Form 12b-25 Litigation

By: Cydney Posner

It's getting to be that time of year and, with the requirements of SOX 404, some of our companies may need to file Forms 12b-25 to reflect late filings. As the following two matters indicate, Forms 12b-25 can be the subject of enforcement actions by the SEC and should not be taken lightly.

FFP Marketing Company, Inc., dated February 14, 2005, related to an overstatement of net income arising out of serious bookkeeping errors that ultimately resulted in a multi-year restatement. Among the allegations of the enforcement action against the company, its controller and CFO and general counsel was the SEC's contention that two Forms 12b-25 were false and misleading.

In late March 2002, the company's CFO realized that, because of an ongoing investigation into these bookkeeping errors, the company would not have audited financial statements in time to meet its Form 10-K deadline and, as a result, filed a Form 12b-25. In response to the requirement to state "in reasonable detail the reasons why" the company could not file its Form 10-K within the prescribed time period, the CFO stated only: "Certain financial and other data required to be disclosed in the Registrant's Form 10-K could not be obtained by Registrant prior to the required filing date for the report." The Form did not mention an ongoing accounting inquiry into the bookkeeping errors, state that the outside auditors were unable to supply an unqualified audit report because of the overstatement or attach a required statement from the outside auditors as to the reason for their inability to supply an unqualified audit report.

The instructions to the Form 12b-25 also asked whether the company "anticipated that any significant change in results of operations from the corresponding period" of the prior year, including "an explanation of the anticipated change, both narratively and quantitatively." The response, while quantifying an anticipated net loss and providing some explanation, did not mention that approximately half of the expected loss was due to a writedown related to the bookkeeping errors. Similarly, in the Form 12b-25 filed for the company's late 10-Q, the company did not disclose that it would restate its financial statements for the first three quarters of 2001 and for the two prior years, although that was known at the time of filing. The SEC contended that the Forms 12b-25 were misleading because they omitted to disclose the ongoing inquiry and the writedown, failed to attach the required third-party statement and because one of the forms failed to disclose the expected restatement.

In an earlier action, related to Spiegel, Inc., 2003, the SEC alleged that Spiegel did not disclose that its independent auditor had notified Spiegel that it may not have been able to continue as a "going concern." Because Spiegel had not resolved its financial problems by the due date of its Form 10-K, its outside auditor insisted on issuing an audit report stating that it had substantial doubts about Spiegel's ability to continue as a going concern. The SEC charged that, instead of filing its required 10-K and 10-Qs with the auditor's qualification, to conceal the going concern issue from the public, Spiegel filed a series of Forms NT (notices of late filing) inaccurately stating that it was not in a position to file because it had violated certain of its loan covenants and had decided to sell its bank subsidiary. No mention was made of the going concern report.

In a Nasdaq hearing to avoid delisting, several Spiegel representatives admitted that they could have filed the 10-K, but, to avoid disclosure of the qualified opinion and related business disruption, elected not to, in the expectation that new lending arrangements would solve the problem. At least one of Spiegel's officers sent the board's audit committee a letter requesting that the company be authorized to file its Form 10-K. Instead, the audit committee passed a resolution recommending to the board of directors that the company delay filing its Form 10-K. Spiegel, founded in 1865, filed for bankruptcy in 2003.

Spiegel continued to file various Forms NT without disclosing the going concern qualification. After being contacted by Enforcement,, Spiegel finally filed its Form 10-K, which contained the outside auditor's going concern report and also revealed that Spiegel had a huge net loss of $587.5 million and billions in debt.

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