S.E.C. v. Dunlap

From the last quarter of 1996 through June 1998, senior management of the Sunbeam Corporation orchestrated a scheme to create the false appearance that Sunbeam’s revenues were greater than they actually were. The objective of the scheme was to sell Sunbeam at an inflated figure. The scheme was facilitated largely through the actions of Lee Griffith (defendant). Griffith served as vice president for sales from August 1996 through April 1998, thereafter assuming the position of president of the household division when CEO Al Dunlap (defendant) dismissed the prior officer from that role. Griffith, along with other top Sunbeam officials, set aggressive sales and revenue targets and then utilized improper accounting and misleading disclosures to create the appearance that these targets were being met. Specifically, Griffith caused Sunbeam to engage in channel stuffing, a practice in which customers were offered discounts or other incentives to purchase merchandise far before the products were needed. Griffith proposed that the discounts be coupled with offers to warehouse the inventory until customers needed the inventory delivered. Through these tactics, Griffith was able to artificially boost Sunbeam’s income in 1997 by pulling revenue into that year that would normally not be realized until 1998. Due to the channel stuffing in 1997, the company faced the prospect of poor sales figures in 1998. In response, Griffith concealed the financial shortfall by engaging in revenue-reporting practices that did not satisfy applicable accounting rules. This included accelerating future sales revenue, eliminating return authorizations, and misrepresenting company performance to analysts. On May 11, 1998, the company reported a first-quarter loss of 52 cents per share. In a press conference after the earnings release, Dunlap and Griffith categorically rejected accusations that they engaged in channel stuffing. Griffith also stated that they were pursuing a sound marketing idea. The Securities and Exchange Commission (SEC) (plaintiff) filed a complaint against Dunlap and Griffith for violations of the antifraud provisions of federal securities laws. Griffith moved to dismiss on the basis that the SEC’s complaint did not satisfy the scienter requirement. Griffith argued that his denial of channel stuffing was immaterial because the earnings announcement on the same day included information regarding Sunbeam’s losses over the quarter. Griffith also argued that the mere departure from generally accepted accounting principles (GAAP) was insufficient as a matter of law to establish the necessary element of scienter.