In re Star Technologies, Inc.

Star Technologies, Inc. (Star) (defendant) manufactured high-speed computers. The Securities and Exchange Commission (SEC) (plaintiff) instituted a proceeding against Star, making numerous allegations. First, in 1989, Star entered into an agreement with Glen Culler & Associates (GCA) under which Star advanced funds to GCA for research and development (R&D) of a new computer. GCA’s ability to repay the advances was contingent on the outcome of the R&D. In fiscal year (FY) 1989, Star recorded these payments as assets rather than expenses. Second, the market for Star’s ST-100 computers plummeted in the mid-1980s. Despite this, Star projected that it would sell 29 ST-100 computers in FY1989. Ultimately, Star sold only one, refurbished ST-100 in FY1989. Nevertheless, Star maintained a value of $2 million on its books for ST-100s. Third, as of FY1989, Star had accounts receivable of over $6 million. Two of those accounts, representing over $1 million, had been outstanding for almost five years. Star had referred these accounts to its lawyers for litigation. Despite this, Star did not increase its reserve for bad debts to cover these likely losses. Finally, in 1987, Star took out a loan that was due in 1990. In FY1989, Star defaulted on the loan, enabling the bank to call it due immediately. Despite this, Star classified the loan as long-term debt as opposed to a current liability. The SEC instituted an enforcement action against Star, alleging that Star’s accounting practices as reflected in its FY1989 SEC filings were inconsistent with generally accepted accounting principles (GAAP) and thus violated SEC regulations.