Dunlap Scandal Summary

The Sunbeam Corporation’s former CEO, Al “Chainsaw” Dunlap was a turnaround specialist and professional downsizer. Dunlap did not believe that corporations owed loyalty to their community or to their employees. His prospective was that the appropriate corporate concern was for their stockholders and that the primary goal of any business should be to make money for its shareholders. (Byme, 1998),
Before his employment as CEO of Sunbeam, he had achieved notable success with Scott Paper and Crown Zellerbach. His methods were ruthless even by American Corporate standards. Dunlap’s goal was to show the maximum possible profits. In order to achieve his goals he made widespread cuts, laid off thousands of employees, and closed plants and factories.

His savage business style earned him a $100 million dollar golden parachute for the sale of Scott Paper to Kimberly-Clark alone. (PRNewswire, 1997)
In 1996, Dunlap took over as Sunbeam’s Chairman and CEO. By 1997, Sunbeam was reporting record earnings of $189 million dollars. Dunlap was ready to sell, but in 1998, he could not find a buyer. To create a greater appearance of value for Sunbeam he purchased Colman, Signature Brands and First Alert; it worked and Sunbeam stock leapt up to an all time high of $52 dollars per share. (Byme, 1998).
Irregular off season sales tipped off Paine Webber, Inc. analyst Andrew Shore and other savvy insiders that all was not well with Sunbeam’s financial statements. There is an accepted business practice known as “Bill and Hold” wherein seasonal items are sold to retailers at large discounts, held in third party warehouses and delivered later. The strategy of “Bill and Hold” is an accepted accounting practice when the sales are booked after delivery. Dunlap went beyond acceptable practice by booking the sales immediately. (Daniels Fund Ethics Initiative Staff).
This practice shifted apparent profits from future sales to the immediate quarter and in the case of Sunbeam in 1997 it resulted in an 18% increase in revenues, or at least the revenues reported in the corporation’s financial statements. (Daniels Fund Ethics Initiative Staff)
As a result of this fraudulent financial practice shareholders filed a class action lawsuit against Dunlap and the Sunbeam Corporation.

The basic allegations in this class action suit was that the shareholders were misled as to the value of Sunbeam’s stock in violation of the Securities and Exchange act of 1934. Because the financial statements misrepresented and omitted information regarding he business operations, sales, and sales trends the shareholders ultimately suffered financial loss as a result. As CEO of Sunbeam, Dunlap was charged with utilizing earnings manipulation to achieve fraudulent financial goals.
Legal actions against Dunlap did not stop at the shareholders action in the civil courts, the Securities and Exchange Commission brought charges against Dunlap, Russell Kersh, Robert Gluck, Donald R. Uzzi and Lee B. Griffith, all former officers of Sunbeam Corporation in May 2001. (CNN Money Staff, 2001). The SEC allegations included that Dunlap had engineered a massive accounting fraud with the cooperation and in collaboration with the four other former Sunbeam executives and the Sunbeam’s lead partner with Arthur Andersen

LLP.
The SEC investigation revealed that Dunlap and the others involved in the Sunbeam financial manipulations had created the impression of a greater loss in 1996. In doing so Sunbeam Corporation took a big bath in 1996 by taking a large deduction for prepaid expenses. This is not an uncommon strategy in a bad year when the company is not expected to achieve its financial goals. Recording the deduction decreases the future amount of assets to be amortized, depreciated, or written-down. Specifically the SEC found “senior management created $35 million in improper restructuring reserves and other "cookie jar" reserves3 as part of a year-end 1996 restructuring, which were reversed into income the following year.” (U.S. Securities and Exchange Commission, 2001)
In the case of Sunbeam, it also had the effect of making it look like the company had experienced a dramatic turnaround in 1997. (U.S. Securities and Exchange Commission, 2001). As a result of Sunbeam’s fraudulent practices including the Bill and Hold sales and the guaranteed sales the SEC estimated at least $62 million of Sunbeam's $189 million reported income in 1997 were fraudulent. Additional financial misrepresentations were created by a practice known as channel stuffing wherein inadequately disclosed sales of products that would have otherwise been sold later in the year. The SEC found that these fraudulent misrepresentations were made with the intent of selling the corporation by the end of 1997.
The SEC reported that the purchases of Coleman, Signature and First Alert, which were funded in part by the public sale of debt securities, were part of an attempt to conceal Sunbeam's growing financial problems. The SEC found that “Sunbeam's first quarter 1997 press release was materially false and misleading.” and “Sunbeam overstated its second quarter income by more than 50%” (U.S. Securities and Exchange Commission, 2001). In addition, they found Sunbeam’s Bill and Hold sales were improper, as were their supplier rebates. Because of these and other fraudulent accounting practices that Sunbeam’s management team and accountants knowingly engaged in the SEC found “Sunbeam's Year-End 1997 Disclosure Was Materially False.” (U.S. Securities and Exchange Commission, 2001).
Sunbeam further manipulated their financial accruals to allow funds that would normally be reported in one quarter to be recorded in another by shifting its fiscal year to a calendar year allowing an additional almost $20 million in sales to be reported in the first quarter 1998, statements leading to other disclosure failures.

The SEC determined that Sunbeam filed quarterly and annual reports that had false financial statements and failed to make required disclosure. Subsequently the SEC findings went on to state “Sunbeam's books and records were manifestly inaccurate on so many items and over such an extended period of time as to indicate complete failure of internal controls in violation of Sections 13(b)(2)(A) and 13(b)(2)(B).” (U.S. Securities and Exchange Commission,

2001).
These findings were restated in a Civil Court action filed by the Securities and Exchange Commission and brought before the United States District Court for the Southern District of Florida. This action alleges that investors lost billions because of the fraudulent practices that eventually led to Sunbeam’s bankruptcy filing. (SEC Legal Staff, 2001).
The SEC documentation shows that Sunbeam used inaccurate accounting practices to inflate its reported losses in 1996 in order to show an increase in income for 1997. Management’s intent in this was to create incentives for other corporations to purchase Sunbeam Corporation and provide a profit for shareholders and management.