaint, Vari-L's March 31, 2000 balance sheet was
overstated by $39 million or 132% as a result of the company
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the Securities and Exchange Commission filed suit in the United States District Court for the
Company, Inc. and three of its former officers for violations of the antifraud, periodic
According to the Complaint, Vari-L engaged in a massive financial reporting fraud designed to
Named as defendants in the Complaint are Vari-L, David G. Sherman of Denver, Colorado, the
According to the Complaint, Sherman managed Vari-L's earnings by imposing strict revenue and
Hume carried out the scheme by fraudulently recognizing revenue each quarter to "make the
The Complaint alleges that Sherman, Clark and Hume each realized the fruits of Vari-L's
the Complaint alleges Vari-L's financial statements filed with the Commission quarterly and
The Commission claims, however, that Vari-L's reported income growth was fictitious and made
According to the Complaint, Vari-L's March 31, 2000 balance sheet was overstated by $39
First, Vari-L allegedly improperly recognized bill and hold sales each quarter through the
Fourth, Vari-L allegedly overstated inventory by disregarding physical inventory counts,
Additionally, the Complaint alleges Vari-L failed to disclose in proxy statements filed in
Due to a number of unique circumstances presented in this matter, the Final Judgment, when
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