Cannon Group Settles SEC Charges That It Misstated Finances Over Several Years

A 14-month investigation into the financial affairs of Cannon Group ended Monday when the entertainment company and three current or former Cannon officials agreed to a settlement with the Securities and Exchange Commission.

Among its sweeping allegations, the SEC said Cannon misstated pretax earnings from 1982 through the first half of 1986, using those figures to raise $339 million from the public between October, 1983, and April, 1986. The agency also said Cannon improperly recorded a $42-million gross profit last year from the licensing of TV and video rights to a West German company while the deal was being negotiated.

In its civil action, the SEC alleged that the Los Angeles company, its President and Chief Executive Yoram Globus, Senior Executive Vice President Barry I. Lublin and former Vice President David A. Burkhardt violated or helped others violate anti-fraud provisions of the federal securities laws.

The SEC also contended that Cannon, Globus and Lublin violated laws concerning reporting, proxies, record-keeping and internal controls.

Without admitting or denying any of the allegations, Cannon and the three individuals agreed to the entry of a permanent injunction ordered Monday in Los Angeles by U.S. District Judge Dickran Tevrizian.

Neither Globus, Lublin nor Burkhardt was available for comment.

Independent Audit

When asked if any change in their company roles is anticipated, Cannon Chief Financial Officer Frederic Scheer replied: “We have a board; the board will decide.”

Lublin was recently named chief executive of Commonwealth Theatres, a Cannon subsidiary, according to Cannon Executive Vice President Lisbeth Aschenbrenner. Lublin was an outside accountant to Cannon before joining the company to serve as chief financial officer from July, 1985, to December, 1986.

Burkhardt, formerly vice president of finance, is a consultant in the international sales department, Aschenbrenner said.

As part of the settlement, Cannon agreed to have independent auditors review the adequacy of its accounting procedures and controls in eight specific areas and to hire an “independent person” in the next 60 days to examine all company transactions between Jan. 1, 1984, and Dec. 31, 1986, that cost more than $60,000 and involved directors, officers or family members.

The company also agreed to make specific and continuing disclosures about its contract to provide television and video rights to Video Medien Poll GmbH of Munich, down to the very titles delivered.

Cannon also agreed to engage independent auditors for the next three years to conduct a special review of the adequacy of the company’s accounting procedures and controls in eight areas, including the amortization of film costs and recognition of revenue.

Scheer, a Cannon investor since May who became chief financial officer in September, said Monday that “a lot of the SEC (requirements) are already followed now.” However, he said, the company has not yet named an independent person to review past transactions with directors, officers and family members.

The settlement does not require Cannon to make any additional adjustments to its financial statements, the company said, nor does it require any change in the company’s management.

Current and past SEC lawyers noted privately Monday that the agency almost never seeks a change in management, however.

Nor is the SEC empowered to file criminal charges against a company for false financial filings. SEC officials declined to say Monday whether they will ask the Justice Department to launch its own investigation for possible criminal violations.

Without commenting specifically on Cannon, regional SEC Administrator Irving Einhorn said: “We show just about all of our cases to the U.S. attorney. Historically, I don’t think you’ll find that the Department of Justice is particularly interested in false filing cases.”

Among the allegations in its 39-page complaint, the SEC said that Cannon:

- Overestimated in 1984, at a time when the company was readying a public offering, the revenue to be generated by films between Dec. 31, 1983, and June 30, 1984, and increased previously established estimates for films in release as of Dec. 31, 1983.

- Failed to disclose in its 1985 proxy statement that Cannon paid $75,000 to Dutch banker Frans Afman, who oversees entertainment lending at a major Cannon bank. A three-year employment agreement with Afman--beginning Jan. 1, 1985--was not disclosed by Cannon until June, 1987. Afman, who became a Cannon director in June, 1985, resigned from the board in December, 1986.

- Duped the SEC staff in the spring of 1986, when the agency demanded more information relating to a Cannon registration statement. Rather than tell the SEC that certain information did not exist or had not been prepared, Cannon, “with the assistance of non-Cannon employees, prepared schedules containing some of the requested information” for a meeting at the SEC on April 4, 1986. (The non-Cannon employees were not identified.)

- Submitted data to the SEC in April and May of 1986 that differed materially from items shown on Cannon’s books. For the amortization amounts submitted, more than 90 of 295 entries differed materially.

- Failed, until 1986, to maintain documentation--country by country, market by market or media by media--of what revenues and costs were anticipated for each film.

- Improperly recognized gross profit of $42 million for the six months ended June 28, 1986, from Video Medien Pool GmbH, which was negotiating to acquire television and video rights from Cannon’s own library and its newly acquired Thorn-EMI library. Although the letter of agreement was not signed until Aug. 12 of that year, Lublin and Globus decided that Cannon would recognize $55 million in revenue as of June 28, 1986, and booked a $42-million gross profit.

The actions occurred even though Lublin, “on or about Aug. 14” determined that Cannon had only 1,100 titles available to the German firm--or less than half of the 2,500 titles initially offered.

- Made false and misleading statements relating to a 1983 deal to have MGM/UA Entertainment Co. distribute Cannon films to theaters. Cannon failed to disclose in its 1983 annual report that certain aspects of the agreement were being renegotiated and that MGM was demanding payment of all losses incurred. In June, 1984, when the distribution deal was canceled, Cannon agreed to pay MGM all its losses, which totaled $5.35 million. But in its 1984 annual report, Cannon said the payment was for release prints and related advertising material for five films.