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[August 02, 2014]
SEC Issues Administrative Ruling on Marc Sherman
(Targeted News Service Via Acquire Media NewsEdge) WASHINGTON, July 30 -- The Securities & Exchange Commission issued the following administrative proceeding: In the Matter of MARC SHERMAN Respondent.
ORDER INSTITUTING CEASE-AND-DESIST PRO CEEDINGS PURSUANT TO SECTION 21C OF THE SECURITIES EXCHANGE ACT OF 1934 I. The Securities and Exchange Commission ("Commission") deems it appropriate that cease-and-desist proceedings be, and hereby are, instituted pursuant to Section 21C of the Securities Exchange Act of 1934 ("Exchange Act") against Marc Sherman ("Respondent" or "Sherman").
II. After an investigation, the Division of Enforcement alleges that: A. SUMMARY 1. During its 2008 fiscal year and continuing up to its filing for Chapter 11 bankruptcy on July 2, 2009 (the "relevant period"), QSGI Inc. ("QSGI" or the "Company") was a reseller of and maintenance services provider for used computer equipment. Sherman, who during the relevant period served as QSGI's Chief Executive Officer and Chairman, was aware of deficiencies in and the circumvention of internal controls for inventory and the resulting falsification of the Company's books and records. On occasion in 2008 and increasing in frequency in 2009, Sherman improperly accelerated the recognition on QSGI's books and records of accounts receivable and receipt of inventory in order to increase the borrowing base available under a revolving credit facility with the Company's chief creditor. Sherman withheld this information from the Company's external auditors in connection with their audit of the financial statements for the fiscal year ended December 31, 2008 and review of the financial statements for the quarter ended March 31, 2009, and made affirmative material misrepresentations and statements that were materially misleading as a result of his omission of information in management representation letters to the auditors about the design, maintenance, and operation of internal controls. Further, Sherman signed a Form 10-K and a Form 10-K/A for the 2008 fiscal year, each containing a management's report on internal control over financial reporting ("ICFR"), as required by Section 404 of the Sarbanes-Oxley Act of 2002 ("Sarbanes-Oxley Act") and Exchange Act Rule 13a-15(c), which falsely represented that he, in his capacity as CEO, had participated in assessing the effectiveness of the Company's ICFR. Sherman also signed certifications required under Section 302 of the Sarbanes-Oxley Act and Rule 13a-14 of the Exchange Act included in filings with the Commission falsely representing that he had evaluated ICFR and, based on this evaluation, disclosed all significant deficiencies to the auditors. The certifications were attached to the 2008 Forms 10-K and 10-K/A, and to the first quarter 20 09 Form 10-Q filed with the Commission, which Sherman also signed.
B. RESPONDENT 2. Sherman, age 50 and a resident of West Palm Beach, Florida, founded QSGI in 2001. He has since served as QSGI's CEO and Chairman of its Board of Directors.
After the Company filed for bankruptcy and until at least July 2010, he served as Chief Financial Officer and Chief Accounting Officer.
C. RELEVANT ENTITY 3. QSGI, Inc., incorporated in 1967 in Delaware under a different name and headquartered during the relevant period in West Palm Beach, Florida, is engaged in the business of purchasing, refurbishing, selling, and servicing used computer equipment, parts and mainframes.
On May 4, 2011, the U.S. Bankruptcy Court for the Southern District of Florida, West Palm Beach Division, confirmed QSGI's plan of reorganization pursuant to which, effective June 17, 2011, the corporate shell merged with a private company which had been founded by Sherman and others.
The Company's common stock is registered with the Commission pursuant to Section 12(g) of the Exchange Act and quoted on the OTC Link (formerly "Pink Sheets") operated by OTC Markets Group Inc.
D. SHERMAN'S AWARENESS OF DEFICIE NCIES IN AND CIRCUMVENTION OF INV ENTORY CONTROLS.
4. During the relevant period, QSGI maintained inventory principally at facilities in New Jersey and Minnesota. The New Jersey inventory, which comprised 50% of the company's reported gross inventory and 55% of its reported net inventory, after reduction for reserves, as of the close of its fiscal year ended December 31, 2008, was comprised of laptops, monitors, and other consumer electronics and components. The Minnesota inventory, which comprised 40% of QSGI's reported gross inventory and 35% of its reported net inventory, after reduction for reserves, as of the close of QSGI's 2008 fiscal year, was comprised chiefly of servers, mainframes, and component parts.
5. For a period of years prior to the Company filing for bankruptcy in 2009, QSGI experienced recurring inventory control problems. Throughout the relevant period, Company personnel: (1) shipped certain inventory received into its facilities out to customers without making the appropriate entries into the Company's books and re cords; and (2) removed items from physical inventory without relieving the inventory from the Company's books and records. Company personnel removed component parts from the physical inventory for such parts without recording the parts removed and occasionally stripped component parts from operating systems without recording the parts removed. As a result, the Company's books and records incorrectly reflected certain components in inventory and operating systems as intact systems. These component parts were then sold by the Company or used for the Company's maintenance services.
6. These internal control problems resulted in the falsification of QSGI's books and records relating to QSGI's inventory.
7. These inventory control problems escalated at the Minnesota facility beginning in 2007 for several reasons. First, a manufacturer's policy of curtailing resellers' ability to modify machines to customers' specifications hastened QSGI's shift from selling machines to selling parts and providing repair and maintenance services. This, in turn, exacerbated the problem in Minnesota of personnel removing component parts from operating systems without any corresponding adjustment to the Company's books and records. The units continued to be recorded on the books and records as intact systems. Second, key personnel, including accounting personnel, left the Minnesota operations in late 2007. Personnel designated to replace the departed accounting staff lacked an accounting background and failed to fully carry out their responsibilities. Third, while QSGI management had undertaken to design, document, and implement internal controls to come into compliance with federal securities law requirements, such efforts were not begun in earnest in Minnesota until late 2007, after the departure of key personnel. Prior to that point, QSGI senior management had accorded Minnesota personnel a fair amount of autonomy, including using an accounting system that differed from the one used in New Jersey.
8. The Company's efforts to introduce new controls to the Minnesota operations during the 2008 fiscal year largely failed. More particularly, the Company failed to design procedures taking into account the existing control environment, including the qualifications and experience level of persons employed to handle accounting. Training of accounting, sales, and warehouse personnel either did not take place or was inadequate. As a result, controls the Company attempted to implement in February 2008 were widely ignored during the ensuing ten months of the 2008 fiscal year and well into the 2009 fiscal year. For example, sales and warehouse personnel often failed to document their removal of items from inventory or, to the extent they did prepare the paperwork, accounting personnel often failed to process the paperwork and to adjust inventory in the company's financial reporting system. The Company's attempts to monitor compliance on an ongoing basis were also inadequate. Company personnel regularly circumvented controls.
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TNS 30TagarumaMar-140802-4818907 30TagarumaMar (c) 2014 Targeted News Service
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